Why is it in the news?
1. The United States President Donald Trump declared that he would adopt reciprocal tariffs in international trade. It means the end of existing trade rules. The reciprocal tariff would come into effect after 1st April ,2025.
2.It should be noted that countries have been imposing tariffs on imported goods from foreign countries. However, since the end of World War II, the world has moved towards free trade. There has been consensus among developed countries that free flow of goods and services among countries is mutually beneficial for all. A world body called GATT (General Agreement on tariff and trade) was established in 1948 to look into international trade practices.
3.In 1995, GATT was replaced by the WTO which was given more power to enforce trade rules. It should be noted that although the developed countries gave emphasis upon free trade, they ensured that developing countries should not be flooded with cheap items from the developed countries. The logic was simple. That the goods and services produced by developing countries would not be matched and cannot compete with that of developed countries. So while the tariffs in the developed countries were kept at low, the tariffs for the developing countries were kept at high level. For example, the average duty levied by the US in 2023 was 3.3% followed by Japan less than 4%, EU 5%, Russia 6.6%, China and South Africa more than 7% , Brazil 11% and India 17%.
4.The higher tariffs in India are on account of high tariffs on agricultural products to protect farmers. While import duties on agricultural products were at 39%. It was only 13.5% on non-agricultural products in 2023 (Source : The Hindu). The high import duty on agricultural products is meant to protect our farmers who cannot compete with subsidised US agricultural products.
What is the reciprocal tariff?
The new reciprocal tariffs announced by President Trump want to do away with this exception of providing higher tariffs on imported goods into developing countries. It means that if a country has imposed 20% tariffs on imported goods and services from the US, the US Government would also impose 20% tariffs on goods and services exported from that country into the US. It is also suggested that if a country has given subsidies and other incentives to promote exports, then the exported goods to the US will be levied additional duties. For example, the Indian Government has disbursed $1 billion to companies between 2022-24 under the production linked incentives to boost exports of mobile phone handsets. The new reciprocal tariffs adopted by the US would take into account these subsidies while calculating the additional import duties.
Why has President Trump enforced reciprocal trade?
1.The US trade deficit with the rest of the world has gone to $1 trillion annually. While China enjoys a trade surplus of more than $1 trillion annually, the US has a huge trade deficit with China, India, EU, Mexico, Canada, Japan, and South Korea. The US wants to do away with the tariff differential with different countries whose goods imported into the US cause trade deficits. Following are the tariff differential with the US against India, China, Canada, Mexico and Vietnam.
For example, the US imposes 2.5% tariff on European cars while the EU imposes 10% tariffs on US cars. Earlier, the US removed India from its GSP (Generalised System of Preferences) leading to higher tariffs on Indian exports of goods like 25% tariff on Indian steel and 10% on aluminium. Thus, the US wants to protect domestic jobs and domestic industries like steel and aluminium because these industries are struggling in the face of cheap steel and aluminium imported into the US. It puts 25% tariffs on all goods and services imported into the US from Canada and Mexico and 10% tariffs on Chinese goods and services imported into the US. China retaliated by levying 15% duties on coal and LNG and 10% on oil and agricultural equipment imported from the US.
2. Critics are also of the view that President Trump wants to offset the loss of $460 billion annually on account of reduction in corporate and personal income tax under tax cuts and job act of 2018 during his previous tenure and this act is to expire in 2025. President Trump wants to extend those tax cuts permanently. Since the US imports around $4 trillion of goods annually, the collective import share of Mexico (15.6%), Canada (12.6%) , China (13.5%) and EU (16%) accounts for 58%. An increase of 25% tariff on Canadian, EU and Mexican goods along with 10% additional tariff on imports from China, plus 10% duties on energy imports from Canada would raise $480 billion annually, thereby financing the entire annual cost of extending the tax cuts.
What would be its impact upon India and the world?
1.Indian steel, aluminium, textile products exported to the US would become expensive leading to the reduction of export volume of these items to the US.
2. Since, the US is the largest trading partner of India and India had $45 billion surplus trade in 2024, the reciprocal tariff would hit the Indian market. As of now, India exports primarily engineering goods, electronic goods, gems & jewellery, drugs and pharmaceuticals and petroleum products. On the other hand, India imports from the US primarily minerals, fuels and oils, precious and semi-precious stones, nuclear reactors, boilers, electrical machinery and aircraft and its parts. If the US insists upon reciprocal tariffs, the biggest casualties would be the agricultural sector and this sector would be flooded with cheap American agricultural products. Secondly, the US may insist upon India to buy more mineral fuels and oils to offset the trade deficit. This would put more pressure on the demands of the US dollar, causing further dipping of Indian rupees vis-a-vis the US dollar.
3.Since the EU is the second largest trading partner of India after the US, any increase in tariff of goods & services of EU imported into the US would give an opportunity to India to increase its exports to the EU.
4.Critics also point out that the US-China trade war in the long run will benefit Indian exports to the US.
5.There would be disruption in the supply chain causing inflation in different parts of the world. Secondly, China, EU, India and other countries would retaliate by raising tariffs on goods and services imported from the US.
6. There would be higher prices of consumer and capital goods faced by people worldwide.
7. Countries would sign free trade agreements and trade pacts with other countries to lessen their reliance upon the US.
8. The trade war between the US and China would benefit Brazil, Mexico, Vietnam and India.
9. The biggest sufferer would be the US farmer, the US export of farm produce amounts to $191.2 billion in 2024. China, Canada and Mexico import a maximum chunk of farm produce amounting to $91 billion or 47.6%. If these countries retaliate and stop importing US farm produce like soyabean, cotton, coarse grains, almonds, walnuts, wheat, dairy products, forest produce, tree nuts , beef, corn etc. the biggest beneficiary would be Brazil, Argentina, Paraguay, Ukraine, Russia. Although the US farmers constitute less than 2% of the US population, they exert more political influence in American politics. So any set back to the US farmers would drastically reduce the popularity of President Trump.
What is the way out for India ?
1.Diversification of export markets. This would reduce the reliance on the US.
2. Boosting of domestic manufacturing.
3. Free trade agreements with various countries so that Indian goods and services get access to those markets.
4. Lobbying with the US for trade concessions.
5. India should simultaneously raise the issue of unfair practices before the WTO.
Conclusion
India must not buckle under the pressure of the US. It must safeguard its agricultural sector, otherwise farmers of India would be hard hit. It should diversify exports to reduce dependence upon the US. It should further lay stress upon the growth of local industries to minimise trade deficits.
No comments:
Post a Comment