ExplainSpeaking: Trump’s reciprocal tariffs and the impact on India

On Thursday, US President Donald Trump unveiled his plan to hit the whole world with “reciprocal tariffs”. The actual imposition will likely happen after April 1st; between now and then, the US trade department is supposed to work out the details for each country.

If, for argument’s sake, Trump were to impose reciprocal tariffs, then, in terms of global trade and how countries do business amongst themselves, he would be sending the world almost a century back in time.

In announcing his desire to impose reciprocal tariffs, Trump has not spared anyone — neither enemies nor allies — and has, as such, signalled the end of all existing trading rules that are governed by the nuances of World Trade Organization agreements arrived at after careful deliberations over the decades.

What are reciprocal tariffs?

Tariffs are taxes imposed by an importing nation on goods coming into the country. As such, if an American citizen were to order a Banarasi saree from a producer in India, the US import tariffs on it will raise the price of the saree, and this increased price will be paid by the US consumer. Thus, tariffs essentially throw mud in the wheels of global trade and slow it down by making trade costlier for all concerned.

In the past century, and more particularly since the end of World War II, the world has moved towards more and more free trade in goods. That’s because there was consensus around the world, especially among the developed and industrialised countries, that free, or at least freer, trade is mutually beneficial. In other words, everyone wins when countries trade freely.

However, there were some caveats. As the world trading rules were getting coded — think the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) — it was agreed that the developing countries would get “special and differential treatment”. That’s because often such countries did not have the internal strength (say a robust industrial sector or an efficient farm economy) to compete on an even keel with the developed countries. As such, the developed countries (such as the US) were expected to have tariffs much lower than the tariff rates in developing countries (such as India).

Until now, this was considered to be a “fair” deal. That’s because this system ensured that India could levy higher tariffs that ensured that cheap food grains produced by rich farmers in Europe and US did not flood into the Indian market and ruin the livelihood of millions of Indian farmers, a large bulk of whom were surviving on subsistence agriculture.

Trump’s reciprocal tariffs essentially do away with any such carve outs for any country, at least on paper. While announcing reciprocal tariffs during a press conference in the Oval Office, Trump said the following: “It is a beautiful system. And we don’t have to worry about who is charging too much or too little.”

Simply put, Trump has announced that the US will charge the same level of tariffs on goods coming into the US as others are charging on US exports. Trump argues that this is the “fair” system.

How will these reciprocal tariffs be calculated?

This is a crucial calculation and one that is still underway. It is expected that the US trade department will arrive at the final numbers for each country by the start of April.

However, it is important to note how the US intends to go about calculating these reciprocal tariffs. To be sure, the US doesn’t want to simply mirror the tariff levels with each country. President Trump suggested that his officials will look at the whole gamut of subsidies and other help that countries provide their traders when they compete with the US. In other words, arguably if India provides a subsidy to its exporters then the US will most likely calculate that as well while determining the eventual tariff levels in order to make it completely equal in terms of effect.

If this is a negotiating ploy, then it is a different matter but if this is how all US tariffs are calculated, most developing countries such as India, which provide all kinds of subsidies to its exporters, will face the biggest tariff burden going forward.

Take, for example, the front page story in The Indian Express on Thursday. It showed that RTI documents reveal that the Indian government had disbursed $1 billion (or Rs 8,700 crore) between 2022 and 2024 to companies in India under the Production Linked Incentive scheme to boost exports of handsets (phones). To be sure, the PLI scheme is essentially a subsidy to companies.

Why is Trump doing this?

The interesting thing is that Trump is not being driven by one reason nor is he singling out just one country for this treatment. While China is the US’s biggest competition, Trump’s first tariff threats were to US’s closest trading partners and allies such as Canada and Mexico.

On Thursday, he also came down severely on the European Union, claiming that EU rules and courts have unfairly treated US companies. Moreover, his tariff threats to Canada and Mexico were linked to issues such as illegal immigration and the export of drugs into the US.

