Trump’s Tariffs: Impact on India & Global Trade

Context

Reciprocal tariffs are a trade policy tool where a country imposes tariffs on imports from another country in response to the tariffs that country imposes on its exports. Recently, the United States, under President Donald Trump, has implemented a comprehensive set of reciprocal tariffs targeting nearly all its trading partners. This move has significant implications for global trade and economies worldwide, including India.

Background of Reciprocal Tariffs

The idea of reciprocal tariffs isn’t a new one, but it gained currency during the Trump administration. Following World War II, in an effort to ensure freer trade, the GATT and WTO supported efforts of complementary markets. Trump’s policy aims at undermining this construct by imposing tariffs that match other countries’ tariffs on goods from the U.S.

• Calculation of Reciprocal Tariffs: The Trump administration calculates export tariffs of a country based on the country’s trade surplus with the United States and the amount of its exports. For example, if a country has a huge trade surplus, the higher the tariff rate imposed by the U.S. would be. This methodology is supposed to compensate for what the United States considers unfair trade practices on the part of other nations.

Impact on India

India is among the countries affected by these tariffs, with a specific rate applied to its exports to the U.S.

Tariff Rates for India: 

• Tariff Rate: Slightly more than the previously announced 26%, India has now a tariff of 27%. 
• Affected Sectors: These tariffs have extremely hurt important Indian exports such as electronics and gems. Pharmaceuticals and energy products, however, are exempted. 
• Opportunities: Even with these challenges, India sees opportunities in textiles and steel, especially in view of the U.S. increasing tariff rates on China.

Economic Implications: The imposition of higher tariffs on Indian goods could lead to reduced exports to the U.S., affecting India’s trade balance. However, sectors like textiles and steel might benefit from increased demand due to higher tariffs on Chinese products.

Impact on the Rest of the World

The reciprocal tariffs have far-reaching implications for global trade and economies.

Global Trade Framework: 

• The policy of Trump pivots far away from the free-trade policy that had been followed in international trade since World War II.
• Aspects of Trade War: The introduction of suitable tariffs is one way to create the conditions for other countries to retaliate, hence raising the possibility of worldwide trade wars.

Country-Specific Impacts: 

• With an additional penalty tariff of 20%, China is made to pay a reciprocal 34% on tariffs, which with existing tariffs would total 54% on some imports.
• Tariffs against Union members, France inclusive, have been imposed but contain formal exclusions for territories like Reunion. 
• As for other countries, South Korea, Pakistan, and Thailand states bear increased tariffs with rates depending on their respective trade relationships with the United States.

Economic Consequences

The global economy could experience a slowdown due to increased costs and reduced trade volumes. Countries with significant trade deficits or those heavily reliant on exports to the U.S. will be particularly affected.

Conclusion

Trump’s reciprocal tariffs represent a significant departure from traditional U.S. trade policies, aiming to address perceived trade imbalances and unfair practices. While this approach may offer some benefits to U.S. industries, it poses challenges for countries like India and others worldwide, potentially leading to a broader trade conflict and economic instability. As global trade dynamics continue to evolve, the impact of these tariffs will be closely watched by policymakers and economists alike.

Source: The Indian Express

UPSC Mains Practice Question

Q. Analyze the impact of Trump’s reciprocal tariffs on India’s trade and economy. How do these tariffs affect global trade dynamics, and what are the potential implications for India’s economic growth and trade relationships?

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