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7th April 2025 (16 Topics)

Trump’s Reciprocal Tariffs

Context

US President Donald Trump declared April 2 as “Liberation Day” and announced sweeping tariffs under a new policy of “reciprocal tariffs”—a base tariff of 10% on all imports and country-specific additional tariffs based on what the US perceives as unfair trade practices. This move is driven by the US’s longstanding trade deficit—about USD 1.2 trillion.

Why is this significant?

Country-wise Tariff Snapshot

Country

Tariff Imposed

Share in US Trade Deficit

Cambodia

39%

1%

Bangladesh

37%

<0.5%

China

34%

25%

EU

20%

20%

India

26%

Moderate

UK, Brazil

10–20%

US enjoys trade surplus

  • This marks one of the most aggressive shifts toward protectionism since the Great Depression-era Smoot-Hawley Tariff Act.
  • It challenges the foundations of multilateral trade, especially under the World Trade Organization (WTO), and signals a “go-it-alone” approach in US trade policy.

Impact on India

  • The United States (US) is the top destination for India’s exports, accounting for 18% of the total cargo shipped.
  • Electric machinery and equipment goods, including mobile phones, are the top exports from India, followed by pearls, gems and jewellery, pharmaceutical products, nuclear reactors and equipment, and petroleum products.
  • Impact on Key Sectors
  • Electronics and Mobile Phones: India’s mobile phone exports, particularly due to the assembly of iPhones, have grown steadily and now stand at around $6 billion. However, many of the components used are imported from tariff-hit countries like China and Taiwan. This could affect margins and growth.
    • On the positive side, the higher tariffs imposed on Vietnam and Thailand may open a window for India to attract more electronics manufacturing investment.
  • Gems and Jewellery: This sector forms about 13% of India’s total exports to the US. It is expected to be among the most affected due to the direct impact of the 27% tariff. The industry may need to focus more on value addition and product differentiation to stay competitive in the US market.
  • Textiles and Apparel: This is an area where India could benefit. Countries like Bangladesh, Vietnam, and Sri Lanka — all major competitors — now face higher tariffs. This could provide an opportunity for Indian exporters to gain market share, provided they focus on improving quality, scale, and timely delivery.
  • Pharmaceuticals: At present, pharmaceutical products have been exempted from the new tariffs. India is one of the largest suppliers of generic medicines to the US, and this exemption is a relief for the sector. However, experts caution that sector-specific tariffs could still be introduced in the future.
  • Auto Parts, Steel, and Aluminium: These products will face a 25% tariff. This will affect several Indian manufacturers, though those with production facilities in countries like Mexico — which enjoys a free trade agreement with the US — may be better positioned to manage the impact.

Economic Issues

  • Higher Prices and Inflation in the US: Tariffs mean higher import prices. Unless the US dollar strengthens sharply, consumers will bear the cost, leading to inflation.
  • Slower Global Growth: Tariffs act like friction in trade. They reduce volume, distort supply chains, and dampen investor sentiment.
  • Retaliation Risks: If affected countries impose counter-tariffs, a full-blown trade war could erupt, further hurting global economic prospects.
  • Stagflation in the US: The worst-case scenario is stagflation—rising prices (inflation) combined with stagnant growth. This is politically and economically damaging.
About
  • Tariff: A tariff is a custom duty, or an import duty, imposed on the import of goods into a country. The importer has to pay this tax to the home country’s government.
  • Governments use various types of tariffs depending on trade objectives:
    • Ad valorem tariffs: A fixed percentage of the item’s value (e.g., 10 per cent on imported cars)
    • Specific tariffs: A fixed charge per unit (e.g., USD 5 per kilogram of imported sugar)
    • Compound tariffs: A combination of ad valorem and specific tariffs (e.g., 5 per cent of the car’s value plus USD 500 per vehicle)
    • Anti-dumping tariffs: Levied on imports sold below fair market value to prevent undercutting domestic producers
    • Countervailing duties: Imposed to offset foreign government subsidies to exporters
    • Reciprocal tariffs: Levied in direct response to tariffs imposed by another country, often in trade disputes
  • Reciprocal tariffs are imposed by countries in order to counter the increase in tariffs by trading partners. Informally, a reciprocal tariff is a ‘tit-for-tat’ tax.
    • Reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the US and each of their trading partners.
    • This calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing. Tariffs work through direct reductions of imports.
    • Reciprocal tariff rates range from 0 percent to 99 percent, with unweighted and import-weighted averages of 20 percent and 41 percent.
    • To conceptualize reciprocal tariffs, the tariff rates that would drive bilateral trade deficits to zero were computed.

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