President Donald Trump signed an order on February 13 directing his administration to propose “reciprocal tariffs” on US trading partners, a move that could significantly impact global trade. The tariffs, expected by April, aim to match or offset tariffs and other trade barriers imposed on US goods by foreign nations.
Driving the news
- Howard Lutnick, Trump’s nominee for commerce secretary, said that his team is working to finalize the details, with tariffs expected to be ready by April 2.
- The measure is likely to reshape America’s trade relationships and has already sparked reactions from major economies, including India.
- Trump’s move follows his campaign promise to crack down on what he sees as unfair trade practices by other countries. He has long accused nations—including allies like India, Japan, and the European Union—of imposing higher tariffs on American products while benefiting from lower US duties.
Understanding reciprocal tariffs
In trade terminology, “reciprocal” tariffs typically refer to policies ensuring that countries impose similar levies on each other’s goods, aiming for fairness in trade relations. Historically, reciprocity in trade often meant the mutual reduction of trade barriers to facilitate economic growth and global integration. The US Reciprocal Trade Agreements Act of 1934, for instance, marked a shift away from American protectionism, enabling the US and its trading partners to negotiate lower tariffs on each other’s products.
However, the Trump administration sees the current global trade landscape differently. It argues that many US trading partners have maintained policies that disadvantage American businesses, whether through high tariffs, non-tariff barriers, or other regulatory practices. The administration asserts that these policies unfairly benefit foreign exporters while putting American manufacturers at a disadvantage.
During Trump’s first term, commerce secretary Wilbur Ross floated the idea of raising US tariffs to match those of its trading partners. Under this “ideal” trade system, the US would lower its tariffs only if other nations did the same. The newly proposed reciprocal tariffs are expected to operate along these lines but with a broader scope, factoring in non-tariff barriers such as value-added taxes (VATs), exchange rate manipulations, and industrial subsidies.
Gone are the days of America being taken advantage of: this plan will put the American worker first, improve our competitiveness in every area of industry, reduce our trade deficit, and bolster our economic and national security.
A White House factsheet on Trump’s “fair and reciprocal plan” on trade
How would reciprocal tariffs work?
Unlike the blanket tariffs Trump previously considered, reciprocal tariffs would be tailored on a country-by-country basis. According to a White House memo distributed to trade officials, the policy will account for several elements beyond simple tariff comparisons. It aims to counterbalance:
- Tariff imbalances: If a country imposes high tariffs on US imports, the US will match those levies on goods from that nation.
- Non-tariff barriers: These include government subsidies, stringent regulations that disadvantage foreign companies, VATs, and exchange rate policies that artificially lower the cost of exports.
- Sector-Specific Adjustments: Tariffs may apply to individual products, industries, or as an overall rate on imports from a particular country.
- For instance, Brazil currently imposes an 18% tariff on US ethanol imports, whereas the US allows Brazilian ethanol in largely duty-free. Under the new policy, Washington could either raise its own tariffs on Brazilian ethanol or pressure Brazil to lower its duties. Similarly, the European Union charges a 10% tariff on vehicle imports compared to the US’s 2.5%, prompting Trump to label the EU’s trade policies as “absolutely brutal.”
Why it matters
- The reciprocal tariffs policy is expected to have a widespread impact on global trade, particularly on emerging economies with high tariff rates, such as India. While the intention is to level the playing field, it could also lead to higher inflation in the US and economic slowdowns in affected countries.
- For India, which enjoys a trade surplus with the US, the new policy could mean: Higher costs for Indian exporters, particularly in industries like pharmaceuticals, textiles, and information technology, which are heavily reliant on the US market.
- Potential retaliatory tariffs from India, leading to a tit-for-tat trade war that could hurt both economies.
- Increased pressure on India to lower its trade barriers, which could lead to long-term shifts in economic policy.
- Trump’s order also considers non-tariff barriers, such as value-added taxes (VATs), regulatory policies, and currency exchange rates, which could complicate trade negotiations further.
India has been just about the highest tariff nation in the world…hard to sell to India because of very strong tariffs…whatever India charges, we charge them.
US President Donald Trump
The big picture
- The US-India trade relationship is currently valued at over $190 billion annually, with a $50 billion surplus in India’s favor.
- India’s average tariff rate is around 17%, one of the highest among major US trading partners, compared to the US’s 3.3% average rate.
- Under the new policy, tariffs could be adjusted country by country and product by product, meaning Indian goods could face increased duties based on existing disparities.
- The US government’s decision to impose reciprocal tariffs in response to higher duties from its trading partners is unlikely to have a significant impact on India due to differences in their export profiles, according to economic think tank GTRI on Friday.
- The Global Trade Research Initiative (GTRI) provided an example, stating that if the US imposes a 50 percent reciprocal tariff on Indian pistachios because India does the same, it would have little effect since India does not export pistachios.
