It appears that Donald Trump’s strategy of using tariffs as a foreign policy tool has taken a new turn. A recent decision to enact a significant 50% tariff on India, a crucial player within the Quad consortium that includes the US, Australia, and Japan, may have tremendous implications. These implications could extend beyond the confines of world trade and have a ripple effect on the broader international political landscape. The primary motivation for this surcharge is rooted in politics rather than economics, as per the U.S. government’s standpoint.
The United States administration claims that India’s unapproved conduct of purchasing and subsequently reselling Russian oil, in blatant disregard of sanctions installed post Russia’s 2022 Ukrainian invasion, is grounds for the hefty tariff. By continuing to purchase the oil, India has indirectly buttressed Russia’s ability to finance its ongoing war with Ukraine. Consequently, the diplomatic ties between Washington and New Delhi have been strained considerably, severely affecting their ascendant relationship.
Such is the gravity of this situation that India’s prime minister, Narendra Modi, has even declined multiple phone calls from Trump. Furthermore, Trump has reportedly cancelled a previously planned trip to India to attend the later Quad summit. To further complicate matters, Narendra Modi has been present at the Shanghai Cooperation Organisation (SCO) summit in Tianjin, China, along with Russian president Vladimir Putin from the end of August to early September.
It’s becoming increasingly evident that the raised US tariffs will not stop India from its continued purchase of Russian oil. In fact, Modi has reiterated India’s commitment to not only retain this purchasing habit but even ramp up the volumes. Taking a deeper look, the explanation for India’s resilient stance is not rooted in a lofty geopolitical plan, but rather a straightforward economic necessity: curbing inflation.
India, as a nation heavily reliant on energy imports, requires stable, affordable energy prices for its highly impoverished and vulnerable population. Despite the mounting pressure from the U.S. and its G7 allies, India’s requirement is driven largely by this simple economic reality. The new tariffs imposed by the U.S. might cause a drop in the exports of Indian clothing and footwear to the U.S, forcing western brands to look for cheaper alternatives.
As a direct consequence of this tariff, consumer prices may rise in the U.S., leading to a potential decrease in the demand for Indian suppliers. However, this should not critically harm Indian suppliers since there remains considerable global demand for clothing and footwear. Therefore, finding alternative markets should not be too arduous for Indian suppliers. Gemstones, another major Indian export item in which India holds a significant global market share, will likely continue to prosper despite the tariff pressure.
Trade relations between India and Russia are likely to deepen, introducing fresh opportunities for reciprocal investment. Concurrently, Russia’s overall economic standing might experience an upward trajectory as a result of these tariffs. The possibility of not only an increase in India’s oil imports but an enhanced prospect of importing clothing and footwear from Indian suppliers could bolster Russia’s economic stability.
The prospect of closer economic alliances with India, intending to elevate bilateral trade to US$100 billion by the year 2030, presents Russia with a sizeable market to vend its goods beyond China. Concurrently, it gains a major supplier of consumer goods that could help keep local prices low for its citizens. The rising tariff concerns might trigger the redirection of Indian investment away from the U.S. and G7 nations towards Russia and China, should this conflict escalate into more severe financial sanctions.
Indian investors hold significant stakes in the automotive, pharmaceutical, and IT and telecom sectors in the western world. These investments could be redirected elsewhere, compounding the issue further. The BRICS nations, comprising Brazil, Russia, India, China, and South Africa, along with recent members such as Egypt, Ethiopia, Iran, Indonesia, and the United Arab Emirates, are already developing technical mechanisms to facilitate domestic investments and trade settlements outside of the U.S. dollar.
The recent turmoil in global trade induced by the U.S. tariffs has resulted in a short-lived but notable decline in the U.S. dollar’s value. While not a drastic shift when viewed from a historical perspective, these fleeting trends may obscure a potentially serious long-term implication. The risks go beyond mere trading transactions, which only account for a minor portion of all dollar transactions.
The greater concern lies in the likely diminished role of the dollar in exiting transactions related to asset management, investment, finance, and international reserves. Particularly, the dollar’s practically exclusive status as the reserve currency for BRICS and other emerging south nations is perilously close to being undermined. Any policy modification that endangers this status could potentially threaten the U.S’s prosperity and security footprint.
A prevailing worry is that any financial or trade policies that nudge the U.S.’s prominent trading associates closer to Russia and China might lead to exactly such a scenario. The current tariff measures indeed seem to be steering the commerce world in that direction, involving a quiet reshuffle of global power dynamics.
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