Impact of US Reciprocol Tariffs on Global Trade and India

Syllabus: 

GS-2:

International Treaties & Agreements, Government Policies & Interventions

GS-3:

Inclusive Growth, Government Policies & Interventions, Effect of Policies & Politics of Countries on India’s Interests

Focus:

  • US President Donald Trump has proposed reciprocal tariffs, ensuring the US imposes the same tariffs on imports as other countries impose on US exports.
  • This challenges existing trade agreements, particularly impacting developing nations like India, which benefit from lower tariffs under WTO rules.

Impact of US Reciprocol Tariffs on Global Trade and India

Understanding Reciprocal Tariffs:

What Are Tariffs?

  • Tariffs are taxes imposed by an importing country on foreign goods.
  • They increase the cost of imports, impacting global trade.
  • Over the last century, trade agreements have aimed to lower or eliminate tariffs.

Concept of Reciprocal Tariffs

  • Announced by US President Donald Trump, reciprocal tariffs ensure that the US imposes the same level of tariffs on imports as other countries impose on US exports.
  • This policy challenges existing global trade rules, which grant developing countries special and differential treatment.

Historical Context of Trade Agreements

  • Trade rules have been governed by agreements like the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO).
  • Developed nations traditionally accepted lower tariffs than developing countries to support weaker economies.
  • India, for example, protected its farmers and industries from foreign competition through higher tariffs.

Trump’s Tariff Policy Shift

  • The new reciprocal tariff policy disregards these prior agreements.
  • Trump argues this approach is “fair,” as the US has long been at a disadvantage.
  • The US Trade Department is expected to finalize tariff calculations by April 1.

Calculation and Implementation of Reciprocal Tariffs:

How Will These Tariffs Be Calculated?

  • The US Trade Department is working on a methodology to determine tariff levels for different countries.
  • Trump has indicated that the US will not just mirror tariff rates but also consider subsidies and trade policies that give foreign exporters an advantage.

Impact on Developing Nations

  • Countries like India offer subsidies to industries under schemes such as the Production-Linked Incentive (PLI) Scheme, which provided $1 billion (₹8,700 crore) between 2022 and 2024 to boost mobile phone exports.
  • If the US factors in these subsidies, developing countries may face higher tariff burdens.

Sector-Specific Implications

  • American firms exporting to high-tariff countries may benefit.
  • Foreign exporters targeting the US market may see reduced competitiveness.

Why Is Trump Pushing for Reciprocal Tariffs?

Concerns Over Trade Deficits

  • The US trade deficit (imports exceeding exports) is nearing $1 trillion.
  • Trump views trade deficits as unfair, believing that the world is “cheating” the US.
  • His goal is to reduce deficits by:
    • Forcing countries to import more American goods.
    • Encouraging companies to manufacture in the US rather than exporting to it.

Targeting Allies & Trade Partners

  • Trump’s first tariff threats were directed at Canada and Mexico, the US’s closest trading partners.
  • He also criticized the European Union (EU) for unfair trade practices.
  • Despite China being the US’s biggest competitor, the policy extends to all nations, including allies.

Are Trade Deficits Always Harmful?

  • Trade deficits indicate more money is flowing out than in, but they also reflect economic relationships.
  • For example, India enjoys a trade surplus with the US but has trade deficits with China and other nations.
  • In a free-market economy, deficits can signal consumer choice and global integration rather than economic weakness.

Impact of Reciprocal Tariffs on India:

Trump’s View on India’s Trade Policies

  • Trump has criticized India’s tariffs on American goods, notably citing Harley-Davidson motorcycles, which faced high import duties.
  • He ranks India among the nations imposing the highest tariffs on US products.

Possible Consequences for India

  • Increased US Exports to India: India may have to buy more American goods (e.g., defense equipment, oil, gas) to balance trade.
  • Cheaper US Goods in India: Reduced tariffs could make US imports more affordable.
  • Rupee Depreciation: Increased dollar demand for American products could weaken the Indian rupee.

Economic Policy Implications

  • India’s Finance Minister recently provided ₹1 lakh crore in tax breaks to boost domestic consumption.
  • However, if wealthier Indians use this tax relief to buy cheaper US goods, the intended consumption boost for India’s GDP may not materialize.
  • India’s Atmanirbhar Bharat (Self-Reliance) Initiative: Increased dependence on US imports may hinder domestic industries.

Long-Term Outlook for India & Global Trade:

Short-Term Gains vs. Long-Term Risks

  • Potential Benefits:
    • More affordable American goods for Indian consumers.
    • Strengthened trade ties with the world’s largest economy.
  • Challenges:
    • Indian manufacturers may struggle to compete with an influx of American products.
    • The rupee’s depreciation could increase the cost of essential imports.

Broader Implications for Global Trade

  • If other countries retaliate with their own reciprocal tariffs, it could lead to a global trade war.
  • The World Trade Organization (WTO) may struggle to mediate disputes, weakening multilateral trade agreements.
  • Developing nations may face increased economic pressure if their subsidies and trade policies come under scrutiny.

India’s Policy Response

  • India must carefully diversify trade partnerships and strengthen domestic industries.
  • Enhancing export competitiveness through innovation and cost-effective production can mitigate tariff challenges.
  • Maintaining stable currency policies will help manage the rupee’s value amid rising dollar demand.

Conclusion:

The reciprocal tariff policy signals a major shift in global trade, potentially benefiting US industries while disrupting established trade agreements. For India, it presents opportunities through cheaper US goods but also challenges in terms of weakened domestic industries and rupee depreciation. A balanced trade strategy is essential to mitigate risks.

Source: TH

Mains Practice Question:

Discuss the implications of the US’s reciprocal tariff policy on India’s trade relations and domestic economy. How should India respond to protect its economic interests while maintaining strong trade ties with the US? Suggest measures to balance Atmanirbhar Bharat with global trade commitments.