U.S. Reciprocal Tariffs: Global and Indian Implications

Context

On April 2, former U.S. President Donald Trump announced a sweeping tariff policy as part of America’s Liberation Day celebrations. This move introduced reciprocal tariffs against major trading partners, aiming to correct long-standing trade imbalances, protect domestic industries, and realign global trade flows.

These developments are significant as they impact bilateral relations, global trade architecture, and economic stability. A clear understanding of this issue is essential for analyzing international economic policies and their ripple effects.

What are Reciprocal Tariffs?

• A reciprocal tariff is a retaliatory trade measure, imposed in response to the tariffs or trade restrictions placed by another country.

• It reflects the principle of trade fairness—if one country imposes duties on imports, the affected country mirrors similar tariffs in response.

U.S. Framework:

• Known as “USA Discounted Reciprocal Tariff”

• Calculated by:

  • Estimating the tariff a country imposes on U.S. goods

  • Halving that rate to arrive at the U.S. response

Structure of Tariffs Announced

Two sets of tariffs were introduced:

1. Base Tariff

• 10% tariff on all imports

• Applies to all countries that impose tariffs on U.S. goods

• Effective from April 5, 2025

2. Country-Specific Tariff

• Varies by country

• Calculated based on:

  • Tariff rates on U.S. goods

  • Currency manipulation

  • Weak labor and environmental laws

  • Trade regulations that disadvantage the U.S.

• Effective from April 9, 2025

Tariff Structure on Indian Goods

• As per the U.S. Trade Department, India imposes 52% tariffs on American goods

• In response, the U.S. has announced a 26% tariff on Indian exports

Why Is the U.S. Imposing These Tariffs?

• Reduce Trade Deficit:

  • Targeting the $1.2 trillion trade deficit

• Reshoring Production:

  • Incentivizing businesses to relocate production to the U.S.

• Attract Investment:

  • Policy expected to bring in $6 trillion in domestic investments

• Revenue Generation:

  • Tariff revenue to be used for debt reduction and tax relief

• Revive Manufacturing:

  • Aimed at boosting U.S.-based jobs and industries

Impact on India

Positive Impacts

• Tariff Advantage:

  • India faces a lower tariff (26%) compared to:

    • China (34%)

    • Vietnam (46%)

    • Thailand & Taiwan (36%)

  • May help increase market share in U.S.

• Boost to Textiles:

  • U.S. market could open up for Indian textile exports

  • Especially over competitors like Bangladesh and Vietnam

• Flexibility in Trade Balance:

  • India’s low electronics imports from U.S. allow strategic tariff management

• Pharma Exemption:

  • Pharmaceuticals excluded from reciprocal tariffs

  • India exports $8.7 billion worth pharma products to the U.S. annually

Negative Impacts

• Export Pressure:

  • U.S. is India’s second largest trading partner

  • Accounts for 18% of total Indian exports

• Decline in Export Volume:

  • Possible 2–3% decline in exports to the U.S.

• Domestic Industry Strain:

  • Could impact profit margins and employment in export sectors

• GDP Impact:

  • Growth may reduce by 50 basis points, from 6.5% to 6%

• Currency Risk:

  • Drop in dollar inflow may weaken the Indian rupee

Global Implications

Global Economy

• Slower Global Growth:

  • Trade tensions could slow growth and increase volatility

• Inflation Risk:

  • Import prices rise, leading to inflation in U.S. and globally

  • Only mitigated if U.S. dollar strengthens (e.g., from ₹85 to ₹108)

• Trade Flow Disruptions:

  • Exporters may absorb losses or pass on costs, reducing demand

• Supply Chain Realignment:

  • Exporters may seek alternative markets, altering global supply networks

• Retaliatory Measures:

  • Countries may respond with counter-tariffs, risking trade wars

U.S. Economy

• Stagflation Risk:

  • Combination of low growth and high inflation

• Recession Possibility:

  • Rising costs and falling demand may trigger GDP contraction

What Lies Ahead?

• Trade Negotiations:

  • Bilateral talks may lead to tariff revisions or sectoral exemptions

• Avoiding Trade Wars:

  • Escalation will hurt both sides; mutual restraint is critical

• Strategic Engagement:

  • Diplomacy and calibrated trade policies can preserve economic stability and growth momentum