The Relationship Between Trade, Industrial Policy, Economic Growth and Human Development
Trade can be a powerful source of economic growth, industrialization, enhanced domestic purchasing power, poverty reduction and human development. But liberalizing trade through reduced tariffs should not be regarded by any country or peoples as a reliable mechanism for generating self-sustaining growth, reducing poverty or enhancing human development outcomes. Moreover, trade is not an end, but only one means to human development and while there is a two-way relationship between the two, trade theories do not offer unequivocal conclusions about either the dynamics or direction of the relationship.
Trade and industrial strategy go hand in hand and need to be viewed in terms of their dynamic interaction and synergy. A major objective of a forward looking and dynamic trade policy should be a diversified industrial economy. This is a sine qua non for attaining a minimum, reasonable threshold level of human development for most, if not all countries.
Multilateral, Plurilateral and Bilateral Trade Agreements
The serious pursuit of the type of trade and industrial policies just articulated will require appropriate and adequate policy space and room to make domestic institutional and other innovations which have historically been integral to most successful trade and industrial development strategies. Through the centuries, starting with Alexander Hamilton in the US, tariffs have been used as a strategic tool for industrial policy and still are by the US, Europe, the People’s Republic of China, India, the Republic of Korea and many other countries.
More tangibly, trade agreements and tariffs should be judged by whether they demonstrably support diversification, value added and decent job creation in the agriculture, micro and small and medium enterprise (MSME) industrial and services sectors or whether they have a constraining, or even disabling, influence on such possibilities.
It is important to state in the current globalisation and emerging new global context, that despite the many criticisms of the global multilateral trade regime, it is always more beneficial for developing countries to be part of multilateral agreements rather than plurilateral free trade agreements (FTAs) or bilateral trade agreements (BTAs) since the last two modalities are always skewed in favour of the more powerful partner(s). The multilateral trade regime is also likely to be far superior in terms of contributing to human development outcomes in developing countries, compared to FTAs and BTAs.
The Impending Global Trade War and the Possibility of a Global Recession
Trade rules can be either offensive or defensive in nature. Examples of offensive trade rules include the market access agenda in goods and services and the use of trade rules to change domestic regulation. Defensive trade rules represent a mercantilist, protectionist agenda which is now being threatened or implemented by the United States against China, Mexico, Canada. It is also beginning to be put in place against the European Union (EU), India, Vietnam and other countries whom President Trump considers “tariff abusers” because of the US’ high trade deficits with these countries.
This is partly because the role of trade policy and its relationship with industrial policy, economic growth and human development is not understood well by the current US Administration. They appear to believe that the country’s current huge global trade deficit (caused by its imports exceeding its exports of goods and services) are a result of the US being taken advantage of by other countries. In economic reality, trade deficits are a function of the disparity between a country’s aggregate domestic savings and investments. They indicate that domestic investments exceed domestic savings which necessitate capital flows from overseas to fill the gap. These represent borrowings from foreign sources to cover the difference between investments and savings.
If the gap between these two is not fundamentally addressed, trade deficits will not reduce in the US or elsewhere, whatever else a country does. It is important to recognize that the US economy is structurally highly trade dependent. This is reflected in the fact that it imports much more than it exports because it consumes much more than it produces. It will continue to have high trade deficits with a lot of countries unless this fundamentally changes which is it highly unlikely to do in the foreseeable future.
Moreover, contrary to what senior current US Administration officials have repeatedly said, raising the country’s tariff walls against China, Mexico, Canada, Vietnam, India and other countries will not reduce its trade deficits by bringing back its long-lost, low-end manufacturing production or jobs. Nor will it create new manufacturing jobs in the United States in products or services in which it no longer has comparative advantage. Consequently, Make America Great Again (MAGA) will not happen by imposing high US import or reciprocal tariffs on countries around the world.
This is best understood through a simple example. The US cannot efficiently or competitively produce labour-intensive manufactured products, or even Apple I-phones when compared with China, Vietnam or India. This is for the simple economic reason that it lost its comparative advantage in these products long ago and this will never return, given its relatively high labour costs.
