Can India Benefit From Tariff War?: Raghuram Rajan Exclusive With Rajdeep Sardesai On India Today

Summary

In an exclusive interview with Rajdeep Sardesai on India Today, former RBI governor Raghuram Rajan discusses the implications of the US tariff war initiated by Donald Trump. Rajan highlights the detrimental effects on the US economy and its rippling impacts globally, including in India. While he describes the tariffs as a short-term self-goal for the US, he suggests that other countries, like India, might find silver linings amidst the chaos by reassessing their trade policies and reducing tariffs. Rajan advocates for India to use this time to negotiate favorable trade deals and enhance its business environment to attract more foreign investment and position itself advantageously in the global market.

Highlights

• Rajan describes the US tariffs as disruptive to the US economy, calling it a short-term self-goal. 🤦‍♂️
• He explains the ripple effect of these tariffs on global markets, including India. 🌊
• Rajan suggests that India could seize the moment to refine its tariff policies. 🔧
• The trade tension is predominantly between US and China, with high stakes negotiations anticipated. 🎯
• India has a chance to revamp its business environment and draw foreign investments amidst these tensions. 🌱

Key Takeaways

• Raghuram Rajan sees the US tariffs as a short-term self-goal hurting its own economy. 🚩
• The tariffs have a ripple effect, impacting global economies like India and China. 🌍
• India might benefit by reassessing and reducing its tariff structures. 📉
• China and the US are in a tug of war, potentially leading to a trade deal. 🤜🤛
• This trade situation presents an opportunity for India to improve domestic policies and attract more FDI. 🏢

Overview

Raghuram Rajan, in a frank discussion with Rajdeep Sardesai, delineates the adverse impact of US-imposed tariffs under President Donald Trump. According to Rajan, the tariffs threaten to derail the US economy, which was on a steady growth path, and could spur inflation making it difficult for the Federal Reserve to manage. The tariffs are expected to increase consumer prices, slow down investments, and raise anxiety among investors, which could ultimately throttle the US economic momentum.

The reverberations of the US tariffs are felt globally, impacting markets in India and putting pressure on China's trade standing with the US. Rajan posits that while the immediate reaction seems damaging, it could coax nations like China into negotiating more equitable trade terms with the US. The tariffs, while detrimental, might urge countries like India to reconsider their protectionist policies and engage more actively in revising trade strategies to foster growth and stability.

In discussing India's position, Rajan sees a silver lining amid the trade war chaos. India, he suggests, should leverage this scenario to streamline its tariff structures and better its business climate, making it an attractive destination for firms looking for alternatives to China. By acting promptly, India could not only improve its trade terms with the US but also bolster foreign direct investment, ultimately accelerating its economic growth in a volatile global market.

Chapters

• 00:00 - 00:30: Introduction The chapter introduces a discussion with Professor Raguram Rajan, former RBI governor and renowned voice in global economics. The context is set around a turbulent week for the global economy, particularly marked by Donald Trump's tariff announcements.
• 00:30 - 02:30: Short-term Implications of US Tariffs The chapter discusses the short-term implications of US tariffs, with a focus on the perspective that these tariffs could be considered a 'self goal.' It highlights concerns over the immediate effects of imposing very high tariffs, while suggesting that long-term outcomes may differ.
• 02:30 - 04:30: Ripple Effects on the Global Economy The chapter discusses the interruption of the US economic growth, which was exceeding its potential at over 2%, with unemployment at record lows implying near full employment. It also mentions the Federal Reserve's response to decreasing inflation levels.
• 04:30 - 08:30: Focus on US-China Relations This chapter focuses on the impact of tariffs on US-China relations, particularly in the context of the US economy. It discusses whether a reduction in tariffs could prevent a potential economic downturn in the US. The key concern is that if tariffs increase, it could lead to higher prices for US consumers, prompting them to spend less, which would affect the broader US economy. The chapter raises questions about the immediate consequences of such actions, highlighting the delicate balance between tariff policies and economic stability.
• 08:30 - 15:00: Impact on India and Potential Opportunities This chapter discusses the impact of tariffs on the US economy, indicating that they lead to increased anxiety over their duration, slow investment, and consequently slow overall economic growth. The text highlights the accompanying issue of rising inflation and the Federal Reserve's inability to reduce interest rates unless a significant recession occurs. This situation is described as a 'self goal' by Donald Trump, suggesting that these policies are counterproductive in the short term.
• 15:00 - 24:30: Global Economic Uncertainty and Strategic Advice for India The chapter discusses the global economic uncertainties triggered by actions from the United States, particularly under Donald Trump's administration. It explores how such actions have ripple effects, causing economic instability in other countries, including market meltdowns in India, even though markets may recover shortly afterward. The conversation delves into concerns about a potential trade war instigated by the US, which could harm several economies worldwide, highlighting it as collateral damage in global economic dynamics. The chapter provides strategic advice for India in navigating these uncertainties.

