What is the US trying to achieve through reciprocal tariffs? Explained

It could be easier for India to deal with reciprocal tariffs by increasing imports from the US to protect its existing exports to the US, said analysts at Kotak Institutional Equities.

As US President Donald Trump's tariff turmoil deepens, analysts at Kotak Institutional Equities have explained what the US is trying to achieve through its reciprocal tariffs.

 

The goals of the US's reciprocal tariff regime, according to the KIE note, are centred on reducing its trade deficits with other countries and reviving manufacturing. “Thus, reciprocal tariffs need to be viewed in the context of the US trying to either increase exports to or reduce imports from other countries,” the analysts explained.

 

Adding: "The reciprocal tariff formula shows that the tariffs are not ‘linked’ to the existing tariff structure but to trade flows. Lower tariffs on US imports by other countries may not immediately help rebalance the US’s trade deficits in the short-term.”

 

Analysts further pointed out that there is a disconnect between how the US perceives the reciprocal tariff system and how the market interprets it. 

 

"The US is looking to reduce its trade deficits and boost manufacturing. These objectives won’t be realised instantly, even with trade concessions from other countries. Market expectations for quick trade deals are likely premature,” the note said.  ALSO READ | Trade deficit vs tariff: How were Trump reciprocal tariffs calculated?

 

India unlikely to gain substantially from lower tariffs

 

Analysts at Kotak Institutional Equities believe that the market's view of India benefitting from relatively lower tariffs compared to countries like China or Vietnam is shortsighted. 

 

“Supply chains are unlikely to shift immediately, especially if the US keeps trade deal options open," the analysts said. 

 

While some shifts may occur in low-value-added segments like footwear, furniture, textiles, and toys, they stressed that a radical shift in supply chains toward India isn’t guaranteed. US companies would need to balance the marginal gains from tariff-related rerouting against factors such as labor costs, scale, and taxation.

 

What should India do in this scenario?

 

The brokerage suggested that it might be easier for India to manage reciprocal tariffs by increasing imports from the US to protect its existing exports to the country. 

 

“India’s exports to the US make up around 19 per cent of its total exports, while imports from the US account for 6.6 per cent of its total imports,” they explained.   ALSO READ | US tariffs to have small, indirect impact on India: NITI member Virmani

 

Key imports from the US include energy, gems and jewellery, electronics, and transport equipment. The US would likely want India to increase imports of agricultural goods (which India may not agree to), commercial aircraft, defence goods, electronics, machinery, and more.

 

What can other countries do? 

 

The brokerage highlighted how different countries might respond to the challenges posed by the US’s reciprocal tariff regime. China has already imposed 34 per cent tariffs on US exports to China, while the EU is considering retaliatory tariffs on US exports, it said.

 

Countries like Malaysia, Taiwan, Thailand, and Vietnam, which rely heavily on the US, may not be in a position to retaliate. They will likely seek trade deals through increased imports from the US and/or reduced tariffs on US imports. However, such measures may not necessarily align with the US’s goals.  ALSO READ | How a false Trump tariff pause headline moved $2.4 trillion on Wall Street

 

Meanwhile, countries like Bangladesh, Cambodia, and Sri Lanka, with smaller markets, analysts believe, could struggle without special concessions from the US, making it difficult for them to withstand the impact of the tariffs.

 

Apart from that, the brokerage also highlighted the heightened risks of adverse measures on services if the tariff war drags on for an extended period.