By Anu Singh
Increasing import tariffs to 50% against Indian goods to be sold in the USA is not an economic move to reduce the trade deficit of the United States, but a strategic move to pressure India to
divert its economic and political relationship from Russia. Washington is playing a game of chicken, also known as the prisoner’s dilemma, between India and Russia. India and Russia are two players, and the US is the
cop to break the ties between the two. India has two strategies: maintaining its alliance with Russia or getting reduced import tariffs from the US for its exports. If India opts to maintain its
partnership with Russia, it can continue to secure beneficial deals in sectors like oil and defence; however, this may put it at odds with U.S. interests. Agreeing to U.S trade deals could yield short-term economic benefits but risk forfeiting strategic advantages. Whether to fall under the prisoners’ dilemma and achieve a less efficient position completely depends on India and its trust
in Russia in continuing to offer better trade deals for oil or defence goods to India. The U.S. acts as a cop in this game, trying to influence the prisoners to defect against each other by
manipulating tariffs. Since Russia has no direct actions to take in this matter, it should maintain its alliance with India, even when India is no longer partnering with the US in the future. The solution to the prisoners’ dilemma is for the prisoners to stay cooperative. India should stay
strong and should not defect from its relationship with Russia to choose the trade deals expected by Washington, which is a less reliable partner compared to Russia. It is important for Delhi to
carefully choose the strategy that has long-term benefits to India compared to short-term benefits.
Donald Trump’s hike of import tariffs against India is not an advantageous move for India, for sure, but it is not even good for his own country. Increasing tariffs on a country that produces goods more cost-effectively than your own domestic producers not only leads to inefficient allocation of your country’s resources but also negatively impacts consumer satisfaction in America.
The economic goals of increasing tariffs against a country that can produce some goods in a cost-effective manner than the domestic economy can be three: one, to reduce trade deficits; second, to create a free trade area (FTA) with other economic partners under some trade deals; and third, to protect its infant industry. One of the other political reasons to increase tariffs is to protect the national security of the nation. The US should not have any infant industry issue where the tariff has been raised to protect its
infant industries against a developing economy like India. The Wall Street Journal has already reported a slight increase in tariff revenue for the US, despite a significant increase in tariff rates. It is rather affecting the corporate entities of the US. Therefore, increasing tariff revenue may not be working for Washington. Countries generally go for reciprocal import tariffs, which can fail
Trump’s attempt to reduce trade deficits. Therefore, tariff hikes are not a good move for Americans, as they also bring disadvantages to America.
India Must Stay Strong!
India must stay strong, as America cannot sustain tariff hikes for long, for the following reasons. When imported goods become more expensive for Americans, the US, being a market economy, where price signals economic activity, domestic producers may raise their prices too, knowing
that now there is less competition from competitive Indian industries. The result would be that US consumers would pay more for a smaller variety of goods available to them.
With US producers facing tariffs on their exports to India, it will also hurt them. US local producers will face higher input costs amid increased import tariffs, which will not only raise the price of local goods but also reduce their export competitiveness in global markets. When industries are protected from foreign competition, which reduces the incentive for domestic producers to innovate or improve productivity, it leads to a slower innovation rate in the country that has imposed high import tariffs against the competitive nations.
Furthermore, it may yield a slight revenue gain for the government, but in the long run, it disrupts the country’s economic and political advantages by positioning it as a foe to the rest of the world. The policymakers in Washington are well aware of the risks they may face; this battle will not last long; therefore, the ideal situation for India is to remain strong and not cheat Russia.
- Anu Singh has a PhD in Economics and is currently working as an Associate Professor of Economics at Christ University, Bangalore
Living Economics Chronicle 