Can India Benefit From Tariff War?: Raghuram Rajan Exclusive With Rajdeep Sardesai On India Today Transcription

• 00:00 - 00:30 And joining me now from Chicago is a very special guest. I'm joined by the former RBI governor, the uh professor at Chicago's uh business school and someone who's uh really seen as a preeminent voice in the world of global economics today. Professor Raguram Rajan joins me. Appreciate you're joining us. Uh Dr. Rajan, it's been quite a turbulent week if I may say so to put it mildly. I recall uh on the day last week that Donald Trump brought these tariffs uh
• 00:30 - 01:00 his so-called liberation day, you had briefly commented saying this was a potential self goal by the US president. Do you want to be more specific? Why do you think this tariff war could be a self goal? Well, I I uh said self goal in the short term. In the longer term, we can speculate about what happens. But but clearly what happens with uh very high tariffs in the short run is you're
• 01:00 - 01:30 derailing uh what was a US economy which is going at a reasonable pace. It was actually uh growing more than its potential growth which is about 2%. uh unemployment was at uh really low levels uh consistent with saying that uh you know any American who wanted a job was pretty much uh employed. And so in that environment with uh inflation coming down to levels where the Fed
• 01:30 - 02:00 might feel comfortable reducing rates to suddenly bring in this jutka so to speak uh of uh of tariffs uh was spoiling a a potential uh soft landing in the US economy. uh the consequences uh immediately if these tariffs tick and of course that's a big question we can come back to is that prices go up hugely for the US consumer they tighten their belt they stop spending the US investor gets
• 02:00 - 02:30 a lot more anxious about how long the tariffs will stay investment slows so aggregate growth in the US economy slows considerably with higher inflation and the Fed unable to cut interest rates unless it sees a really uh sharp recession. So this is uh why in the short term it uh it clearly is a self goal. So you're saying what Donald Trump has done in the short term is a self goal.
• 02:30 - 03:00 But is it a self goal just for the United States? What about the rest of the world? The ripple effect it's having across the world. We've seen the meltdown in India in the markets yesterday. They've recovered today. though the general sense is that Donald Trump what he's done has hit the entire world. So it's not just about what h what's happened with the US and the self goal that he may have scored but is he willy-nilly taking the world you believe into a trade war that could destroy several other economies as well. Uh yes I mean that is uh the collateral
• 03:00 - 03:30 effect of course of what what has been done. uh I mean for the rest of the world it's not a self goal uh unless uh you know the reaction to the uh tariffs that the US has set u you know uh creates problems for themselves but um what we are going to see in the next few days is how this plays out. Clearly uh some of this is the US attempting uh to bring some of its trading partners to
• 03:30 - 04:00 the table. One would have thought there are milder ways of doing it. But uh clearly Mr. Trump is waiting for a call from China to try and discuss uh what can be done uh including I understand the fate uh of uh uh Tik Tok the web platform. But but I think uh more more generally uh you know some of these tariffs are going to stay and they certainly affect the countries that are
• 04:00 - 04:30 selling into the US partly because the US consumer himself or herself is tightening their belt but also partly because this makes their goods more expensive and that is going to cause some falloff in demand for those countries. uh some countries like Vietnam are much more affected because of the high level of tariffs and the high exposure to the US than other countries uh for example like India where the tariff uh setting has been lower and the exposure for our 4 trillion economy is significantly lower
• 04:30 - 05:00 than say for Vietnam. Dr. Rajan, I'll come to India in a moment, but I want to focus on China because many believe this is the immediate war taking place after United States imposes tariffs. China announced retaliatory tariffs of 34%. U you're saying that maybe Donald Trump is hoping to get China to the negotiating table. Do you believe as some observers have told us that all of this is a US China war over tariffs and
• 05:00 - 05:30 if they the two sides come and settle and and come to the negotiating table uh then much of this uh could be sorted out. There is a sense in the United States in particular that China has got away with lowcost manufacturing for too long. Is this Trump versus China? No, I think it's it's deeper than that. I mean, you have a record of President Trump talking in the 1980s when China
• 05:30 - 06:00 really didn't signify uh at that point in the global economy about how the US was being taken advantage of by Japan, by the Europeans, etc. So part of this is a long-standing grievance in his mind that the rest of the world sells into the US and any deficit that the US runs is a evidence of their taking advantage of the US. Of course economists would disagree significantly with that that view. The I think the second apart from