The current US Administration also views high domestic tariffs as a way of increasing US government revenues. It also needs new source of revenue to bridge the US’ fiscal deficit and finance the huge tax breaks that have been already announced for the rich and private corporations.
The Trump Administration does not care that reciprocal tariff measures on all countries from April 2, 2025, will be a violation of the World Trade Organisation’s (WTOs) “special and differential treatment” principle which legally allows developing countries to maintain higher tariffs because of their much lower levels of economic and human development compared to the US and other rich countries. The US’ reciprocal tariffs are likely to destroy, seriously jeopardize or render ineffective at least some of the industrial and development policies of countries such as India.
Import tariffs are akin to a tax on the goods and services on which they are levied. The high US import tariffs currently being levied will be paid by US consumers not by producers or exporters from China, Canada, Mexico, India, Japan and the European Union. The US’ reciprocal tariffs will also ultimately be paid by consumers in the United States and countries around the world. This is because American companies or representatives of foreign companies in the US that pay these higher tariffs will pass them on to those who need to buy their products. The same will be true in all countries affected by reciprocal tariffs. This will inevitably increase inflationary pressures in the US and the world at the worst possible time for US residents because inflation was brought under control only relatively recently, in the last year of the Biden Administration.
The US Administration did not appear to expect significant tariff retaliation. But this has already started through counter-tariffs from its most important trading partners such as Canada and China. The EU has also threatened such retaliation from April. The resulting global trade wars will lower the standards of living in the US and elsewhere, in addition to destroying many jobs and livelihoods around the world. The resultant inflationary pressures of higher import tariffs in the US will also force its Federal Reserve (Fed) to raise interest rates, not reduce them, as the government wants the Fed to do. A vicious inflationary cycle in the US, caused by all these factors coinciding, is now a realistic possibility.
Furthermore, the huge uncertainty and chaos caused by the US Administration’s tariff policies and the “on-off” and “back and forth” approach to some of them (e.g. rolling back the newly imposed 25% import tariff on Canada and Mexico for auto related products just a day after they went into effect) have introduced an unprecedented level of trade policy uncertainty in global markets. They are also bad for investment and business, with negative implications for economic growth not just in the US but across the world.
The uncertainty and tariff war has also upset stock markets across the world. Wall Street only reacted negatively in early March, because naively, it did not believe that the new US Administration would go through with the tariff threats that had been made during his 2024 Republican Party election campaign. A stock market crash which President Trump says he is not concerned about will result in huge losses for ordinary Americans, including many MAGA supporters, who are heavily invested in equities.
Ironically, the combined impact of all these policies will be to increase the US’ overall trade deficit because the gap between aggregate domestic savings and investment will likely widen. There is also a real risk now of not just a contraction and recession in the US but for the world economy.
India: The Perils and Opportunities
The Perils
President Trump has called India one of the world’s worst “tariff abusers” with amongst the highest tariffs in the world.
There is little doubt that India is a country with relatively high average agricultural and industrial tariffs by global standards. President Trump is correct that India has relatively high tariffs but that does not make it a “tariff abuser”. With respect to the US, India’s simple average rate of 17% tariffs contrasts with the US’ 3.3% according to a February 2025 report by the Indian Council for Research on International Economic Relations (ICRIER). These differential tariff structures are primarily a reflection of the different stages of economic and social development and industrial policies of the two countries.
The tariff differential between the two countries is particularly high in the agricultural sector. The simple average tariff for agricultural goods in India is 39%, while the trade-weighted average is 65%. In comparison, the US maintains relatively low agricultural tariffs, with a simple average of 5% and a trade-weighted rate of 4%.
