ExplainSpeaking: Trump’s reciprocal tariffs — impact on India, rest of the world

The US runs a trade deficit of around $1.2 trillion. Trade deficit is the difference between the value of goods the US exports and the value of goods the US imports. A trade deficit (shown with a minus sign) of more than a trillion dollars means the US imports a trillion dollars worth more of goods than it exports.

To understand the background of how acutely President Trump believes this situation requires a fundamental reset, please read the last edition of ExplainSpeaking.

What was announced?

There were two sets of tariffs announced. One, a base tariff of 10% against all countries. This in itself is a sharp increase from the pre-Trump 2.0 tariff rate of around 2.5%. This base rate of tariffs will go into effect on April 5.

Then there are country-specific tariffs (see table below) that were arrived at by estimating how much each of these countries charges on US goods and then halving it to reach “USA discounted reciprocal tariffs”. President Trump said that Americans are “kind” people and that is why he is only levying half of the tariffs that he believes other countries are imposing on the US. These country specific tariffs will be enforced from April 9 onwards.

What the tariffs look like

How ‘kind’ or reasonable are these tariffs?

The Table lists the main countries against which the US announced reciprocal tariffs, in descending order of tariffs imposed.

Cambodia — with a per capita income of just $2,950 (just a tad more than India) and accounting for just 1% of the overall US trade deficit — has been hit with the highest level of tariffs. Bangladesh — with an even lower per capita income and accounting for half a per cent of the overall US trade deficit — has got a tariff of 37%.

In contrast, China (with a much higher per capita income and accounting for almost 25% of the total US deficit) and the EU (with an even higher per capita income and accounting for almost 20 per cent of US trade deficit) have been hit with 34% and 20% tariffs respectively.

Indeed, of the list that President Trump shared while announcing the tariffs, there were only three countries/ regions — China, EU and Vietnam — that accounted for the US trade deficit in double digits. And there were only two countries — Switzerland and Singapore — that were richer than the US in per capita terms.

It is also noteworthy that even countries with whom the US enjoys a trade surplus — that is, it exports more than it imports from them — have not been spared from a sharp increase in tariffs. These include the UK, Brazil, Singapore, and Colombia.

What about India?

India has been smacked with a tariff rate of 26%. Trump shared a report of the US Trade Department that gave details of why each country was being tariffed. The report came down heavily on the Government of India’s increasingly protectionist stance since 2014.

Here are some of the key statements regarding India:

• India’s World Trade Organization (WTO) bound tariff rates on agricultural products are among the highest in the world, averaging 113.1 per cent and ranging as high as 300.0 per cent. Given the large disparity between WTO bound and applied rates, India has considerable flexibility to change tariff rates for both agricultural and non-agricultural products at any time, creating tremendous uncertainty for U.S. workers, farmers, ranchers, and exporters. The Government of India took advantage of this tariff flexibility in the 2019/2020 budget by increasing tariffs without any notice or public consultation process on approximately 70 product categories…
• In its 2020/2021 budget, India further raised tariffs for 31 product categories, including solar inverters and solar lanterns.
• In its 2021/2022 budget, India further raised tariff rates on imported headphones, loudspeakers, and smart meters used by power distribution companies.
• In addition, starting in 2014, India has repeatedly applied tariffs on certain telecommunications equipment…
• India’s tariff rates are announced with the annual budget and are modified on an ad hoc basis through notifications in the Gazette of India without opportunity for comment.
• India lacks an overarching government procurement policy and, as a result, its government procurement practices and procedures vary among different ministries within the central government.
• India’s overall IP (intellectual property) enforcement remains inadequate.
• India imposes certain restrictions on foreign direct investment (FDI) in the retail industry.
• Although India allows privately held banks to operate in the country, the banking system is dominated by state-owned banks, which account for approximately 60 per cent of total market share and 67 per cent of all Indian bank branches. Most privately owned banks are Indian owned, with foreign banks constituting less than 0.6 per cent of the total bank branches in India.
• India maintains an unlevel playing field in the insurance market. State-owned companies are not subject to the same law and prudential supervision as private firms and enjoy various guarantees from the government.
• India provides a broad range of subsidies and support to its agricultural sector, including credit subsidies, debt waivers, crop insurance, and subsidies for inputs (such as fertilizer, fuel, electricity, and seeds) at both the central government and state government levels. These subsidies, which are of substantial cost to the government, lower the cost of production for India’s producers and have the potential to distort the market in which imported products compete.
• India has conducted a number of localized shutdowns of the Internet in recent years. These shutdowns restrict access to information and services, disrupting commercial operations, and thereby undermining a free and open Internet and impeding trade in the digital economy.
• A lack of transparency continues to affect new and proposed laws and regulations, as well as a lack of uniform notice and comment procedures and inconsistent notification of these measures to the WTO.