• 06:00 - 06:30 this general sense is that there is a bunch of mercantalist uh uh economists around him like Peter Navaro who really believe that uh deficits are a bad thing. They somehow indicate you're not creating enough jobs in the US and by um you know tariffing the rest of the world you can bring jobs back to the US. Now this is a a a kind of economic theory which has been derided for over 300
• 06:30 - 07:00 years uh right from Adam Smith but uh some people still cling on to that and uh you know uh that's part of the reason for tariffs but I think the primary uh force right now for why the tariffs won't go back to the previous level is the US needs revenues uh to fund the tax cuts that uh that the president has been promising. and tariffs are a source of revenue. So many believe that this 10% basic universal tariff is probably here to
• 07:00 - 07:30 stay uh even if some of the higher uh reciprocal tariffs can be renegotiated down because uh the US actually is using this as a source of funding for its tax cuts. You know let's turn to India then uh ahead of these reciprocal tariffs. Uh uh professor Rajan, Prime Minister Modi was in Washington. Uh there is much talk now of a potential Indo-US trade deal by the
• 07:30 - 08:00 autumn. How do you see India being affected uh by these tariffs in the short term? So far it seems India uh is not getting any special exemptions barring in some sectors uh like pharmaceuticals. Do you believe? How do you see this now play out in India in the short term or for India in the short term? Well, yes. Uh I I mean this goes back to the way the tariffs were set uh based on a somewhat rudimentary formula and uh by
• 08:00 - 08:30 that formula India's exports uh manufacturing exports to the US uh and its uh surplus uh played a role in in that number which by the way I see 26% 27% not quite sure what the precise number is uh uh but uh the uh the fact is that uh Indian exports uh to uh the United States are relatively small compared to our GDP right GDP of around 4 trillion uh exports around 800 uh
• 08:30 - 09:00 around 80 85 billion and so yes uh there will be some effect uh and uh it will be harmful for Indian exporters but uh this is not going to uh sort of change the nature of our uh econ economy and uh and our growth uh significantly. Uh it would be nice to negotiate them down. I think this is also an opportunity for India to bring down its own tariffs. Uh not just
• 09:00 - 09:30 for the US but uh more broadly. Uh some of us economists were a little worried about the creeping rise in tariffs once again in in India over the last few years. Uh this is a chance to do that. Of course, there are sectors which are more sensitive agriculture. How can we figure out a win-win situation there where we create opportunities for our agriculturists in the rest of the world while giving a little bit uh on that dimension that's those are things that
• 09:30 - 10:00 we need to spend some time thinking. I am uh of the view that knee-jerk reactions are probably not warranted which is uh uh which the government is wisely not doing but I do think uh trying to conclude a deal sooner rather than later will certainly help our exporters. So, so what you're saying, Professor Rajan, is that India should pursue and seal a bilateral deal with the United States, hopefully on favorable terms, not seemingly at gunpoint, but at the same time, maybe use this as an
• 10:00 - 10:30 opportunity to get our own tariff structure in place. Maybe explore trading opportunities with ASEAN, with other regions also. Maybe not just be dependent on the US and maybe take advantage, would you say, of a China plus one strategy that the world is looking at? look at options to China and India could be one. I think that's right. Uh I do think that uh you know uh we shouldn't necessarily favor just the United States in this deal. We should uh
• 10:30 - 11:00 if we are giving a certain kind of treatment uh follow the most favored uh nation uh logic and and give it to other countries also. There's no reason why we should privilege uh US uh producers in this. But I think more broadly thinking about the level of our tariffs and non-tariff barriers uh this is a a good chance to actually uh benefit our economy more widely. But I I also think it is a good time to start looking east
• 11:00 - 11:30 uh looking north and and try and see what other deals uh can India do uh because the last thing we want to do is be uh sort of isolated because we don't belong to any of the regions which are forming right now uh in terms of trade. So certainly revisit uh REP uh revisit any kinds of links to ASEAN but also you know uh reach out to Japan uh reach out to China and see how we can uh create a
• 11:30 - 12:00 better trading relationship with China. Of course with China we run the large uh deficit and uh perhaps there are ways that can be remedied uh to be more balanced. You've also been quoted uh uh professor Rajan as saying that tariffs could be disinflationary for India while sparking possible concerns of growing inflation in the United States. Could you explain what you meant when you said that uh this entire tariff uh structures that Donald Trump is putting in place could
