Distribution: weekly

Why in the News?

U.S. President Donald Trump criticised the high tariffs imposed by India and other countries, calling them “very unfair,” and announced that reciprocal tariffs would be implemented from April 2 on nations that levy duties on American goods.

What are the main reasons for imposing reciprocal tariffs on countries like India and China?

• High Import Tariffs Imposed by These Countries: The U.S. administration has expressed concerns over the substantial tariffs that nations such as India and China impose on American goods. For instance, India charges auto tariffs exceeding 100%.
• Trade Imbalances: The U.S. aims to address significant trade deficits with countries like China. By imposing reciprocal tariffs, the U.S. seeks to encourage these nations to reduce their tariffs and open their markets to American products, thereby promoting fairer trade practices.
• Protection of Domestic Industries: High tariffs from countries like China have adversely affected U.S. industries, particularly manufacturing and agriculture. The reciprocal tariffs are intended to protect these sectors from unfair competition and to support domestic employment.

Why did USA’s President emphasize that India “will not be spared” from the reciprocal tariff measures?

The U.S. President emphasized that India “will not be spared” from reciprocal tariff measures due to several key factors:

• High Tariffs Imposed by India on U.S. Goods: The U.S. argues that India imposes excessively high tariffs on American products, particularly in the automobile and agricultural sectors. Example: India levies over 100% import duty on U.S. motorcycles like Harley-Davidson, which the U.S. considers an unfair trade barrier.
• Trade Imbalance Between the U.S. and India: The U.S. has consistently faced a trade deficit with India, meaning India exports more to the U.S. than it imports. This imbalance is viewed as economically disadvantageous. Example: In 2023, the U.S. trade deficit with India was approximately $42 billion, prompting calls for more balanced trade relations.
• Market Access Restrictions: The U.S. claims India imposes non-tariff barriers and complex regulatory frameworks, limiting American companies’ access to the Indian market. Example: U.S. agricultural products such as dairy face strict Indian regulations on sourcing and labeling, restricting their market entry.
• Retaliation Against U.S. Tariff Policies: India has imposed retaliatory tariffs on several U.S. products in response to American tariffs on steel and aluminum. This reciprocal action has escalated trade tensions. Example: After the U.S. raised tariffs on Indian steel (25%) and aluminum (10%), India imposed tariffs on U.S. agricultural products like almonds and apples.
• Strategic Leverage in Trade Negotiations: By targeting major trading partners like India, the U.S. aims to pressure these countries into negotiating more favorable trade agreements. Example: The U.S. sought reduced tariffs on electric vehicles to facilitate the entry of companies like Tesla into the Indian market, using tariff threats as a bargaining tool.

What are the potential global trade implications of the U.S. imposing reciprocal tariffs? 

• Escalation of Global Trade Wars: Reciprocal tariffs can trigger retaliatory measures from affected countries, leading to prolonged trade conflicts and increased global economic uncertainty. Example: After the U.S. imposed tariffs on Chinese goods under Section 301, China retaliated with tariffs on U.S. agricultural products, disrupting global supply chains and trade flows.
• Rising Costs for Consumers and Businesses: Increased tariffs raise the cost of imported goods, leading to higher prices for consumers and increased production costs for businesses reliant on global supply chains. Example: U.S. tariffs on Chinese electronics increased costs for American companies like Apple, which faced higher prices for components and devices.
• Disruption of Global Trade Agreements and Alliances: Imposing unilateral tariffs undermines multilateral trade frameworks like the World Trade Organization (WTO), weakening global cooperation and trade stability. Example: U.S. tariffs on European steel and aluminum strained transatlantic relations and led the EU to impose counter-tariffs on American motorcycles and bourbon.

How will it impact India? 

• Widening of the Current Account Deficit (CAD): Higher U.S. tariffs on Indian exports can reduce foreign exchange earnings, leading to a wider CAD as export revenue declines while import costs remain unchanged or increase. Example: The U.S. withdrawal of GSP benefits in 2019 reduced India’s export competitiveness, contributing to a widened CAD of 2.1% of GDP in FY19 from 1.8% in FY18.
• Depreciation of the Indian Rupee: A higher CAD increases demand for foreign currency, putting pressure on the rupee’s value and causing depreciation, which raises the cost of imports like crude oil. Example: In 2018, after U.S. tariffs and India’s rising oil import bill, the rupee fell to ₹74 per USD, increasing inflation and making imported goods more expensive.
• Reduced Export Competitiveness: Higher tariffs on Indian goods in the U.S. market can make Indian products more expensive, reducing their competitiveness and affecting export-driven industries. Example: U.S. tariffs on Indian steel and aluminum (25% and 10%, respectively) in 2018 affected Indian exporters, leading to a decline in shipments and increased production costs.
• Disruption in Key Sectors: Industries such as pharmaceuticals, textiles, and auto parts—major contributors to India’s exports—could face higher barriers, impacting growth and employment. Example: U.S. withdrawal of Generalized System of Preferences (GSP) benefits in 2019 affected $6 billion worth of Indian exports, especially in textiles and jewelry.

Way forward: 

• Bilateral Trade Negotiations: Strengthen diplomatic efforts to negotiate mutually beneficial trade agreements with the U.S., focusing on reducing tariffs and enhancing market access for key sectors like pharmaceuticals, textiles, and technology.
• Diversification of Export Markets: Reduce dependency on the U.S. by exploring new markets through regional trade agreements (e.g., Comprehensive Economic Partnership Agreements) and expanding in regions like Africa and Southeast Asia.

Mains PYQ:

Q “What introduces friction into the ties between India and the United States is that Washington is still unable to find for India a position in its global strategy, which would satisfy India’s National self-esteem. (UPSC IAS/2019)