Why is it in the news?
1. On 2nd April 2025, The US President Donald Trump announced a comprehensive tariff policy. He imposed a baseline 10% duty on all imports from 5th April. This would be followed by individualised reciprocal tariff rates on nations with which the US has a high trade deficit. The increased tariff would be enforced from 9th April.
2. The US tariffs on India were set at 26%, China 34%+ earlier 20%, totaling 54%, Vietnam 46%, Thailand 36%, Indonesia 32%, Laos 48%, Japan 24%, South Korea 25%, European Union 20%, UK 10% , Taiwan 32%. Thus, the main focus was on China and countries receiving significant Chinese investment called China + one nations acting as conduits for Chinese products into the western world.
1. Tariff is a tax imposed by the Government on imported goods and services. It makes foreign products more expensive. The purpose of tariffs is to protect domestic industries from cheap foreign goods, generate revenue for the Government, correct trade imbalances and retaliate against unfair trade practices. There are two types of tariffs
Ad Valorem Tariff - It is charged at a percentage to the value of goods. For example, countries can charge a 10% tariff on the price of imported cars. If a car is valued ₹5 lakh, 10% tariff would be ₹50,000 realised by countries.
There are specific tariffs charged as a fixed amount per unit. For example, $100 tariffs on every imported smartphone.
Reasons for the new tariff policy announced by the US
1. President Trump claimed that the US has reduced trade barriers for other countries for decades. On the other hand various countries imposed massive restrictions on American products. This resulted in the decimation for American industries. He cited the example of Detroit which was famous for car manufacturing. Its prime manufacturing position has slid with the passage of time. Most of the workers were thrown out of the job.
2. President also accused several countries of manipulating their currencies, subsidising their exports, stealing intellectual property, adopting unfair rules and technical standards.
3. The new tariff policy announced by the US was on account of huge trade deficits with countries like China, Mexico, European Union, Vietnam, Taiwan, Japan, South Korea, India, Canada, Malaysia and Israel. See the graph below
4. USTR report (US Trade Representative) criticised India’s high applied tariffs on a wide range of goods like vegetable oil, apples, maize, motorcycles, natural rubber, automobiles , coffee, walnuts and alcoholic beverages.
5. The US Government also reiterated that agriculture support programmes extended by India. Leads to distortion in the international markets. However, the Indian Government argued that US subsidies for farmers are much higher than those provided by India.
6. By increasing tariffs on imported goods into the US, the US government intends to increase the production of manufacturing industries, job opportunities to the youths and increasing the revenue of the Government. It also hopes that the increasing tariffs would have a salutary effect upon other countries of the world and so they would be forced to reduce tariffs on imported goods from the US, thereby, bringing a level playing field.
Impact on global economy
1. The new tariff policy of the US led to significant global economic repercussions. China retaliated by imposing a 34% tariff on all US goods and restricting export of critical , rare earth elements.
2. Major US stock indices experienced declines of nearly 3% reflecting investor concern about a potential global recession.
3. European and Asian markets also saw substantial drops with fears of escalating trade wars and economic instability.
4. Higher tariffs will raise the cost of imported goods like electronics, clothing and machinery in the US. It is estimated that $3800 would be added as expenses to each household.
5. The IMF's 3.3% global growth projection for 2025 is likely to be revised downward. Critics also point out that there is a chance of global recession on account of trade disruption and reduced economic activity. The developed countries like the European Union and Japan may see GDP shrink by 1-2% because of their heavy reliance on exports to the US.
Similarly, export-dependent countries like Vietnam, Thailand, Mexico may experience sharper declines because of the heavy tariff duty by the US on their goods.
6. Emerging markets like India, Mexico, Vietnam, Thailand may see capital outflows, thereby weakening currencies of respective countries.
7. Countries facing high US tariffs may diversify their exports. This redirection of trade would benefit Africa, Latin America, South Eastern Asia, India.
8. The high tariffs of the US may push for regionalisation, instead of globalisation. Countries would seek formation of regional blocks to reduce reliance on the US market. For example, India may shift its focus upon the European Union for its export instead of the US.
9. If nations take recourse to retaliatory measures, it is apprehended that there would be trade wars among nations, resulting in shrinking of global GDP by 1-2% annually. Small countries like Singapore, Ireland, Thailand, Vietnam, Bangladesh would suffer the most.
10. Economic friction may exacerbate US-China rivalry and would push neutral countries to pick sides, complicating multilateral cooperation on issues like climate change.