• 12:00 - 12:30 be disinflationary for India? Yeah, I mean certainly when uh countries are uh kept out of a major buyer uh they have excess production uh including in India some of our exporters may have uh you know production which is not selling in in the US. So uh what do they do? They turn around and look uh for other markets. uh Indian export Indian uh exporters might look for markets in East Asia but certainly the domestic market
• 12:30 - 13:00 will look also somewhat attractive. Similarly, Chinese production which is denied uh sort of entry into the US with the high tariffs may uh look for a home in India. So uh I think uh this could uh from that perspective be disinflationary. Of course there is a worry uh in country after country with uh being flooded by goods from elsewhere which aren't being uh sort of absorbed in the United States. I think in the
• 13:00 - 13:30 short run uh that absorption will continue. It's very hard for the US to move away from buying from the rest of the world and the tariffs will be paid but in the medium term I think uh uh you will have a reconfiguration of global trade and that could be disinflationary uh for countries like India with uh with more cheap export uh cheap imports available. So, so are you saying that in a way and you referred to this briefly also earlier that this is an opportunity
• 13:30 - 14:00 maybe for India to be less protectionist set its own tariffs and non-tariff barriers in order and maybe therefore avail the opportunities that may lie if this potential US China trade war escalates out of control. India could end up being a beneficiary in a way as the world looks at options to China. That's right. uh I mean nobody really benefits from an action like this but there are silver linings and uh I think
• 14:00 - 14:30 this is why it's important to for India to negotiate that tariff structure uh sooner rather than later don't delay but you know don't be precipitous but uh but certainly uh take action sooner sooner rather than later because that gives you uh you have a large India has a large domestic market uh as it is producers want to have a foot on the ground in the in India. But if in addition you say we are uh you
• 14:30 - 15:00 have low tariffs uh in entering the United States uh perhaps that will give an added impetus for countries and firms that are looking for a China plus one strategy. So I think uh we don't want to delay too long. uh this is a moment when there's a lot of uncertainty among business and the uh attractiveness of our domestic market coupled with the possibility that we are a low tariff
• 15:00 - 15:30 entry point into the US could create a lot more investment uh if we if we play our cards right. Of course, we also need to do the other part which is make investment more friendly in the U in India. Uh make tax laws more predictable, reduce the uh raid Raj from the tax authorities. All that stuff we need to do. Uh but this is a good time to pull up our socks and do what is necessary. The the worry though, Professor Rajan,
• 15:30 - 16:00 is that we still haven't done enough domestically. The ease of doing business. Uh there are still uh companies that are now complaining some of them privately others publicly stating uh talking about a raid raj about uh the about the way taxes are being put in place private in investment consumption as a result hasn't picked up. Are you suggesting this is therefore a good time for us to get our domestic act together above all else?
• 16:00 - 16:30 Absolutely. I mean we should do it anyway as you as you put it but but I would say uh the added sweetener is that we could see a fair amount of FDI coming. A lot of uh you know companies are are sort of thinking well China looks a little toxic at this point and anyway I was reducing my position in China. Where else do I position it? It used to be Vietnam, but Vietnam has got hit again uh with these significant tariffs and and Mexico is no uh is no uh
• 16:30 - 17:00 you know full solution as we've seen. So, so my sense is um you know the big domestic market that India has attached to it uh will be a sweetener uh so worst comes to worst India doesn't uh you know gets tariffed at some point once again at least there's a large domestic market we can play to and India is not poisonous on the geopolitical front unlike some other countries so in that
• 17:00 - 17:30 sense I think that uh you know this is an opportune moment for us but we really need to get our act uh together. Overall though uh uh uh professor Rajan do you believe we are heading for more global headwinds and uncertainty that uncertainty over the next year is something the world will have to live with as long or perhaps as long as Donald Trump is in power we will be in uncertain times almost surely the answer is uh
• 17:30 - 18:00 yeah I hope uh this was the big sort of uncertainty coup but uh you know the reality is that uh uh you know policym today in the United States is concentrated in one man and uh given that uh it it will be volatile regardless of the personality but uh given the personality is Mr. Trump uh it is even more volatile. So uh I think uh
• 18:00 - 18:30 the rest of the world has to uh live with this. Uh of course a lot of countries are going to sort of start thinking of uh alternatives that they were ignoring so far and I think this is a good time for India to revisit its uh its economic strategy. Uh I think one good news in all this is our services exports uh have been relatively untouched by tariffs and as you know services exports overtook manufacturing
