The recent political setback for Donald Trump in the US midterm elections has ignited discussions about a potential softening of Washington's assertive tariff policies. This shift could offer a much-needed reprieve for trading partners like India. However, economists are quick to point out that broader geopolitical considerations and existing trade authorities mean Indian exporters may still face targeted restrictions.
Midterm Results and Trade Policy Speculation
Reports indicate that Democrats have made gains in both the US Senate and House of Representatives, reflecting voter discontent over high prices and trade disruptions. This outcome has fueled debate on whether declining political support for Trump's economic agenda might influence ongoing India-US trade negotiations.
Tanay Dalal, SVP – Business & Economic Research at Axis Bank, noted that the Republican Party's weaker-than-expected performance could significantly impact the administration's future trade strategy. He stated, "The weaker-than-expected Republican performance in the US midterm elections has renewed debate around the future trajectory of US trade policy and its implications for ongoing trade negotiations with India."
Limits to Immediate Policy Shifts
Despite the election results, Dalal cautioned that a change in congressional control does not automatically diminish the executive branch's existing authority over trade measures. Altering congressional power over trade policy would necessitate a veto-proof majority, which remains unlikely. Moreover, judicial challenges against current tariff measures continue to face considerable uncertainty.
Tariffs as a Political Liability
According to Dalal, the election results suggest a potential weakening of public support for tariff-heavy policies, especially in regions experiencing higher costs due to trade disruptions. Several states, including Texas, Ohio, and Michigan, reportedly saw a decline in Republican vote shares. While tariffs haven't severely hampered overall US economic growth, their costs have been concentrated in specific industries and regions. This concentration has amplified their political significance, potentially influencing voter behavior and pressuring the administration to re-evaluate aggressive trade tactics.
Impact on Inflation Outlook
A divided government might gradually restrict the administration's capacity to impose additional tariffs, particularly if concerns about household affordability continue to dominate political discourse. Dalal suggested that moderating tariff policies could alleviate supply-side disruptions and imported cost pressures, potentially improving the inflation outlook and creating room for monetary policy easing. However, he emphasized that the actual impact would depend on concrete policy decisions, not solely on election outcomes.
What This Means for India's Trade Risks
For India, the evolving political landscape in the US presents opportunities for smoother trade negotiations, but significant risks persist. Dalal warned that US trade policy would continue to be shaped by strategic and geopolitical considerations, including developments in Ukraine and West Asia. Consequently, India could remain susceptible to targeted trade measures even if Washington adopts a less aggressive overall tariff strategy.
"While the broader direction of travel may be towards reduced tariff activism, India could still remain vulnerable to targeted trade measures where strategic and geopolitical interests intersect," Dalal explained.
Therefore, while Trump's election setback might increase pressure to moderate tariffs, it does not guarantee immediate relief for Indian exporters or a swift breakthrough in bilateral trade negotiations. India must navigate these complex trade risks carefully.