Why in the News
In less than a month, the United States has threatened buyers of Russian energy with tariffs, become a buyer of Russian diesel itself, and then put the penalties on hold. The reversal comes as India and the US near an interim trade agreement, raising the question of what India gains by signing.
What did Washington do on Russian energy, and why?
- Graham sanctions law: Enacted on September 18, it threatens countries such as India with extra tariffs of up to 100% for buying Russian oil. It is a secondary sanction, punishing third countries, not Russia.
- Diesel deal with Russia: On October 9 the US agreed to buy Russian diesel, after US retail diesel prices rose 66.5% in a year and angered voters before the midterm elections.
- Relief and waiver: Russia gained sanctions relief until April 2027 for producers such as Rosneft and Lukoil. Punishing others would now look hypocritical, so the US waived the penalties for an unstated period.
- Allies’ objections: Ukraine’s President said the relief would legitimise Moscow and finance its war. European leaders said it undermines sanctions.
- The takeaway: Domestic needs overrode a foreign policy commitment within weeks. India can keep buying Russian oil, but the tariff threat survives as trade leverage.
Where do the India-US trade talks stand?
- Interim agreement: The deal follows the February 6 Joint Statement framework, and its legal text is reportedly being drafted.
- Signals of progress: The US Trade Representative said talks were “in the short strokes”, meaning nearly done. India’s External Affairs Minister called them “pretty far advanced”.
- Finance Minister’s warning: The Finance Minister said talks had reached a “plateau” and further concessions would be “very, very difficult”.
- Condition for signing: The deal can be signed once the US gives Indian goods a clear tariff advantage over competitors.
Why is the US tariff offer the central obstacle?
- Lapsed tariff cut: The February framework proposed cutting the US reciprocal tariff on Indian goods from 25% to 18% in return for major Indian concessions.
- US Supreme Court ruling: The Court struck down those reciprocal tariffs on February 20, so the promised cut had nothing left to apply to. India’s concessions stayed on the table.
- Forced labour tariff: Washington then imposed a 10% forced labour tariff under Section 301, a US trade law provision against foreign practices it judges unfair.
- Competitors shielded: Most competitors face no penalty for Russian oil. China is shielded from new bilateral tariffs until January 2027 under the Busan Agreement.
Should India sign on the February terms?
- No special favour: The US could extend India’s Russian oil exemption if India accepts the February terms. That is no real favour, since competitors without a deal pay only normal duties plus 10% or 12.5%.
- Duty cuts already given: Over two years India has cut duties on goods of US interest, such as motorcycles, bourbon, some pharmaceuticals and Ethernet switches.
- Policy concessions: It allowed foreign investment in inventory-based e-commerce, where the platform owns the goods it sells, for exports. It also scrapped the equalisation levy, a tax on payments to foreign digital platforms.
- Lost bargaining power: Each concession without a return weakens India’s hand, so accepting the old terms now could leave India worse off.
Challenges
- Unpredictable US policy: Domestic needs can override Washington’s commitments, so tariff relief can be reversed.
- Concessions before a deal: Unilateral changes give away leverage early. Eg. Proposed Unified Payments Interface (UPI) fees could benefit Visa and Mastercard.
- Energy security on a waiver: India’s Russian oil imports rest on a waiver of unstated duration.
Way Forward
- Wait for final duties: Sign only after the US states its final duties on Indian goods and on competitors.
- Freeze unilateral concessions: The Commerce Ministry should pause further duty cuts until the deal is signed.
- Price the concessions: Count the value of concessions already given and seek a matching US offer.
Conclusion
US tariff threats over Russian energy have proved to be bargaining tools that bend to domestic needs, not fixed policy. The test is whether Washington offers Indian goods a final tariff below competitors’ duties before New Delhi signs.
About India-US Trade Relations
- Largest export market: The US is India’s largest export destination, and India runs a trade surplus with it.
- Investment: The US is India’s third largest source of foreign direct investment (FDI), with about $70.65 billion in cumulative inflows since 2000.
- Mission 500: A joint target of $500 billion in bilateral trade by 2030.
Matching Previous Year Question
“No direct PYQ traced in the provided files. Thematic PYQ: [2024, GS2, 10 marks] Discuss the geopolitical and geostrategic importance of Maldives for India with a focus on global trade and energy flows. Further also discuss how this relationship affects India’s maritime security and regional stability amidst international competition?”