But if there is one overwhelming reason for Trump’s tariffs, it is his dislike for “trade deficits”. A trade deficit is the difference between the values of goods imported and the goods exported. The US has a trade deficit with the rest of the world which is closing on $1 trillion while its closest competitor, China, enjoys a trade surplus of more than $1 trillion.

Trump sees deficits not just as unfair and unjust, but also a marker that the rest of the world is cheating the US by not following the rules of the game. As such, Trump is out to remove all trade deficits.

There are two ways to remove such deficits.

One, is to force other countries to import US goods and thus balance the trade.

Two, force the other countries to come to the US and set up shop instead of exporting to the US from afar.

Are trade deficits always bad?

At one level it is true that a trade deficit in the US vis-à-vis India shows that more money is flowing out of the US than coming in. It can also show dependence of the US on India. However, the fact is also that in a global setting where countries trade with each other freely and fairly, the trade deficit is just an accounting exercise. For instance, India may have a trade surplus with the US but it also has trade deficits with its other trading partners such as China.

A trade deficit or surplus does show the relative strength of one country’s exporters vis-à-vis the others but a deficit also shows that consumers of the domestic country are able to enjoy goods at a cheaper price.

While the sustainable way to remove deficits is to boost domestic productive efficiency, economic wisdom lies in understanding not just that no country enjoys an absolute advantage in all goods over all other countries when it comes to trade but also that free trade helps even when a country, by some miracle, enjoys such absolute advantage.

What will be the impact on India?

The global media saw Prime Minister Modi’s visit as the one of the first test cases to Trump’s threat of reciprocal tariffs. In fact, President Trump singled out India as being the country “right on top” of the list of countries that “charge tremendous tariffs”. He gave the example of iconic US motorcycle company Harley Davidson “failing to sell their bikes in India as the tax was so high”.

As headlines suggest, India is likely to buy more and more US goods — such as defence equipment and oil and gas — to balance the trade.

It is also possible that other US goods will become cheaper and more affordable for Indians in the coming days.

As such, the trade deficit India has with the US can be expected to close up.

However, this would mean that the Indian rupee will weaken further against the US dollar because more dollars will be demanded as more US products are imported (or bought) by Indians.

A noteworthy aspect of this development is that the Indian Finance Minister just provided a Rs 1 lakh crore worth tax break to Indian income tax payers in the Union Budget. It was seen as a way to boost domestic consumption and, thus fuel GDP growth.

However, since it is targeted at the richest Indians — with incomes upwards of 6-times the average Indian incomes — there is a good chance that such Indians may spend this tax relief on US products, especially if US products become suddenly cheaper.

This, in turn, may imply that the anticipated consumption boost to India’s GDP may not happen to the same extent as imagined by the government as the money will add to the US GDP growth.

Over the medium to longer term, India and Indian consumers can benefit a lot if US goods are available at a cheaper price, not to mention the broader benefits that an association with the world’s largest economy can provide as India attempts to become a developed country by 2047.

However, India’s other resolve — Atmanirbhar Bharat (or self-reliant India) — may take a hit as the US forces India to buy more goods (say cars and motorcycles) from the US.

Further, expectations from the US for economic growth and security should be tempered by the way the current US administration is treating its long-standing allies such as Canada and the European countries. For instance, Trump reiterated the desire to make Canada the 51st state of the US and referred to Prime Minister Trudeau as “Governor” Trudeau yet again.

How do you see India’s response to Trump tariff threats? Share you views and queries at udit.misra@expressindia.com

But before I finish, here’s some food for thought when it comes to tariffs. While arguing against tariffs, Nobel-prize winning US economist Milton Friedman had once quoted Henry George, 19th century American economist and journalist, thus:

“In times of war, we blockade our enemies in order to prevent them from getting goods from us. In time of peace, we do to ourselves by tariffs what we do to our enemies in time of war”

Take care,

Udit