• 18:30 - 19:00 exports uh recently. So uh you know we we are in a sense a little more protected. Uh the US is also uh a huge services exporter and therefore has less incentive to tariff services. Um so my sense is uh you know we have had uh somewhat uh uh uh good doses of luck so far but let's take advantage uh of this even though as I said it is a problem
• 19:00 - 19:30 for the world but there are silver linings you know speaking of uncertainty uh uh professor Rajan in the last 24 hours Donald Trump has also said that if China doesn't withdraw its retaliatory tariffs US will impose additional tariff of 50%. Do you see all of this as typical Trump bluster or is this all part of a larger bargaining tactic to get the Chinese to the negotiating table? Is that what you expect to happen next?
• 19:30 - 20:00 I think he's signaled fairly strongly that he wants to talk. Um I think the Chinese uh certainly were uh using back channels to talk to the US even before this and were a little surprised by the size of the uh imposed tariffs on on China. Uh but we know that there wasn't a whole lot of calculation that went into those numbers. Uh that said I mean look uh 34 64 104 uh that level doesn't
• 20:00 - 20:30 matter. It's it's hugely uh disturbing for Chinese exports into the US. So you can keep threatening more and more at some point the Chinese are going to say we're dead uh on the export front. Uh we can't be dead than dead. Uh and and so to some extent what you have here is uh two uh uh strong leaders uh trying to uh gauge each other uh and needing to talk. So I presume back channels are at work
• 20:30 - 21:00 right now and uh at some point there may may be more of a discussion. Now China is complicated from the US's perspective. On the one hand, there is a a whole bunch of people in the administration who see China as a strategic rival which has to be undercut in every which way including economic and then there are there's the business interest which basically sees the ties significant ties with China in so many ways and uh you know a company like Apple is going to be hurt very very hard
• 21:00 - 21:30 uh if uh if these tariffs do come on board and there are no exemptions. So um there is a tugofwar right now. Elon Musk for example has a big Chinese market uh and produces that. So the there is a tug of war within the administration on on views with respect to China. Uh but I presume some negotiation is on the cards. In conclusion though Dr. Rajan would you say that uh the world could be heading for a global recession later this year?
• 21:30 - 22:00 Several leading economist think tanks seem to suggest that. Do you think a global recession is likely in the near future? Well, I I think that if the level of tariffs which have been imposed uh do not come down uh significantly uh you know 10% I think the world can live with uh 46% on Vietnam more on China those will inhibit trade significantly disrupt
• 22:00 - 22:30 supply chains and uh to some extent uh you know uh create a significant slowing in the US economy uh also in economy of exporters, China is not going to do uh well if its primary export market is cut off. So um I think that uh yes if the tariffs stay where they are uh we could indeed see a global recession uh something which was unthinkable at the beginning of the year when you know
• 22:30 - 23:00 recovery was there all round. uh but hopefully uh you know we see uh reasonable renegotiation of these tariffs uh in the next few months and uh and some of the damage that could be done is doesn't actually happen. A final question uh Dr. Rajan if you were advising Prime Minister Modi and I guess you probably are not. What would be that one piece of advice you would give the Indian Prime Minister on how to deal with uh Donald Trump and tariffs?
• 23:00 - 23:30 No, I I would say that uh very clearly uh you know uh treat this as an opportunity for India and uh and certainly don't um you know uh delay the negotiations on tariffs too long but also uh you know we we've been talking about improving the business environment. We've did done some some uh we've taken some actions including improving infrastructure but uh this is
• 23:30 - 24:00 to be encouraged including uh you know many states uh the south the west up have been trying to lure business people into into India with the promise of easier uh business environment. I think that should be encouraged. uh these fairs where we try and get foreign business people to see what is possible. These uh government initiatives guidance for example in Tamil Nadu helping uh you
• 24:00 - 24:30 know business uh people uh with uh with the logistics uh with land acquisition etc. These are all uh welcome initiatives which ease doing business. The center should support the states and uh and basically be neutral to where things are set up. across the country but encourage much more FDI. This is an opportunity to do that. Professor Rajan for giving us uh your view of where the world stands at this critical juncture. Uh thank you so much
• 24:30 - 25:00 for sharing your wisdom. really appreciate you joining us there from