India’s merchandise exports aren’t too exposed to the US—we need to watch out for services

The US is the largest economy in the world, accounting for about a fourth of global GDP in nominal terms and Trump is the most powerful man in the world. His executive orders, dealing with the US as much as with its global strategic and trade policies, whether legal or not, unleash waves of turmoil almost daily. We need to minimize our exposure to such turmoil.

A major source of India’s current exposure to such turmoil is its trade relations with the US.

Official-level discussions on the trade agreement being negotiated are over. But without President Trump’s approval, the shape of the final agreement is not clear. Given that, it is important to be clear about our vulnerabilities and options to minimize such vulnerabilities.

As we pointed out in the mid-term review of the economy by National Institute of Public Finance and Policy (NIPFP) on 11 November, India’s goods exports to the US are quite limited. About 80% of India’s merchandise exports are to other countries and have no exposure to the US. Of our five largest merchandise exports, 70% go to other countries.

For a more granular picture, only 18% of our largest export, engineering goods, goes to the US, followed by a mere 8% of our second largest export, petroleum products. Electronic goods, the third largest export, has high exposure with about 56% going to the US, but these products are exempt from the 50% reciprocal-plus-punitive tariff Trump has imposed on India.

Drugs and pharmaceuticals are our fourth largest export and nearly a third of these go to the US, indicating high exposure. However, the 100% tariff imposed on drugs and pharmaceuticals is on patented and branded products, not on generics which account for the bulk of Indian exports. Gems and jewellery are our fifth largest export, of which 19% goes to the US. But exports of these products are quite diversified and the UAE accounts for nearly a third.

Two products with very high exposure to the US, though not among the five largest exports, are textiles and apparel and marine products (shrimp). However, financial support can be extended to buffer these and some other products with large US shares.

Thus, overall, our exposure of goods exports to the US is quite manageable. The picture is very different for the export of services, where the US accounts for well over half of these exports. In fact, service exports are the most dynamic and surplus component of our exports. High exposure to the US here is at the heart of our trade and trade-related growth vulnerability.

There are also worrying signs of rising US trade barriers to service exports. It has raised H-1B visa fees to $100,000 and also proposed a Halting International Relocation of Employment Act (HIRE) Act, which seeks to impose a 25% outsourcing tax. Against this background, India’s trade-policy priority should be to diversify away from the US as quickly as possible in service exports. Further diversification is also desirable for our goods exports.

Thus, our trade policy must build on two pillars. Diversify away from the US, especially in services, as much as possible and at the same time negotiate hard with the US for a fair deal, especially in services. Two scenarios can be envisaged going forward.

A worst-case scenario is that despite its efforts to diversify away from the US, especially in service exports, India is unable to do so early enough and the US significantly raises its trade barriers vis-à-vis India.

Our exports to the US, especially of services, will then take a hit. The trade surplus in services will vanish and India’s overall trade deficit will increase substantially. Foreign exchange reserves of around $700 billion should be enough to absorb this, especially as the present trade deficit is very modest. However, a larger trade deficit will put pressure on the rupee. More importantly, the increase in trade deficit—a net leakage from domestic demand—will hurt growth.

A more benign scenario is that India makes some headway in its trade diversification efforts and/or reaches a reasonable trade agreement with the US such that there is no significant increase in the US tariff barriers we face.

India does not have the leverage that a few other countries like China have vis-à-vis the US. However, the agreements that the US has signed with other countries that similarly lack leverage suggest that Trump’s bark may be worse than his eventual bite.

There is hope in this. If this scenario plays out, there will be no adverse pressure on either the rupee or on our export growth. Meanwhile, a more diversified trade basket would have significantly reduced our long-term vulnerability vis-à-vis any single country.

Thus, our main takeaway is that the vulnerability of India’s goods trade vis-à-vis the US is limited and manageable. However, the country’s service exports to the United States constitute a significant vulnerability.

Unless India is able to diversify its service exports away from the US early enough, or reach a fair trade agreement with Washington, India’s current account deficit, exchange rate and growth will all be hurt because of heightened US service import restrictions.

These are the author’s personal views.

The author is chairman, Centre for Development Studies.