Reciprocal Tariffs by the U.S.

Context: The US President Donald Trump announced plans for reciprocal tariffs on numerous trading partners, which could take effect from April 2025. 

This move has significant implications for global trade and India's economic relations with the United States. India will be amongst the worst to hit with sectors like food products, vegetables, textiles and clothing set to be the most impacted. 

India-US Trade Relations

• India-US Bilateral Trade (April-November 2024-25):
  • Total trade: $82.52 billion
  • Indian exports to the US: $52.89 billion
  • Indian imports from the US: $29.63 billion
  • India’s trade surplus: $23.26 billion
• The US was India's second-largest trading partner during this period.

What are Reciprocal Tariffs?

• Definition: 
  • Tariffs are taxes imposed on imported goods. Reciprocal tariffs imply that the US will charge the same tariff rate on imports as the exporting country levies on the US goods.
• Historical Context: 
  • Post-World War II global trade shifted towards free trade under GATT and WTO, allowing developing countries special and differential treatment. 
  • Developed countries (such as the US) were expected to maintain tariffs much lower than the tariff rates in developing countries (such as India).
  • This system allowed India to levy higher tariffs that ensured that cheap food grains produced by rich farmers in Europe and US did not flood into the Indian market and ruin the livelihood of millions of Indian farmers.
• Trump’s Policy Shift: The new policy eliminates differential treatment, making all countries subject to equal tariff measures.

Rationale behind US’s Reciprocal Tariffs 

• Address Trade Deficits: The US has a significant trade deficit with multiple countries, including India.
  • The US has a trade deficit of $1 trillion with the rest of the world, while China enjoys a trade surplus of more than $1 trillion.
• Protectionist Economic Policy: The US aims to boost domestic industries by making foreign imports costlier.
• Political Strategy: Trump used the trade deficit as a campaign issue, claiming unfair treatment by trade partners.

Calculation of Reciprocal Tariffs

• Comprehensive Review: The US Trade Department is formulating tariff structures considering direct duties and indirect subsidies.
• Subsidy Adjustments: US calculations include export subsidies, such as India's Production Linked Incentive (PLI) scheme.
  • During 2022-24, $1 billion has been disbursed to companies in India under the PLI scheme to boost exports of handsets. 

Impacts on India

• Limited Adverse Effects: According to the Global Trade Research Initiative (GTRI), reciprocal tariffs by the US are not expected to hurt India significantly.
  • India's export profile differs significantly from the US.
    • For example, if the U.S. charges 50% reciprocal tariffs on Indian pistachios because India charges the same, its impact can be neglected as India does not export pistachios. 
  • Additionally, for 75% value of the U.S. exports to India, the average tariff is less than 5%.
  • In contrast, India faces high U.S. tariffs on many labour-intensive goods like textiles, and footwear, of between 15-35% on several products.
• Trade Deficit Adjustments: Increased Indian imports from the US may reduce India’s trade surplus with the US.
  • India is likely to buy more and more US goods- such as defence equipment and oil and gas- to balance the trade.
  • US goods might become cheaper and more affordable for Indians.
• Depreciation of Rupee: Could lead to a depreciation of the Indian rupee due to higher demand for US dollars.

• Hamper consumption-led GDP growth in India:
  • Budget 2025 provided a Rs. 1 lakh crore worth tax break to Indian income tax payers, to boost domestic consumption and thus fuel GDP growth.
  • However, since it is targeted at the richest Indians, they may spend this tax relief on US products, especially if US products become suddenly cheaper.
  • Thus, the anticipated consumption boost to India’s GDP may not happen to the same extent as imagined by the government.
• Adverse effect on Aatmanirbhar Bharat:
  • Domestic manufacturing could face pressure if US goods flood the Indian market.
  • Could slow down India's progress towards self-reliance.
• India-US Relations:
  • Increased defense and energy purchases may strengthen bilateral ties.
  • US actions against allies like Canada and the EU indicate unpredictability in trade policy.

Way Forward

• Monitoring US Decisions: India should wait for the US to finalize the tariff policy before reacting.
• Strengthening domestic manufacturing: Enhancing industrial competitiveness to withstand external tariff pressures.
• Balancing Trade Relations: India might increase its purchases of US goods, such as oil, gas, and defense equipment, to maintain positive trade relations.
• Negotiating Fair Trade Terms: Engaging diplomatically to ensure balanced trade agreements with the US.