‘It’s time for a full tariff overhaul and aligning them with broader economic goals’: Ajay Srivastava at explained.Live

Until recently, most countries abided by their WTO commitments and operated within those agreed limits. The problem started when US President Donald Trump began openly violating these rules. The tariffs he imposed broke at least two major WTO principles, first by exceeding the bound tariffs on a wide range of goods and second, by imposing country-specific tariffs, applying different rates on different sources. The WTO requires countries to treat imports from all member nations equally, so this step is a clear violation undermining the very foundation of the WTO system.

On India’s approach to trade deals

Today, every country talks about free trade agreements (FTAs) as if they are the driving force behind global trade. In reality, less than 20 per cent of global trade happens through the preferential route, through Free Trade Agreements or FTAs. The remaining 80 per cent happens under the WTO’s Most-Favoured Nation (MFN) tariffs. For countries like India, we need to focus on the 80 per cent trade that doesn’t depend on FTAs to grow our exports meaningfully.

India has increasingly positioned FTAs as a key tool to boost exports. Initially, our strategy was “Look East.” We began signing FTAs with our neighbouring countries under SAFTA (South Asian Free Trade Area), then moved on to ASEAN, Japan, South Korea and later Australia. At one point, we were close to signing a deal with China through the Regional Comprehensive Economic Partnership (RCEP) but we withdrew at the last minute.

After covering most of the East, we shifted our focus westward. We signed FTAs with Mauritius, the UAE, Switzerland and Norway. We’ve now announced the completion of negotiations with the UK and it’s expected that we’ll sign agreements with the US and the EU in the near future.

Once these are finalised, India will have FTAs with more than 75 countries, covering roughly 75 per cent of global trade. So while we started late, compared to Europe or the UK, we’re catching up fast.

On why some countries have higher tariffs than others

On the surface, countries like the US have average tariffs of around four per cent while India’s average is closer to 17 per cent. However, this is the result of a larger, negotiated settlement under the General Agreement on Tariffs and Trade and the WTO, which the US helped broker and now conveniently ignores.

During these negotiations, developed countries like the US, EU and Japan, then global leaders in global production of industrial and high-tech goods, wanted two things: One, to lower global tariffs to make it easier to sell their high-end goods. Two, to expand the scope of the global trading system beyond just goods to include intellectual property rights and services, such as finance, telecom and IT and agricultural subsidies.

Developing nations, like India and China, were seen as producing low-end goods and having weaker intellectual property frameworks. Thus, the developed nations drafted the Trade-Related Intellectual Property Rights, or TRIPS, to bring Intellectual Property (IP) enforcement under the WTO, given its strong dispute settlement mechanism. The result was a trade-off: Developing countries accepted stricter rules on IP and services. In exchange, they were allowed to maintain somewhat higher tariff levels for a longer period.

As part of this agreement, every country submitted a “schedule of commitments” to the WTO for each product. For example, for glass, India might have said its maximum tariff, or “bound tariff,” would be 40 per cent. These schedules were negotiated and accepted by all WTO members.

On the terms of reference for the India-US deal

Once the scope is set, the actual negotiations begin. Each country studies its domestic industries and identifies products and industries it would like to protect, which it considers sensitive sectors. For India, these include certain agricultural products to protect farmers and some industrial items. After industry-wide consultation, the country prepares an “offer list”, based on which tariff lines are listed in an Excel sheet. (India has around 12,800 of them.) In that list, it indicates which tariffs we’ll reduce and the timing and extent of these reductions. Items to be excluded completely will be recorded in the negative or exclusion list.

After both countries exchange their offer lists, they may choose to send each other request lists, asking the other to reconsider. The process continues over multiple rounds, often taking months or even years. Only after these are resolved do they announce the completion of negotiations, after which the legal teams finalise the text and the leaders of the countries sign the agreement. The agreement itself, typically, becomes effective two to three months after the signing. That’s when the actual trade benefits — like lower tariffs and improved market access — start kicking in.

Audience Questions

On how India can deal with tariffs and improve  trade deficit

We need to take a comprehensive look at our entire tariff structure. Right now, in every Union Budget, we make incremental changes — raise tariffs here, reduce them there — but what we haven’t done is a full review of all 12,800 tariff lines.

When I did a simple analysis, I found that over 90 per cent of our total Customs revenue comes from less than five per cent of our tariff lines. Meanwhile, the bottom 60 per cent of tariff lines contribute less than three per cent of revenue. So we have to ask why we are maintaining tariffs on those lines at all. A thorough review could also help us fix other long-standing issues, like inverted duty structures, where the import duty on raw materials is higher than on finished goods. That discourages domestic manufacturing because it makes local production less competitive.

It has been over 25 years since we last did a full tariff overhaul. Now is the time to revisit the structure holistically. Given the number of FTAs we’ve signed and the structural issues in our system, it’s time to conduct a proper, data-driven review. It’s not just about revenue, it’s about making tariffs more logical, targeted and aligned with our broader economic goals.

On India’s slower global trade growth compared to China despite having a huge potential

In the late 1980s, India was ahead of China in several areas. We were exporting more computer hardware. Our pharmaceutical exports, APIs and formulations, were stronger than China’s. In textiles and garments, we were neck and neck. When liberalisation came, we focussed more on deregulation without simultaneously building real manufacturing capacity.

China, on the other hand, used that same period to build, sector by sector, with vision and intent. They began with textiles and garments, moved into machinery and then into electronics. They scaled up across industries methodically. Importantly, they had strong backing from American companies. What did China do differently? They applied highly strategic, foresighted policies and executed them well. In contrast, we continue to talk about increasing the share of manufacturing in our GDP, while importing the most basic items — knives, nail cutters, nuts, bolts. It’s not for a lack of advanced technology, we’ve just never drilled down deep into the product level to build competitiveness.

We need long-term commitment. We need to stop putting bureaucrats in charge of this transformation and instead identify people who have hands-on experience and empower them, set clear goals and get moving. That’s how we change the trade equation, by building from the ground up.