Trump's reciprocal tariffs: A US gamble that could disrupt global trade

On February 13, the day Prime Minister Modi met US President Donald Trump, the US unveiled its reciprocal tariffs plan. Set to take effect in April, these tariffs are a key part of Trump’s effort to reduce trade deficits and revive US manufacturing and jobs. However, they are more likely to disrupt global trade without delivering those benefits.

 

The US argues that while it allows low-tariff access to foreign goods, other countries impose higher tariffs and trade barriers on American products. This, it claims, has contributed to a trade deficit exceeding $1 trillion, hurting American industries and workers.

 

To counter this, Trump introduced the Reciprocal Tariff Plan, a move that could significantly reshape global trade. The Commerce Secretary and the US Trade Representative will assess how partner country practices are hurting the US exports and submit a report to the president recommending higher tariffs.

 

The plan lacks clarity

 

The term reciprocal tariffs is misleading as the US plans to factor not just import tariffs but also non-tariff barriers, currency manipulation, and local taxes like VAT (similar to GST in India) while assessing trade practices of partner countries.

 

It is not clear, whether the reciprocal tariff applies to specific products or entire sectors. For example, a White House fact sheet (February 13) states that the US average MFN tariff on agricultural goods is 5 per cent, while India’s is 39 per cent. It also claims that India imposes a 100 per cent tariff on US motorcycles, while the US tariff on Indian motorcycles is just 2.4 per cent.

 

However, the comparison is inconsistent — for agriculture, the US refers to the entire sector using average tariffs, while India's actual tariffs on US agricultural exports vary and apply only to certain products. On motorcycles, the US selects a specific product instead of considering the whole auto sector. The results would be different depending on whether tariffs are compared at the product or sector level, making the US position unclear.

 

Additionally, the US cites incorrect figures in above examples. India reduced motorcycle tariffs to 30-40 per cent in the latest Budget, yet the US continues to claim India charges 100 per cent tariffs. India needs to be prepared while we still debate if the Agriculture Infrastructure and Development Cess is part of tariffs.

 

It is not clear, if the reciprocal tariffs apply only to items of US interest, or will it be a bilateral exercise. If it is bilateral exercise, most countries, including India, may not be significantly affected due to the differences in export profiles between the two countries.

 

For example, if the US raises tariffs on pistachios to 10 per cent to match India’s rate, it won’t impact India, as India does not export pistachios. This scenario applies to many other products as well. Also, for 75 per cent of US exports to India, the average tariff is already below 5 per cent, meaning raising tariffs selectively will not be effective.

 

The US is likely to pressure countries to lower tariffs by citing non-tariff barriers, high local taxes, and currency manipulation—without needing to justify them. This may be done through brute force rather than fair negotiation. If a country surrenders to a bully, it should be ready for ever new demands.

 

India faces high US tariffs (15-35 per cent) on labor-intensive goods like textiles, garments, and footwear. India could reduce its tariffs to zero on these products in exchange for the US doing the same, which would be an immediate benefit for India.

 

Impact

 

The 2018 trade war mainly targeted China, but this time, all countries are at risk. However, the US did not win the last trade war.

 

Between 2017 and 2023, while US imports from China fell by $82 billion, the US trade deficit grew by $762 billion, and China’s exports surged by over $1 trillion. Many Chinese goods still enter the US tariff-free through USMCA and the US-Vietnam FTA, reducing the impact of tariffs.

 

By advocating Reciprocal Tariffs, the US is essentially abandoning WTO rules and MFN tariffs. In few months, it will be like US has hurriedly negotiated a Goods only FTA with large number of countries.

 

If the US imposes different tariffs on different countries, importers will struggle to source goods based on cost and supply chain efficiency.

 

As a major market, the US is likely to face retaliation, further disrupting global supply chains and penalizing the most competitive suppliers. This would slow global trade and undermine US manufacturing and exports—the very industries the policy aims to support.

 

The US was the driving force behind the GATT and WTO-led global trade system. Over 75 years, stable trade rules helped global trade grow from under $100 billion to over $33 trillion, benefiting economies worldwide. The US’s recent actions risk undoing these gains.

 

  The author is founder of GTRI