Pharma & consumer goods: Donald Trump’s tariff threats, and where India could feel the heat

That aside, there is a risk of an across-the-board tariff on all items entering the US, which could hit overall demand for imported goods in the country. The new US Treasury Secretary, Scott Bessent, is drawing up plans to impose 2.5 per cent tariffs across the board, The Financial Times reported. However, Trump told reporters on Tuesday that he wanted a tariff rate “much bigger” than 2.5 per cent.

If imposed, the impact of tariffs on India could be disproportionately high, as the US is India’s largest trading partner, with bilateral trade in 2023 crossing $117 billion. India is also vulnerable to changes in American trade policy, as the US market is India’s largest export market for both goods and services. Most importantly, the US is the only country with which India has a trade surplus, making it a crucial source of US dollar earnings.

Pharma sector: India’s largest vulnerability

The 2023 India-US trade data suggests that India’s tariff vulnerability could lie in the ‘final goods’ category, which recorded the largest sectoral trade surplus of $26.8 billion with the US. The final goods category also contributes 79.3 per cent of India’s overall trade surplus with the US. Notably, India had a $33.8 billion overall goods trade surplus with the US in 2023.

Within the final goods category, the pharmaceutical sector, followed by the gems and jewellery sector, are the largest trade segments where India enjoys a significant trade surplus. Pharmaceutical products comprised the largest 21.9 per cent share of the $20 billion worth of final consumer goods that India exported to the US in 2023. Precious metals, with a 9.6 per cent share, and shrimps and prawns, with a 6.6 per cent share, occupied the second and third spots.

The 2024 US election data showed that non-college-educated voters mostly swung in favour of Trump.

“The new trade regime may target a select few high-value items, particularly from the pharmaceuticals, fisheries, and jewellery sectors. If the trade restrictions adopt a broad-based approach, segments such as chemical products, made-up textiles, and wood pulp may also come under scrutiny. In the event of product-specific actions, exports from the pharmaceuticals, fisheries, and gems and jewellery sectors would likely bear the brunt,” said the think tank Research and Information System for Developing Countries (RIS) in a report last month.

Official trade data suggests that in the last 10 years, India’s goods trade surplus with the US grew from $16.64 billion in FY14 to $35.32 billion in FY24, as India’s goods exports to the US nearly doubled from $39.14 billion to $77.51 billion, making the US the largest export destination, with a 17.73 per cent share in India’s total export basket. Notably, over 70 per cent of India’s IT export revenue comes from the US, making India vulnerable to US trade policy changes, particularly in relation to H-1B visa norms.

Why is China a bigger tariff target than India?

On his first day in office, Trump instructed his commerce and treasury departments to investigate the causes of America’s “large and persistent” annual trade deficits in goods, as well as the “economic and national security” implications of such deficits, according to an official document titled America First Trade Policy released by the White House.

US trade data shows that India contributes barely $33.2 billion, or 3.2 per cent, of America’s overall trade balance, compared to China, which contributed 30.2 per cent, or $317.7 billion, in 2023. Most notably, India is only the ninth-largest contributor to America’s goods trade deficit. The top trading partners that could, therefore, be targeted are China, Mexico, and the European Union if the US decides to seek a reciprocal trade balance.

An National Bureau of Economic Research (NBER) paper titled Importing Political Polarisation and Electoral Consequences of Rising Trade Exposure (2017) stated that growing import competition from China has contributed to a shift to the right in the political beliefs of US adults. The paper also noted that in the 2016 presidential election, trade shocks increased the vote share of the Republican candidate.

The research paper explained that the China trade shock, caused by China’s entry into the WTO in 2000 and the resulting influx of cheap Chinese goods into the US, led to a decline in US manufacturing jobs.

India’s top exports to US

“While in earlier decades, manufacturing helped workers without a college degree reach the middle class, the sector’s steep decline has left US employment more partitioned between highly paid professional occupations and low-wage service jobs. Industries more exposed to trade with China have seen higher plant closures, larger contractions in employment, and lower incomes for affected workers,” the paper stated.

Why are tariffs so important to Trump’s politics?

Trump’s affinity for tariffs predates the 2024 US presidential election. During his first term, he launched a tariff war with China, India, and other countries, primarily to appeal to his core voter base. The 2016 US election showed that Trump won 89 of the 100 counties most affected by Chinese import competition. Trump likely would not have won the election without support from voters in Michigan, Pennsylvania, and Wisconsin—states that had suffered significant manufacturing job losses due to Chinese imports, a research paper by the US-based National Bureau of Economic Research (NBER) in 2017 indicated.

The 2024 US election data showed that non-college-educated voters mostly swung in favour of Trump. Among voters without college degrees, 54 per cent backed Trump, while 44 per cent chose former Vice President Kamala Harris. On the other hand, college graduates preferred Harris by 57 per cent compared to 41 per cent for Trump. Consequently, Trump has threatened tariffs on a number of countries to attract manufacturing jobs to the US.

However, unlike last time, Trump appears to be more cautious on tariffs. During his first week after resuming office, Trump signed a flurry of radical executive orders to curb immigration, end birthright citizenship, and withdraw from the Paris Climate Agreement and the World Health Organisation (WHO). While many of these orders align with his election promises, Trump is yet to follow through on one of his most consequential campaign pledges—imposing tariffs on American trading partners.

One reason, experts believe, could be Trump’s failure in dealing with China during his first term. Trump signed what he called a “historic trade deal” with China, committing China to purchasing $200 billion of additional US exports before December 31, 2021. According to the Peterson Institute for International Economics, China bought only 58 per cent of the US exports it had committed to purchase under the agreement—not even enough to reach its import levels from before the trade war.

That said, Trump’s tariff plans in his second term have been set in motion to achieve his political and economic goals of curbing immigration and attracting manufacturing back to the country. He has announced the establishment of an External Revenue Service (ERS) to tax imported goods entering the US. Although short-lived, Trump imposed a steep 25 per cent tariff on Colombia in an attempt to coerce the country into accepting migrants being deported from the US, sending global coffee prices to record highs.