While there is agreement to negotiate and agree an India-US BTA by end-2025, with the objective of raising bilateral trade from $ 200 billion to $ 500 billion by 2030, many critical questions remain unanswered. Foremost amongst these is whether the WTOs Most Favoured Nation (MFN) principle will apply to this BTA. India needs to abide by the WTO MFN clause which compels it to extend any trade advantage given to one trading partner (the US in this case) to all trading partners with whom it does not have a separate trade agreement. Since India has relatively few FTAs, the MFN principle is likely to apply to most of its trading partners.
Another key question is about how much of the USD 500 billion trade targeted between the US and India by 2030 will comprise of Indian exports. The Trump Administration certainly expects most of this to comprise US defence, oil and natural gas, agricultural and other exports to India, not Indian pharmaceutical, chemicals, gems, agricultural and other exports to the US. The BTA will almost certainly leave India with a significant and widening trade deficit with the US over the coming years just like it currently has with China. However, the stark contrast with China with whom India’s 2023 trade deficit was over $80 billion and growing is that India currently has a significant trade surplus with the US.
Assistant US Trade Representative for South and Central Asia, Brendan Lynch, along with a team of US government officials, were in India between 25-29 March for discussions on the BTA which were expected to cover not just trade but investment issues, but not reciprocal tariffs. While the results of these discussions was not available at the time of writing this article, it has been reported that, in anticipation of tariff retaliation by the US, India plans to eliminate its so-called 6% “Google tax” in force since 2016 on payments exceeding Rs 1 lakh ( around $1160) per annum to a non-resident service provider for online advertisements from April 1, 2025, amid US tariff pressure. This refers to the equalization levy on online digital advertisements which will be a part of the amendments to the Finance Bill 2025.
Growing Indian trade deficits in the future, including with the US, will lead to both greater imported inflationary pressures and the further depreciation of the rupee. This, in turn, will increase the cost of servicing the significant dollar denominated debt of Indian companies and increase the rupee cost of oil imports on which India is currently dependent for around 87% of its needs. The inflationary pressures which will result will also force the Reserve Bank of India (RBI) to increase its repo interest rate (the rate at which it lends money to commercial banks against government securities) which will, in turn, dampen real GDP growth, slowing it down from even the current inadequate 6% per annum.
India ill-advisedly made tariff concessions to the US on luxury products such as Bourbon whisky, Harley Davidson motorcycles, yachts and expensive cars before PM Modi’s February visit to Washington DC. This took place even before the BTA negotiations had been agreed or begun. While this move was intended to show India’s good intentions to reduce India’s current trade surplus with the US, it is unfortunate that these concessions were made both prematurely and unilaterally. The lack of US reciprocity has become clear quite quickly through the US’ 25% tariffs on steel and aluminium products which went into effect on March 12 with no exemption for India despite its request and hope that its unilateral tariff concessions in February would qualify it for some exemptions or at least interim relief from these tariffs. These expectations on the part of the Indian government, if they genuinely existed, were naïve and unrealistic.
Some affected Indian steel exporters recently stated that the US’ new import tariffs have already cost them $5 billion in lost export revenue. Indian manufacturers of these items also fear a surge in steel imports at lower prices through “dumping.” This is likely from China, and possibly even from the Republic of Korea and Japan which are also large steel producers with domestic capacities that far exceed their domestic requirements.
To add insult to injury, President Trump confirmed, on March 20, that India will not be exempted from the US’ intended reciprocal tariffs which are expected to go into effect worldwide from April 2. The negative impacts of reciprocal tariffs on India’s pharmaceutical exports could be pronounced since it exports close to $ 20 billion worth of such products to the US. The tariff differential against India in this category is close to 9%. India also exports $ 6 billion dollars’ worth of agricultural products to the US which is one of India’s largest export markets for these products. Very high US reciprocal import tariffs on Indian agricultural exports threaten these directly.
