A global setback: India must adjust swiftly to Trump's reciprocal tariffs

India will need to adjust swiftly to reciprocal tariffs

American President Donald Trump’s “Liberation Day” will go down in history as the most damaging day for globalisation in the post-war era. Mr Trump on April 2, as promised, announced sweeping “reciprocal tariffs” against all trading partners. In fact, the tariffs are far more damaging than what most people had expected. This would also be remembered as another momentous event underscoring the American political leadership’s desire to relinquish the global leadership, which the world’s largest economy and sole superpower has held for decades. The shape and the nature of the global economic and political order will now, to an extent, depend on how other large economies respond to the United States’ tariffs. While reactions have been mixed thus far, the actual picture is likely to emerge in the coming days and weeks.

 

The US has imposed a base tariff of 10 per cent across the board, which will come into effect on April 5. The individual reciprocal tariffs will become operational on April 9. For instance, the European Union (EU), the biggest source of imports for the US, will face a 20 per cent tariff. Imports from India will be subjected to a 27 per cent tariff. In the case of China, with an existing tariff of 20 per cent, the reciprocal tariff of 34 per cent, announced on April 2, will take the tariff to 54 per cent. Japanese and South Korean exports to the US will face a 20 per cent-plus tariff, while the tariff on US imports from Vietnam will be 46 per cent. The implications of this increase and potential retaliation by trading partners will go beyond global trade.

 

In Mr Trump’s book, the world has been unfair to the US, which is reflected in its trade deficit. The US ran a trade deficit in goods worth $1.2 trillion in 2024. Thus, higher tariffs will make the American people buy American goods and force foreign companies to produce in the US. Hardly any mainstream economist agrees with this logic. In fact, the US runs a surplus in services. So, is the US being unfair to the rest of the world? Clearly, things don’t work like this and that is well accepted globally. Nonetheless, it is possible that with higher tariffs, the US will witness a smaller current account deficit (CAD) in the near term. However, a lower trade deficit and possibly higher interest rates will strengthen the dollar, affecting US exports. This will negate the perceived advantage on the CAD. Besides, the tariffs have significantly heightened uncertainties, affecting both consumption and investment demand. This could considerably slow global growth.

 

India will also face a tariff of 27 per cent, though pharmaceuticals are exempt for now, which is a relief. While tariffs on India are lower than those on other Asian economies, such as Vietnam and China, or even Bangladesh, a lot will depend on how ongoing India-US bilateral-trade negotiations proceed. It is worth noting that India’s relative tariff advantage may not last. Other countries will also be negotiating trade agreements with the US. However, the bottom line for India is clear. It needs to lower tariffs and other trade restrictions, which is in its interests, to access the US market. It would also need to use this moment to hasten the trade negotiations with other trading partners such as the EU and the United Kingdom. Mr Trump has initiated changes that will damage both the US and the world economy in the medium term. India will need to adapt quickly, not only to minimise the damage but also to tap the opportunities that may arise from the ensuing chaos.