- Furthermore, GTRI founder Ajay Srivastava noted that for 75 percent of US exports to India, the average tariff remains below 5 percent.
- On the other hand, India faces steep US tariffs on many labor-intensive goods such as textiles, garments, and footwear, with rates ranging from 15 to 35 percent on several products, he added.
- “Given the differences in the export profiles of the two countries, reciprocal tariffs may not have a significant impact…In the new Trump era, India may wait to see the US decision in April on reciprocal tariffs and then respond in equal measures as we did in June 2019,” Srivastava said.
The US average applied Most Favored Nation (MFN) tariff on agricultural goods is 5%. But India’s average applied MFN tariff is 39%. India also charges a 100% tariff on US motorcycles, while we only charge a 2.4% tariff on Indian motorcycles.
A White House factsheet on Trump’s “fair and reciprocal plan” on trade
How it may impact India
The impact of Trump’s reciprocal tariffs on India will be determined by how far the US goes in adjusting duties and how India responds.
1. Indian industries at risk
- Pharmaceuticals: India is a leading exporter of generic drugs to the US, and higher tariffs could make Indian medicines less competitive in the American market.
- Textiles: The US is one of the largest buyers of Indian textiles and garments. Increased duties could disrupt supply chains and affect Indian manufacturers.
- Information technology: India’s IT sector depends on the US for business contracts, and while services are not directly affected by tariffs, trade tensions could spill over into tech policy.
- Steel industry: According to a Reuters report, India’s smaller steelmakers could be forced out of business by a further surge in imports resulting from sharp tariff increases imposed by Trump, industry executives warned.
- “The increased tariffs may divert Chinese and other Asian exports to India while heightening competition, creating a downward pressure on domestic prices, and affecting small Indian producers with low-cost Chinese dumping,” said Anubhav Kathuria, managing director of stainless steel producer Synergy Steels.
- “We need to protect ourselves from other countries diverting steel to India because we do not have any safeguards,” said one senior steel company executive, who did not wish to be identified because he was not authorised to talk to the media.
2. Trade deficit and tariff battles
India has a trade surplus of around $50 billion with the US, meaning it exports more to America than it imports. Trump has repeatedly criticized this imbalance, arguing that it reflects unfair trade practices.
India has already taken steps to ease tensions, such as:
- Reducing tariffs on Harley-Davidson motorcycles, a longstanding Trump grievance.
- Dropping retaliatory tariffs on US almonds, apples, chickpeas, lentils, and walnuts in 2023.
- However, these moves may not be enough. Trump’s new policy could force India to make deeper concessions or risk losing access to the US market.
3. Potential retaliation from India
If the US imposes higher duties on Indian goods, India could retaliate with counter-tariffs on American exports. This could affect:
- US agricultural products, such as soybeans and corn.
- Energy exports, including oil and gas. India is a major buyer of US energy, and trade disputes could disrupt agreements.
- Aerospace and defense deals, including purchases of Boeing aircraft and military equipment.
- India has historically been cautious about trade wars, preferring to negotiate rather than escalate. However, if Trump’s policies disproportionately hurt Indian businesses, pressure could mount on the Modi government to respond.
The leaders welcomed early steps to demonstrate mutual commitment to address bilateral trade barriers. The United States welcomed India’s recent measures to lower tariffs on US products of interest in the areas of bourbon, motorcycles, ICT products and metals, as well as measures to enhance market access for US agricultural products, like alfalfa hay and duck meat, and medical devices. India also expressed appreciation for US measures taken to enhance exports of Indian mangoes and pomegranates to the United States. Both sides also pledged to collaborate to enhance bilateral trade by increasing US exports of industrial goods to India and Indian exports of labor-intensive manufactured products to the United States. The two sides will also work together to increase trade in agricultural goods.
India – US joint statement
Between the lines
- Trump’s tariff move is as much about domestic politics as it is about trade. By pushing for tougher tariffs, he appeals to American manufacturing and agriculture sectors, which he sees as crucial for his re-election strategy.
- India’s global trade strategy could shift as a result. With growing ties to the European Union, Middle East, and Southeast Asia, New Delhi may seek new trade agreements to offset US pressure.
- The China factor: Trump’s tariffs have historically focused on China, but expanding them to other countries signals a broader protectionist agenda. India must navigate this carefully, balancing its own trade policies while maintaining strong US ties.
What’s next?
- Trump’s tariff strategy could go in several directions:
- Negotiation and compromise: India and the US could engage in talks to lower tariffs on both sides, preventing a full-scale trade war.
- Gradual escalation: If the US raises duties, India might respond selectively, targeting politically sensitive sectors to push for a better deal.
- Broader trade realignment: If tensions persist, India could explore alternative markets to reduce reliance on US trade.
- India’s diplomatic approach will be key—whether it chooses to push back, negotiate, or make strategic concessions.
(With inputs from agencies)