While the overall negative impacts of the threatened US reciprocal tariffs from April 2 are likely to be significant for India’s key exports to that country—- agricultural, meat and processed foods, automobiles, diamonds, gold products, pharmaceutical products, and chemicals— given its relatively high import tariffs, their actual impact is hard to determine at this time. This will be determined by whether US reciprocal tariffs are levied on an aggregate basis or at a product-by-product level and whether non-tariff barriers such as administrative restrictions, import licences and export subsidies are also included. The US Government’s intentions on which of these three levels will be used as the basis of their reciprocal tariffs is unclear at the time of writing, even though these tariffs are expected to go into effect across the world, not just in India, in a little over a week. An aggregate basis will be the simplest and the one which results in the least differential tariff levels between the US and India even though their negative impact on Indian exports to the US will still be significant.
Can the Crisis Become an Opportunity?
Domestic Priorities and Strategies
India needs to convert this crisis into an opportunity as much as it can. To enable this, it needs to review, in detail, product by product, its existing tariff structures as well as its range of NTBs. This needs to be done comprehensively and quickly. Tariff and NTB protections should either be eliminated or reduced on all non-strategic products and services. Tariffs should also be reviewed and reduced if they have been in existence for an inordinately long period of time and are not credibly linked to safety or security issues.
This should be immediately enforced except for tariffs on products or services which India regards as essential for achieving strategic Indian industrial, agricultural or services policy objectives including but not limited to value addition, employment or current and future exports. Products and services which benefit for tariff protection using a strategic “infant industry” rationale should, nevertheless, be subject to the discipline of international competitiveness with a clear timeline for significantly reducing and then phasing them out over a reasonable period.
It is important that the priority for tariff reduction not be goods or services which the US, EU, UK or any other trading partner are demanding Indian market access for, unless these are considered non-strategic.
Tariffs should not be reduced any further on the luxury goods on which they were already unilaterally reduced in February because Trump wanted this. While luxury items are not strategic, they require high tariffs to dissuade conspicuous consumption by India’s richest 1-10% and because their increased imports will raise the country’s trade deficit, put further pressure on the depreciation of the rupee and contribute to imported inflation and ultimately a higher RBI repo interest rate and lower economic growth.
Priority should be given to providing effective tariff and NTB protection to MSMEs engaged in manufacturing products or providing services which are critical for India’s “Made in India” ambitions as long as they prioritize value addition, exports and the creation of a significant number of formal sector decent jobs to address India’s greatest economic challenges for the foreseeable future: unemployment, under-employment, unemployability, ill-suited employment and informal unpaid work.
In agriculture, food self-sufficiency, diversification and value addition should be the criterion for tariff protection as well as addressing the long-standing unresolved farmer agitation demands for a fair minimum support price (MSP). India will need to resist the US Secretary of Commerce, Howard Lutnick’s call in early March for the country to open its agricultural sector across the board to serve US agricultural export interests. The three major crops of special export interest to the US are soyabean, corn (maize) and cotton. India currently levies a 45% basic customs duty on soyabean and 50% on corn. It also has an NTB in the form of restrictions on genetically modified (GM) organisms which effectively ban the import of any soyabean or corn from the US.
If India succumbs to Lutnick’s call uncritically, it is likely to be at the cost of India’s strategic priorities. Prior to any agricultural opening, India should secure both its food safety, self-sufficiency and small farmer interests. The government and the private sector also urgently need to invest in critical farm to market infrastructure (e.g. cold storage facilities). India should also undertake other appropriate and relevant long-delayed agricultural reforms and have them fully implemented for a reasonable period before opening critical parts of the agricultural sector. Despite the US’ likely pressure on India to significantly increase its imports of these three crops, India should not lift its GM related NTB. However, it can look at reducing or eliminating import tariffs on raw cotton since such imports from the US can boost India’s textile apparel exports to the US and to other countries.
Tariffs should also not be removed from strategic products that India has a clear potential international competitive advantage in, but which still need nurturing, especially to ensure significantly increased domestic value addition. For such products, there should be conditions related to domestic content requirements, value addition and appropriate export commitments (e.g. pharmaceuticals, electronics, certain chemicals) if tariffs are to be maintained or even increased in the short-term. Such increases can be justified because India will first need to ensure intermediary input content or component value addition before it can reduce its dependence on imports of such products on which it currently depends (e.g. pharmaceutical intermediaries and electronics components and parts from China). There should also be a strict timeline for the reduction and ultimate phase-out of tariffs on such products since tariffs should never be open-ended. There should, however, be a reasonable period and mix of tariff protection levels to ensure the international competitiveness of these products.
