US dark cloud, 3 silver linings for India: tariff level, trade talks, reforms

Tariffs work on a comparative basis, and while the levy imposed by one country on another is important, more consequential is the tariff rate applied on the latter’s competitors.

So, while the tariff slapped by the US on India is key, what could be more important is the tariff rate proposed for, say China, Bangladesh or Vietnam.

As per the announcement, the US will impose a 10 per cent base tariff on all countries from April 5, and an individualised reciprocal higher tariff from April 9 on countries with which Washington has the largest trade deficits.

In India’s case, once the first phase of the universal 10 per cent tariff takes effect on April 5, a 17 per cent tariff will kick in after April 9, bringing the total duty to 27 per cent.

Incidentally, as per Trump’s original announcement, India’s reciprocal tariff levy was 26 per cent. But the annexure to the executive order issued subsequently by the White House mentioned a 27 per cent adjusted reciprocal tariff for India.

This rate of 27 per cent on India is way lower than the 34 per cent imposed on China (on top of a 20 per cent tariff slapped earlier), 46 per cent on Vietnam, 37 per cent on Bangladesh and 36 per cent on Thailand, all of which are competitors for Indian exporters while accessing the American market in some commodity segment or the other.

Tariffs on India are also lower than those on other Asian competitors, including the 36 per cent proposed on Thailand and 32 per cent on Indonesia.

Also, while the tariffs imposed on India were higher than the 24 per cent duty on Japan, 25 per cent on South Korea, 24 per cent on Malaysia, 20 per cent on the European Union, or the 10 per cent on the UK and Brazil, most of these countries with lower tariff impact do no really compete with India in exports to the US.

In any case, a 10 per cent base rate is applicable in case of all countries, and so the effective incidence is 17 per cent for India.

New Delhi could actually be better off in comparative terms. In the case of sectors such as textiles and garments, for instance, India could now have a comparative advantage of sorts while accessing the US market in comparison to key competitors such as Vietnam, Bangladesh and China.

This could be of the kind of advantage that Bangladesh had while accessing the European Union market, where it had zero duty access on account of its LDC status, while countries such as India had to pay a duty.

The executive order signed on April 2 provides exemptions for sectors such as pharmaceuticals, which accounts for the biggest share of India’s exports to the US.

Potential to negotiate

The second positive for India is that the Trump administration has indicated that if a country were to address US trade concerns, these reciprocal duties could be potentially revised or reversed. India and the US are already negotiating a bilateral trade agreement, with both sides aiming to finalise the first phase of the deal by October this year, and most of the discussions from India’s side would focus on diluting some of the adverse effects of these tariffs.

Given that a key USTR (United States Trade Representative) report released April 1 had noted that India’s average Most-Favored-Nation (MFN) applied tariff rate was 17 per cent in 2023, which “was the highest of any major world economy”, it was only a question of time when Washington’s fire got directed at New Delhi.

Trump had repeatedly referred to India a “tariff king”. In that context, India seems to have got off lightly – that marks a diplomatic win for the NDA government.

Reaction to American tariffs

Lastly, how the tariff situation progresses from here on would depend on how America’s trade partners react to these tariffs. Countries or groupings that have traditionally had a lower tariff regime, such as the EU or Japan or Australia, or even China, would be tempted to retaliate.

That could result in an escalatory spiral.

In India’s case, that might not be the case, given the quantum and since New Delhi is working on a bilateral deal under which these tariffs could be lowered. Any tariff war would be self-defeating with a clear cost to both sides, and that is best avoided. It might, instead, be prudent for India to focus on getting concessions by pruning its own high tariffs, which is vital for the country’s manufacturing sector to regain competitiveness.

America’s tariffs also present an opportunity for India to negotiate with its other trade partners to bring down barriers that exist currently: tariff barriers and an increasingly large number of arbitrary non-tariff barriers that India has resorted to in recent months.

American reciprocal tariffs — base rate of 10% on all countries