Mentor’s Comment:  The global trade order is witnessing a seismic shift amid renewed trade wars, evolving tariff regimes, and accelerating bilateral negotiations. In this flux, India’s exports of nearly one-fifth of its merchandise to the U.S., finds itself vulnerable, especially in sectors dominated by MSMEs like apparel, gems, and electronics. The uncertainty surrounding U.S. reciprocal tariffs, potential dumping threats, and the instability in trade negotiations pose a structural challenge. However, India also faces a rare geopolitical opportunity—to integrate into the reconfigured global supply chains, reduce dependency on traditional partners, and assert itself as a global manufacturing and export hub.

Today’s editorial analyses the impact of new trade rules and ongoing political tensions between countries. This content would help in GS Paper II (International Relations) and GS Paper III (Indian Economy) in the mains Paper.

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Why in the News?

The global economy is changing in a big way, mainly due to new trade rules and ongoing political tensions between countries.

Why are current global trade dynamics creating uncertainty for Indian exporters?

• Rise in protectionism and trade wars: Many countries are reviewing tariffs and adopting protectionist measures. This creates unpredictability in global trade flows, making it harder for Indian exporters to plan pricing and market strategies. Eg: The U.S. imposing or revising tariffs on Indian goods affects sectors like garments and pharmaceuticals.
• Geopolitical tensions: Conflicts like the U.S.-China trade war or the Russia-Ukraine war are disrupting supply chains and altering trade alliances, impacting Indian exporters’ access to global markets and increasing costs. Eg: Indian exporters face delays or higher freight costs due to changes in trade routes.
• Uncertain tariff regimes: Indian exporters face difficulty in decision-making due to fluctuating U.S. trade policies and lack of clarity on future duty structures, impacting pricing and margins. Eg: Sectors such as auto components and gems & jewellery, heavily reliant on the U.S., face profitability issues.
• Losing competitive advantage: Competing countries like Bangladesh and Vietnam may benefit from early trade deals with the U.S., while India’s relative tariff advantage remains unclear. Eg: Indian textile exports could become costlier compared to Bangladesh’s duty-free access.
• Planning uncertainty: Exporters hesitate to invest or plan for the long term in the absence of stable trade rules and policies. This impacts capacity expansion and export contracts, particularly for MSMEs. Eg: Indian MSMEs may cancel new orders or delay shipments due to lack of tariff clarity.

What challenges do Indian MSMEs face due to potential U.S. tariff changes?

• Profit Margin Erosion: Increased U.S. tariffs make Indian goods costlier, reducing profit margins for MSMEs and making their exports uncompetitive. Eg: A carpet-exporting MSME in Uttar Pradesh may struggle to maintain orders if buyers shift to cheaper alternatives from Bangladesh.
• Order Uncertainty and Planning Delays: Fluctuating tariff policies create hesitation among U.S. buyers, affecting long-term contracts and production planning for small businesses. Eg: An MSME manufacturing leather goods may face cancelled or delayed orders due to uncertainty over final landed prices.
• Limited Ability to Absorb Costs: Unlike large firms, MSMEs lack the financial cushion to absorb increased costs from tariffs, logistics, or compliance. Eg: A small pharmaceutical exporter may not afford sudden freight hikes or additional duties, making exports unviable.

How can bilateral and free trade agreements help India navigate global trade disruptions?

• Ensure Preferential Market Access: FTAs allow Indian exporters to access foreign markets with lower or zero tariffs, making their goods more competitiveeven amid global disruptions. Eg: An FTA with the UK can benefit Indian apparel exporters by reducing tariff barriers, boosting exports.
• Diversify Export Destinations: Bilateral trade deals reduce dependency on a single market like the U.S., helping India shift exports to Europe, Australia, or ASEAN during crises. Eg: The India-EU FTA under negotiation could open up multiple markets for Indian electronics and auto components.
• Address Non-Tariff Barriers (NTBs): FTAs help resolve issues like customs delays, quality standards, or licensing hurdles, ensuring smooth trade flowduring uncertain times. Eg: A mutual recognition agreement (MRA) under a BTA with the U.S. could simplify pharmaceutical exports by accepting Indian drug certifications.

What policies can boost India’s economic resilience?

• Strengthening Public Capital Expenditure: Increased government spending on infrastructure boosts domestic demand, generates employment, and crowds in private investment during global slowdowns. Eg: The PM Gati Shakti scheme accelerates infrastructure development, improving logistics and economic stability.
• Expanding Production-Linked Incentive (PLI) Schemes: Enhancing PLI coverage to include more sectors like IoT devices or battery raw materials promotes domestic manufacturing, attracts FDI, and reduces import dependency. Eg: PLI in electronics has boosted mobile phone exports and created supply chain resilience.
• Maintaining Accommodative Monetary Policy: Ensuring low interest rates and easy liquidity through monetary support helps businesses manage costs and stimulate investment during global headwinds. Eg: RBI’s repo rate cuts post-COVID helped MSMEs access cheaper credit, aiding recovery.

Why should India focus on foreign investment and PLI expansion?

• Diversify Global Supply Chains: Global companies are looking to reduce dependency on China and Southeast Asia. India can attract them by offering stable policies and incentives. Eg: Apple has shifted part of its iPhone manufacturing to India due to the PLI scheme and policy support.
• Boost Manufacturing and Employment: Expanding PLI coverage to sectors like wearables, batteries, and semiconductors can enhance local production, reduce imports, and generate jobs. Eg: The PLI for electronics has helped create thousands of direct jobs and increased exports.
• Strengthen Export Competitiveness: Foreign investments bring technology transfer, better quality standards, and improved productivity, which are crucial for export growth. Eg: Investments in the automobile and pharma sectors under PLI have enhanced India’s global competitiveness.

Way forward:

• Accelerate FTA Negotiations and Ensure Tariff Stability: India should fast-track bilateral and multilateral trade agreements (e.g., with the EU, Australia) to ensure stable market access and reduce uncertainty for exporters.
• Expand and Streamline PLI Schemes: Broaden the Production-Linked Incentive (PLI) schemes to include high-potential sectors (e.g., semiconductors, IoT), and simplify procedures to attract more foreign investment and boost domestic manufacturing.

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