In this context, the IT Ministry’s recent announcement of an incentive policy for electronics components manufacturing with an outlay of Rs 23,000 crores spread over six years, as the government looks both to deepen domestic value addition to 40% from the current dismal 15-20% and create decent jobs for 91,600 people over this period after successfully localizing smartphone assembly in the country is a step in the right direction.
MSME policy cannot just rely on tariff protection for a fixed period, or the credit support announced in the recent February Union Budget for 2025-26, however. The Indian government’s MSME policy to be effective, must be much more comprehensive than it currently is. It needs to effectively regulate big corporations and producers and prevent them from becoming monopolies (e.g. steel), prioritize market deregulation for MSMEs, not for the big players, with a focus on making procedures simpler for them, provide them with appropriate export incentives and support an MSME friendly technology policy, to name just a few critical policy areas for action.
International Trade Agreements
At a broader international level, India needs to continue to prioritize its multilateral trade obligations through the WTO, recognizing their limitations and the WTOs current US-induced dispute settlement mechanism (DSM) paralysis. India also needs to prioritize reducing its export dependency on the US by diversifying its export markets as quickly as feasible. In this context, prioritizing joining the Regional Comprehensive Economic Partnership (RCEP) in its immediate region, which was signed during Vietnam’s 2020 ASEAN Presidency, should be its most important objective, followed by concluding and signing the long outstanding India-EU and India-UK FTAs by end-2025, in that order. These three should take precedence over the India-US BTA. The next level priority should be concluding other FTAs like those with New Zealand, which was just agreed, in principle, between the two countries Prime Ministers.
The 15 RCEP member countries include a mix of high, middle and low-income countries. They accounted for about 30% of the world’s population and 30% of global GDP (approximately USD 30 trillion) in November 2020, making it the largest trading bloc in world history. It effectively pulls the centre of economic gravity back to Asia from the United States and Europe leaving the US, EU and India, who are not part of it, considerably behind in influencing the future economic and political trajectory of both the East and Southeast Asian regions.
India’s reticence, it said in 2020, was because it perceived RCEP to be China-led and because despite India’s repeated requests, RCEP had not prioritized the services sectors in which India sees itself as having comparative advantage. But the reality is more complex. India opted to stay out because of its lack of competitiveness in manufacturing and agriculture, not only with China, but with many Association of South-east Asian (ASEAN) and other RCEP members.
RCEP is the first FTA amongst the largest economies in Asia: China, Indonesia, Japan and the Republic of Korea. It also includes Australia and New Zealand. India is voluntarily missing, despite many requests for it to join. India’s unwillingness to join so far is likely to cost it dearly not just in trade terms but, more importantly, in terms of its strategic presence and economic influence in Southeast and Northeast Asia, something it now seeks as a high priority through its belated Act East Policy. It must bite the bullet on this decisively and without further delay.
ABOUT THE AUTHOR
Kamal Malhotra is a distinguished Visiting Professor, NALSAR University of Law, Hyderabad; Non-Resident Senior Fellow at the Boston University Global Development Policy Center and has recently also Guest Lectured at the School of Interwoven Arts and Sciences (SIAS), Krea University, India. Prior to his retirement from the United Nations in September 2021, Mr. Malhotra had a rich career of over four decades as a management consultant, in senior positions in international NGOs, as co-founder of a think-tank, FOCUS on the Global South, and in the United Nations (UN) including as its Head in Malaysia, Turkiye and Vietnam (2008-21). He was UNDPs Senior Adviser on Inclusive Globalization, based in New York, USA, for most of the prior decade. Mr. Malhotra is widely published.
