The United States has imposed a 25% tariff on certain Indian exports. This aggressive move is further raising economic temperatures between the two countries. India has now become Russia’s second largest buyer of oil. This change comes on the heels of the full-scale invasion of Ukraine in 2022. India’s government has publicly criticized the US for what it perceives as double standards, highlighting Washington’s continued trade relations with Russia despite the ongoing conflict.
Together with the announcement of the tariffs, this represents a seismic shift in the global trade landscape. This change will particularly impact the dynamics of the US and its strategic partners. That’s roughly the total value of goods the US imported from India in 2022. This was just 10% of the amounts collected in 2021. If the US government goes through with these secondary tariffs, US companies purchasing goods from India could face an unexpected 100% import tax. According to our estimates, this onerous tax would heavily damage the bilateral trade relationship.
India’s Foreign Ministry hit back strongly against the tariff threat, calling it “unjustified and unreasonable.” This very strong reaction showcases India’s deep commitment to its trade partners. It ostensibly seeks to increase the manufacturing capacity on products like iPhones to import them back to the US.
While the US-EU trade relationship is still the biggest in the world, India’s bilateral trade with the US is growing rapidly. The later imposition of secondary tariffs, even when lacking the legal foundation for such, threatens to unravel this relationship. Indian exports are dominated by pharmaceuticals and machinery – two key sectors for both economies.
Given all these changes, it’s understandable that former President Donald Trump would return to the old tough talk on countries doing business with Russia. He stated, “They’re fuelling the war machine. And if they’re going to do that, then I’m not going to be happy.” Trump’s remarks reflect his ongoing commitment to leveraging trade policy as a means of exerting pressure on countries perceived as enabling Russian aggression.
Russia’s ongoing trade with India is key to sustaining the Russian economy in the face of the impacts of the sanctions. Recent reports have shown that Russia has established its own “shadow fleet” of tankers. These vessels, whose owners remain anonymous, are specifically built to conceal the source of the country’s exported oil and gas. This intricate web makes one ponder whether sanctions are working and the extensive attempts to make them stick.
Richard Nephew, a US sanctions expert from Columbia University, emphasized the challenges inherent in enforcing sanctions. “Sanctions maintenance is as big a task as the imposition of sanctions in the first place,” he noted. He elaborated that evasion tactics used by sanctioned actors make it difficult to enforce trade prohibitions.
Through all these hurdles, India has worked out a legislative mechanism for compliance that seeks to skirt the sanctions in place. This system protects their trading partners from the threat of arbitrary secondary tariffs from the US. It is an incredibly useful guide for helping to chart a path through those difficult waters. As India continues to balance its energy needs with international diplomatic pressures, it is clear that the stakes are high.
Ursula von der Leyen, president of the European Commission, has similarly expressed alarm over Russia’s weaponization of energy resources. “Russia has repeatedly attempted to blackmail us by weaponizing its energy supplies,” she stated. This feeling is shared by many countries who are wrestling with their dependence on Russian resources in the face of continued geopolitical upheaval.
If India aspires to fortify its medium-term trade growth by building a more ambitious manufacturing base and boosting exports to the US, the country’s in a tight spot. Secondary tariffs are the new hot button. Indian exporters are understandably on edge because they could very soon find themselves caught with one foot in each competing economic interest.