11. Thousands of people gathered in different cities of the US and Europe to protest against the reciprocal tariff announced by President Trump, alleging that he was pushing them into a global recession. Stock exchanges of the US, Europe, Asia and India felt the brunt of the new tariff policy of the US and the share market crashed. Economists fear that the new tariff policy would herald recession worldwide.
Impact on India
1. It is estimated that the imposition of higher reciprocal tariffs by the United States on several Asian countries like China, Vietnam, Taiwan, Thailand and Bangladesh presents an opportunity for India to strengthen its position in global trade and manufacturing.
2. Because of the high rates of tariffs on China and China + 1 countries, India has advantage in several key sectors like textiles and garments. The apparel sector of India would get a boost in the US market because the major competing countries like China, Bangladesh, Vietnam, Cambodia have been slapped with higher reciprocal tariffs by the US. Similarly, higher tariffs on Vietnam may boost Indian smartphones and solar module exports to the US. While there would be an adverse impact upon gems and jewellery. Since, import tariffs in the US may go to 20% from the current 0% on loose diamonds and 5.5% - 7% on gold jewellery. It should be noted that the US is India's largest jewellery export market, accounting for almost 30% of the share.
3. High tariffs by the US on Indian exports would have a far reaching impact upon gems, jewelleries, smart phones, solar photovoltaic modules and auto components. The Trump Government already imposed a 25% tariff on steel, aluminium and automobiles in March and so, these sectors will also be affected. However, certain critical minerals, energy products, pharmaceuticals and bullions were exempted from US tariffs and so these Indian products would witness enhanced export from India to the US. That’s why the share of the pharmaceuticals increased to 3% just after the announcement of the US new tariff policy. Export of generic drugs and antibiotics and along with certain petroleum oils stand to benefit from the exemption.
4. However, discussions are going on between India and the US for the swift conclusion of a mutually beneficial multi-sectoral bilateral trade agreement encompassing a wide range of issues of mutual interest. The ongoing talks are focused on enabling both nations to expand trade, investment and technology. It aims at enhancing the trade volume from $190 billion to $500 billion by 2030.
5. Experts are of the view that the enhanced US tariffs on India would reduce India’s GDP growth by 0.6% points. Sectors like metals, chemicals, jewellery, automobiles and food items would be highly affected.
Ways out for India
1. Diversification of Indian exports
India should reduce dependence on the US for major exports by boosting trade with southeast Asia, Africa and the middle east. It should be noted that the US is the largest trading partner of India.
India should make free trade agreements with the EU, the UK and Australia to offset US losses. The India-EU free trade agreement can open a $500 billion market for Indian goods.
2. India should accelerate efforts to substitute imports and build self- reliance in tariff hit sectors like electronics and autos. Incentives for local manufacturing can offset higher US import cost, thereby, creating jobs. India should focus on value addition. Instead of raw material exports, finished products should be exported. India should focus on high value exports like electronics, semiconductors, green tech and biotech to reduce over dependence on traditional exports like textiles and gems.
3. India should use tariff exemptions on energy commodities like oil and gas to keep production cost low in order to support industrial competitiveness.
4. India should challenge discriminatory tariffs in the world trade organisation if it is treated unfairly compared with other countries.
5. India should deepen its political and economic ties with the Indian Ocean Rim Association (IORA) to offset its losses of exports to the US on account of high tariffs.
6. India should emphasise its role as a counterweight to China in the Indo-Pacific by aligning with the US Geo-political interest to gain favourable trade terms. The bilateral trade agreement between India and the US should be finalised to achieve the target of $5 billion trade by 2030. It should also negotiate to lower tariffs or exemptions for key sectors like electronics, gems, jewellery. India should also offer reciprocal concessions to the US imported goods into India.
Conclusion
The US tariff policy would destabilise the world economy by fracturing trade networks bringing protectionism and reducing globalisation, inflating cost and triggering a potential recession. Critics point out that the new tariff policy of the US would protect American industries, provide jobs to youths, increase the revenues of the US and reduce the trade deficits. However, higher prices, slower growth and market volatility would be witnessed in the global economy. In short, the world faces a turbulent economic landscape. This may mark a pivotal shift away from decades of trade liberalisation. The extent of damage depends upon the scale of retaliations by different countries and the ability of countries to adapt through diversification or negotiation. India should therefore revive SAARC (South Asian Association of Regional Cooperation) and strengthen its economic and political ties with Indian Ocean Rim Association, IORA and EU to bolster its exports to offset losses on account of higher tariffs imposed by the US on Indian goods.
To sum up, the new reciprocal tariff policy of the US will have a dampening effect on global trade. It would also usher in the collapse of economies of countries, like South Korea and Taiwan which are highly dependent upon export driven growth.
