Narendra Modi and Donald Trump have reached an agreement. India’s exports to the United States (U.S.) will be subject to a reduced tariff rate, from 50% to 18%, with immediate effect. Modi’s new deal is conditional. India must purchase $500 billion of U.S. goods over the next five years, although this includes current projects, and must transition to purchasing U.S. oil. Although the deal does constrain India to some degree, overall it is set to greatly benefit the Indian economy and is an important example of successful international cooperation in an increasingly volatile era.

Modi wrote on X: “When two large economies and the world’s largest democracies work together, it benefits our people and unlocks immense opportunities for mutually beneficial cooperation.” The tariff reduction will provide society-wide economic benefit, reducing poverty in India. The Indian aviation industry is set to capitalize on the deal. Air India Ltd and SpiceJet Ltd are forecast to purchase $100 billion in aircraft orders from U.S. firms over the next five years. However, those most impoverished in India are expected to benefit in particular.

Tariffs and Poverty in India

High export tariffs directly impact the trade opportunities of corporate entities and governments. However, they can also be particularly detrimental to the standards of living of low-income households. Tariffs reduce the purchasing power of low-income households, both through increasing the prices of goods and services and by decreasing nominal incomes.

According to the World Bank, 5.3% of India’s population lives below the extreme poverty threshold of $3 per day. Tariffs have a significant impact on the quality of life of this sector of the population. Higher food and water prices, increased unemployment and reduced incomes decrease opportunities to escape extreme poverty and can push more of the population below the poverty line.

International Cooperation and Its Benefits

The World Trade Organization (WTO) reports that reduced export tariffs have a positive impact on low-income households and small businesses that cannot compete under high trade restrictions. Through negotiating a new tariff of 18%, Modi has lessened the economic burdens on the most impoverished sector of his population. Millions of Indians may enjoy greater purchasing power with their incomes, easing access to basic necessities. Modi’s deal also contributes to a larger trend of U.S. export tariff reductions in the subcontinent.

The U.S. and Bangladesh have reached an agreement on a 19% reciprocal tariff rate, with a plan to establish a 0% reciprocal tariff rate for textiles and other apparel goods. The textile and apparel industry is the backbone of the Bangladesh economy. The sector accounts for roughly 80% of Bangladesh’s total export revenue and employs around 4 million workers. Many of these workers are part of the 18.7% of the Bangladeshi population that falls below the national poverty line.

A reduced export tariff on this sector will lessen economic pressures on individual firms, which is expected to lead to improved working conditions and potentially higher wages. The reduction may therefore benefit the quality of life of many who experience the daily challenges of poverty.

Looking Ahead

Overall, Modi’s deal demonstrates that large-scale international cooperation, while benefiting major economic players such as governments and corporations, can also provide advantages for alleviating poverty in India. Reduced export tariffs can contribute to poverty reduction on a broader scale.

– Arthur Horsey

Arthur is based in Hampshire, UK and focuses on Business and Politics for The Borgen Project.

Photo: Flickr