Syllabus: GS2/International Relation; GS3/Economy
Context
- In a significant move, US President Donald Trump announced ‘reciprocal tariffs’ on imports from various countries, including India, aimed to address trade imbalances but sparked global concerns about economic stability and diplomatic relations.
| Tariff – It is a tax or duty imposed by a government on imported goods and services. – It is used to regulate trade, protect domestic industries, generate revenue, correct trade imbalances, and exert economic leverage. Reciprocal Tariff – It refers to trade measures imposed by one country in response to tariffs or trade barriers set by another country. – It aims to create a level playing field by mirroring the duties imposed on exports. Discounted Reciprocal Tariff – It is a trade arrangement between two countries (or economic blocs), where each agrees to reduce or eliminate import duties on goods or services from the other on a reciprocal basis, but at discounted rates compared to standard tariff commitments. – It is a trade measure designed to counteract perceived trade imbalances. |
Key Highlights of Reciprocal Tariffs
- ‘Liberation Day’ Announcement: Trump declared April 2, 2025, as ‘Liberation Day’ marking the introduction of reciprocal tariffs aimed at addressing trade imbalances.
- Baseline Tariff: A universal 10% tariff was imposed on all imports, with higher rates applied to countries with significant trade surpluses with the USA.
- The tariffs ranged from 10% to 50% on its exports to the USA.
- Major sectors affected included textiles, chemicals, machinery, and electronics.
- Country-Specific Tariffs: India faced a 26% discounted reciprocal tariff, while China was hit with 34%, the European Union with 20%, Japan with 24%, and Taiwan with 32%.
- Economic Rationale: The tariffs were calculated to balance trade deficits and address non-monetary trade barriers such as currency manipulation and regulatory differences.
Impact on India
- Export Challenges: India faced a 26% tariff on its exports to the US, affecting key sectors such as automobiles, textiles, and fisheries.
- It posed a challenge for Indian exporters, who had to navigate higher costs and reduced competitiveness in the US market.
- Economic Adjustments: To mitigate the impact, India might consider reducing tariffs on US imports, including gems, jewelry, and auto parts.
- Strategic Partnerships: Despite the tariffs, India is emphasizing its commitment to strengthening bilateral trade relations with the U.S., aiming for long-term economic collaboration.
- Comparative Advantages: Tariff on India (26%) is lower than other Asian and South Asian countries including Vietnam (46%), Thailand (37%), Bangladesh (37%), Sri Lanka (44%) and Pakistan (30%), which could give India some ‘comparative advantages’.
| India-USA Trade: Key Highlights – Total Trade: The total goods trade between the U.S. and India was an estimated $129.2 billion in 2024. 1. US Exports to India: $41.8 billion, up 3.4% from 2023. 2. US Imports from India: $87.4 billion in 2024, up 4.5% from 2023. – Trade Deficit: $45.7 billion in 2024, a 5.4% increase over 2023. | |
| India’s Top Exports to the USA | USA’s Top Exports to India |
| – Precious Stones & Metals: Diamonds and gold are among the highest-valued exports. – Pharmaceutical Products: Generics and APIs form a major chunk of India’s export to the USA. – Apparel & Textiles: Garments, home textiles, and cotton fabrics dominate. – Engineering Goods: Includes auto components, tools, industrial machinery. – Organic Chemicals: Raw materials for chemicals and allied industries. – IT & Software Services: Though not always visible in merchandise data, IT services are a massive contributor. | – Petroleum & Crude Oil: Crude oil and LNG exports have risen significantly. – Aerospace & Defense Equipment: Includes aircraft, parts, and defense systems. – Medical Devices & Instruments: High-quality diagnostic and surgical tools. – Electronic Goods: Semiconductors, computer parts, and more. – Industrial Machinery: Automation, manufacturing, and power generation equipment. – Agricultural Products: Notably almonds, apples, and soybeans. |
Sectors Affected in India
- Electronics Sector: Nearly $14 billion worth of electronics exports from India may be hit by new US tariffs.
- Gems and Jewellery: Over $9 billion worth of exports could be affected.
- Auto Parts & Aluminium: Not impacted by the new 26% tariff, but still face an existing 25% tariff announced earlier by Trump.
- Pharmaceuticals & Energy Products: Approximately $9 billion in pharmaceutical exports are exempt from the latest tariffs.
- Energy products are also exempt.
Impact on the Rest of the World
- Global Trade Tensions: Countries like China, Vietnam, and the European Union faced even higher tariffs, with rates reaching up to 54%.
- It escalated trade tensions and raised fears of a global trade war.
- Market Volatility: The tariffs triggered significant market fluctuations, with global stock indices experiencing sharp declines.
- Businesses reliant on international supply chains faced disruptions and increased costs.
- Retaliatory Measures: Several countries announced counter-tariffs on U.S. goods, further straining international trade relations.
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