Trump's reciprocal tax plan sets off alarm bells amid global trade war buzz

The European Commission on Friday said the US's 'reciprocal' policy is a step in the wrong direction and will react firmly and immediately against unjustified barriers to free and fair trade

The move by the United States President Donald Trump to impose ‘reciprocal’ tariffs on a ‘country-by-country’ basis is set to trigger a global trade war, according to officials watching this space. While the plan on reciprocal tariffs, unveiled by Trump on Thursday ahead of his meeting with Prime Minister Narendra Modi in White House, was meant to narrow America’s long-standing trade deficit in goods and bolster economic and national security, experts pointed out that such a policy would violate the global trade norms of the World Trade Organisation (WTO).

 

While the finer details of the implementation of the reciprocal tariff plan are expected only in April, Indian policymakers are busy trying to decipher the impact. They are also preparing for the trade agreement negotiations with the US.

 

The reactions have been sharp from around the world. The European Commission on Friday said the  ‘reciprocal’ policy was a step in the wrong direction and that it would react firmly and immediately against unjustified barriers to free and fair trade. Similarly, South Korea has said it would review non-tariff barriers, in response to the American plan.

 

Even as Trump and Modi announced their intention to seal a bilateral trade agreement within the next few months, the US president made it clear that Washington would not spare India from reciprocal tariffs. “Whatever India charges, we charge them,” Trump told reporters.

 

Bipin Sapra, tax partner, EY India, said that there might be cases where tariffs on some products may be high in India but the same is for imports from all countries, other than countries with whom free trade agreements (FTAs) have been signed, and not specifically for the US. 

 

“It is generally to incentivise and protect domestic industry in a particular sector. Most of the tariffs, however, are at standard or lower rates in India. To ensure fair and reciprocal tariff arrangements, a limited trade agreement may be explored between India and the US for both countries to get concessions in areas of their interest,” Sapra said.

 

Broadly, reciprocal tariff implies that if a country imposes a certain amount of tax on US goods, the US will respond with equivalent tariffs.

 

Trump has repeatedly called India a high tariff nation, labelling it as a ‘big abuser of tariff and even a ‘tariff king’. However, he acknowledged India's move to address his concerns by cutting basic customs duties on a bunch of items in its February 1 Union Budget. Indian government officials have claimed that India’s average customs duty has been brought down to 11 per cent.

 

According to a report by Delhi-based think tank Global Trade Research Initiative (GTRI), the US is not clear if the reciprocal tariff applies to specific products or entire sectors. This is evident from the White House factsheet that says–the US average applied Most Favored Nation (MFN) tariff on agricultural goods is 5 per cent, whereas India’s average applied MFN tariff or tariff for all nations is 39 per cent.

 

“The US must choose a criteria: product or sector for transparent decision making, else all the US efforts on MFN tariff cuts will end up benefitting  China since China is the largest global supplier of industrial goods,” the report said.

 

The report also said that the reciprocal tariffs may not hurt India much, given the differences in the export profiles of the two countries, reciprocal tariffs may not have a significant impact. For example, if the US charges 50 per cent reciprocal tariffs on Indian pistachios because India charges the same, India is happy as it does not export pistachios.

 

Madhavi Arora, chief economist at Emkay Global Financial Services, said that India had among the highest tariffs on US imports–which means that it will be disproportionately hurt if reciprocal tariffs are imposed.  This is true across most broad product categories, especially for intermediate goods, which could hurt the government's current strategy of incentivizing domestic manufacturing. 

 

She further said that given that the Trump administration has only announced a review at present, with April being the earliest by when these tariffs could be implemented, it looks like a classic Trump move--announce and negotiate. PM Modi may be able to wangle some exceptions/favourable deals, but that would likely entail lowering import duties for some products, as well as higher Indian purchases of US goods, with defence and energy being prime sectors," Arora added.