Kaushik Basu: India must not fall into Trump’s tariff trap

The announcement caught Indian policymakers off guard, particularly given Prime Minister Narendra Modi’s apparent support for Trump’s re-election campaign. The White House’s harsh statement, framing the move as punishment for India’s purchases of Russian oil, has only added to the  confusion. As the Wall Street Journal recently noted, this reasoning does not hold up, since China—the largest buyer of Russian oil—has not been penalized for its purchases.

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So, what explains Trump’s decision? Paradoxically, India’s policy of siding with Trump may have made India easier to take for granted, to the point that even a minor departure from Trump’s preferences is treated as unacceptable.

This dynamic is reminiscent of Anton Chekhov’s short story, The Ninny, in which an employer withholds the equivalent of nearly a month’s salary from his children’s governess for arbitrary reasons. The governess accepts each cut without protest—a passivity that the employer chastises as spineless. Economist Ariel Rubinstein later drew on Chekhov’s story to develop a model illustrating how submission can invite exploitation.

India’s apparent subservience to Trump had marked a departure from  its longstanding role as a strong independent country. As a co-founder of the Non-Aligned Movement, it once championed strategic autonomy, balancing relations with multiple countries while avoiding subordination to any major power, be it the US or Soviet Union.

It is time for India to draw on that legacy and cultivate economic and  diplomatic ties with countries like Mexico, Canada and China. This also means strengthening trade and cooperation with other governments that are concerned about the impact of Trump’s tariffs, particularly in Europe and Latin America.

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It would be a mistake for New Delhi to retaliate by matching Trump’s tariffs, as some prominent Indian commentators have urged. While retaliation would hurt the US, the damage to India would be far greater. The US is India’s largest trading partner, whereas India is only the tenth-largest partner for the US—well behind Mexico, Canada, China and Germany. The US economy is also far larger and therefore better able to absorb major shocks.

More importantly, courage does not necessarily mean responding in kind. By imposing heavy tariffs on its longtime trade partners, the US is making a grave error, isolating itself and inflicting enormous damage on its own economy.

To be sure, tariffs can play an important role in economic policy. A well-known example is the infant-industry argument, which holds that when a promising sector is still in its early  stages, temporary tariff protections  can give businesses the confidence to invest, allowing the sector to grow, achieve economies of scale and become competitive. But once the industry matures, tariffs should be reduced, so that the discipline of open competition can help it perform even better.

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India is a case in point. In 1977, a political dispute led the government to expel IBM, compelling the country to develop its own mini- and micro-computers. Protected by trade barriers, India’s domestic computer sector expanded quickly. But it was the economic reforms of 1991-93, which opened up India’s markets to international competition, that enabled its infotech sector to flourish and Indian corporations like Infosys, Wipro and Tata Consultancy Services to emerge as global leaders, helping drive a period of unprecedented economic growth.

Interestingly, the infant-industry concept predates modern academic economics and can be traced back to Alexander Hamilton, America’s first treasury secretary, who successfully advocated for US tariffs to protect and nurture its nascent industries. Although US trade policies shifted after 1860, relatively high tariffs remained in place until 1934, after which they fell sharply, fuelling a sustained economic boom.

By contrast, Trump’s decision to raise tariff rates to their highest levels in more than 90 years is less an infant-industry policy than a nonagenarian one, shielding an American manufacturing sector that long ago outgrew any need for protection. Moreover, competing with manufacturers in  emerging economies like India, Vietnam and Indonesia would require driving down the wages of American workers—a strategy that is neither realistic nor desirable.

The same applies to India: tariffs should not be used to settle political scores. In the long run, the collateral damage will far outweigh any short-term gains. 

As for Trump’s tariff policy, we can only hope that he will recognize the mistake and reverse course before it causes any more damage to the US economy.  ©2025/Project Syndicate

The author is a professor of economics at Cornell University and a former chief economic adviser to the Government of India.