We should be watchful to the ‘dumping’ effect by China and other countries to the Indian shores and the possible impact of high inflation and recession in US which will affect all the countries globally.
Published Apr 07, 2025 | 11:00 AM ⚊ Updated Apr 07, 2025 | 11:00 AM
Narendra Modi with Donald Trump. (X)
Synopsis: India need not panic though China has retaliated with 34% tariff. The need of the hour is to wait and watch (Trump is ready for negotiations ) how other countries react, especially the Asian countries to the Trump’s tariff policy, push for our early BTA in place, accord tariff concessions on our export products, wherever possible.
US President Donald Trump seems to have declared a ‘trade war’ with the rest of the world.
Trump’s ‘Liberation Day’ policy announcement on 2 April 2025 of overarching base tariffs at 10% across all products combined with the reciprocal tariffs against all trading partners is the most damaging and will destabilise the global trade balance.
The higher tariff rates on different countries including India is based on the quantum of ‘trade surpluses’ that such countries were enjoying with the US by far, Trump’s efforts to reduce the trade deficit worth $1.2 trillion in 2024 and gradually convert American economy to a global manufacturing hub to realise his ambition of MAGA ( Make America Great Again), will back fire.
With this draconian Trump Tariff implementation which is expected to come into force from 9 April, the cumulative tariff on China at 54%, Vietnam 46%, Thailand 37%, Indonesia 32%, Japan 24%, EU 20%, Bangladesh 37% and India at 26% will not only impact the global Gross Domestic Product (GDP) by 1% – 1.5% but will seriously dent the economic growth of the trade partner countries, including India, where the GDP dent is expected to be around 0.3 %- 0.5%.
Trump by levying the ‘unkindest’ 26% tariff on all goods and services exported by India to the US ($46 billion trade surplus of India ÷ $ 87 billion exports to US X 100 = 52 % : Half of that is 26 % which is the differential tariff levied on Indian exports ) has told in his address that “though Prime Minister Narendra Modi is a good friend, India had not been treating the US right”.
Interestingly, our country will not be impacted to the extent dreaded. Trump tariff trauma is a ‘mixed bag’ for India.
The real ‘Liberation day’ is for the pharma sector which has been spared from reciprocal tariff. This is very positive for all the big Indian pharma companies that have significant exports to the US market.
Companies such as Sun Pharma, Lupin, Biocon, Dr Reddy’s stand to gain from tariff exemption, at least in the short run. India exports $9 billion pharma products to US. The rationale behind exempting the pharma sector from reciprocal tariff is not to burden the patients in US from the ‘price passing on effect’ by the exporting companies and to prevent drug shortages in US.
The Damocles’ sword, however, hangs as Trumps latest assertion is that “tariffs may be imposed soon – and at levels never seen before”.
The new tariff levy will not apply for crude oil, refined products and natural gas which will save our oil and petroleum exports to the US which is valued at $6 billion during 2023-24. This perhaps is on the ‘reciprocal commitment’ given by Prime Minister Modi to increase the purchase of US energy to the extent of $25 billion during this year – quid pro quo arrangement.
Many such Bilateral Trade Agreements (BTA) negotiations for various sectors are underway which is expected to be implemented by the end of this year. This when implemented will escape the ‘reciprocal tariff’ and will be a win-win situation for both US and India.
This sector will be seriously hit with the duty burden of 31.5% to 39.5% tariff which was earlier 5.5% to 13.5%. The annual exports of gems and jewellery was worth around $12 billion to the US market in 2024 and imports of similar items from the US was around $5 billion, leaving a trade imbalance of around $7 billion.
Consequent to the stiff tariff imposed, the cost of jewellery for a buyer in US will steeply increase as our manufacturers and exporters will pass on the costs to the ultimate buyers. Further, the demand for jewellery may decline in the US and consequently due to oversupply, the rates of gems and jewellery may decline in our country.
The US-Mexico-Canada free trade arrangement will have competitive advantage over India which makes the sector more vulnerable for us.
Exports of medical devices to the US will be impacted. In FY-2024, this sector’s exports stood at $714 million – low value and high volume products. Though there is price / revenue advantage vis-a-vis China exports to US, manufacturing industries of such products shifting its base to the US is a challenge.
Tariff impact will result in immediate loss of ₹600 crore on account of revision in prices and cancellation of orders.
Shrimp exports will be the biggest casualty as it constitutes 92% of our sea food exports valued at $2.55 billion to the US in 2023-24. Ecuador seems to have an edge over India with a tariff of 10% than ours at 22%.
Similarly, export of spices, mangoes and basmati rice will also face the tariff brunt. However, higher tariffs of 30% on Pakistan, 46% on Vietnam and Indonesia at 32% will ensure price competitiveness of our exports in US markets.
The advantage in textile exports is on account of our 26% reciprocal tariff which is lower than higher tariffs in major textile exporting peer countries like Vietnam’s 46%, Bangladesh’s 37%, 49% in Cambodia and 30% in Pakistan. Though there is competitive advantage, the uncertainty should make our exporters to explore alternative global markets and not only focus on US market.
The $2 billion export gets dented with the levy of 26% tariff on auto parts. There is no competitive advantage over peer countries too. The solution to this is seeking reduced tariff rates in BTA and our government extending more concessions and incentives under the production linked incentive (PLI) scheme.
In sum, India need not panic though China has retaliated with 34% tariff. The need of the hour is to wait and watch (Trump is ready for negotiations ) how other countries react, especially the Asian countries to the Trump’s tariff policy, push for our early BTA in place, accord tariff concessions on our export products, wherever possible.
We should also be watchful to the ‘dumping’ effect by China and other countries to the Indian shores and the possible impact of high inflation and recession in US which will affect all the countries globally.
(S Narendra is a Bengaluru-based Banker, Economist and guest columnist. Views are personal. Edited by Majnu Babu).
