Trump Midterm Setback: India Gains Leverage as US Tariff Threats Ease
A new report suggests Trump's midterm setback could lower US tariff risks and give India more leverage in trade negotiations.
A significant political shift in the United States could breathe new life into India's trade prospects. According to a report by Emkay Research, President Donald Trump's setback in the midterm elections may diminish the risk of abrupt tariff hikes, potentially providing India with more strategic breathing room during trade negotiations with Washington.
A Shift in the Power Balance
The report highlights that with Democrats gaining control of both chambers of Congress, the US administration is likely to face tighter constraints when attempting to introduce new trade measures. While the fundamental structure of US tariffs may not undergo a massive overhaul, the approach toward international trade partners is expected to evolve.
Several key factors are expected to shape this new trade landscape:
- Limited Tools: There will be fewer tools available for sudden escalations.
- Consumer Focus: Increased pressure to maintain affordability for US consumers.
- Deadline Pressure: A push to finalize trade deals before 2028.
Reduced Risk of "Tariff Shocks"
The research suggests that any future tariff increases will likely move away from sudden decrees and toward investigation-based actions under Section 301 and Section 232. This shift is seen as a positive for trading partners like India, as it reduces the likelihood of unexpected "tariff shocks."
For India specifically, the urgency to rush into a trade deal with the US has lessened. The report points out that the proposed 18 per cent framework rate was never put into effect, and Indian goods are currently facing a lower Section 301 duty of 10 per cent. Furthermore, the US has lost its leverage under the International Emergency Economic Powers Act (IEEPA).
Remaining Red Flags for India
Despite the optimistic outlook, the report cautions that trade risks have not vanished entirely. Certain areas remain volatile:
Sector-Specific Concerns
Indian exporters still face potential threats from sector-specific tariffs under Section 232, particularly within the electronics and pharmaceuticals industries.
Geopolitical Pressures
The report warns that any diplomatic friction involving Iran or Russia could reignite US pressure on India regarding its oil imports.
"Trade remains one of the few areas he controls alone, however, so headline volatility will persist even as the bias softens," the report notes, suggesting that Trump may still utilize trade measures despite the shifted political balance in Washington.
Economic Ripple Effects
Beyond direct trade deals, the midterm outcome could trigger a chain of positive economic effects for India. Lower tariff volatility, combined with a weaker US dollar and softer crude oil prices, could provide much-needed support to the Indian rupee and enhance the country's overall export outlook.
While these developments could gradually lower India's risk premium, the report concludes that the relief might be limited by global financial uncertainties and ongoing current account funding requirements.