In essence, the US has placed India’s domestic policy choices as well as the regulatory environment in sharp focus.

What is the broader takeaway?

President Trump has unleashed a wave of protectionism that is worse than the one the US witnessed during the Great Depression of the 1930s.

The so-called Smoot-Hawley Act had then raised import tariffs in the US in a bid to save the domestic industry and farmers. However, the move worsened and deepened the economic depression.

An economic depression is worse than a recession both in terms of its severity — the contraction of economic output and rise in unemployment — as well as its scale — often lasting years instead of months.

While speaking to the media, US Treasury Secretary Scott Bessent said that if the tariffed countries “do not panic” then these tariffs will be the cap of how high tariffs can go. In other words, if countries react and retaliate, then the US can further increase the tariffs since it is in any case going by a reciprocal logic.

Bessent’s comment can also mean that the US is now open to negotiations, and that if the leaders of these countries rush to the US, hat in hand, promising to bring down their own tariffs, then the US may bring down its newly announced tariffs.

For instance, in India’s case, to get a reprieve on tariffs, India’s leadership may have to reform its protectionist policies out of compulsion.

Overall though, here are the likely consequences of Trump’s tariffs for the US and global economy.

1. Slower growth in the US

Even if no country retaliates, these tariffs will throw heaps of sand in the wheels of global trade, and slow down overall economic growth everywhere.

In the next few days, assuming no retaliation happens, stock markets will likely fall to reflect the lower profit outlook of companies and the lower growth prospects in the broader economy.

If retaliations take place, then the growth outlook becomes even worse. Expect rating agencies to raise the probability of recession in the US.

2. Higher inflation in the US

There is only one way in which US citizens can escape inflation: if the value of the dollar relative to other currencies goes up by the degree to which the tariffs have been imposed. For instance, relative to India, if the dollar strengthens by 26% in a short period of time — that is, the rupee falls from 85 to a dollar to 108 to a dollar — then the US consumer will not feel the pinch of tariffs.

A US citizen will be able to import the same Indian goods at the same dollar price. The effect will be felt by Indians who would lose purchasing power as the rupee weakens against the dollar.

A weaker rupee means higher cost of crude oil and higher domestic inflation in India.

If, however, the rupee remains at 85, then US citizens will have to face 26% higher prices for their imports from India. Similarly, all import prices will go up for them by the level of tariffs. This will unleash a huge wave of inflation in the US.

3. Stagflation and its political fallout

If growth falters and inflation spikes, the US could face the worst of both worlds in the form of “stagflation” — a scenario where growth stagnates and inflation continues to remain high.

The high cost of living played an important part in the defeat of the Democrats in the November elections, and such a surge in prices could pose political problems for the Trump administration as well.

4. High inflation, slower growth, elsewhere

The rest of the world too will slow down and face higher prices, depending on countries’ dependence on the US economy and their ability to find newer trading partners and supply chains.

What happens to the rest of the world now crucially depends on how Europe reacts. The US accounts for just 13% of the global trade while Europe accounts for almost 38%. If Europe can strengthen its ties with Asia (which accounts for almost 35% of global trade), then over the medium to long term the dependence on the US — which essentially is the biggest customer in the global market — can come down.

However, in the short term, the trade wars could lead to considerable economic pain across the world.

How should India navigate the torrent of Trump’s tariffs? Should India protect its domestic policy choices or use this outside pressure to bring domestic policies in line with what the US wants?

Share your views and queries at udit.misra@expressindia.com

Take care,

Udit