The US decision to levy ‘reciprocal tariffs’ on India — which it earlier said will kickstart from 2 April — was a tactical move with diplomatic intent.
Published Mar 08, 2025 | 3:49 PM ⚊ Updated Mar 08, 2025 | 3:50 PM
US President Donald J Trump
Synopsis: Sectors that get deeply impacted if reciprocal tariff is implemented are: apparels and textiles, pharmaceuticals, gems and jewellery, manufacture and machinery, automobiles, electrical items and IT services. However, Trump, on Friday, said India wants “to cut their tariffs way down”.
A fully blown trade tariff war has begun between the US and its three major trade partners, China, Canada and Mexico.
While the US has steeply raised its tariffs on China at 20%, and Canada and Mexico at 25% each, the trade allies have retaliated by levying increased tariffs on US imports to their countries.
China levied a 15% tariff on US imports (including sanctions against 25 US entities exporting goods to China). Canada retaliated by levying 25% tariffs, and Mexico is contemplating the quantum of additional tariff (20 – 25%) to be levied on US imports.
Donald J Trump, in his second term as the US president, is showing aggression and pushing his agenda of ‘America first’ vociferously and is walking the talk.
The impact of the tariff war and economic setbacks will be immediately felt by the people of the US, Canada and Mexico, whose economies are highly interlinked. The three countries had a free-trade agreement (FTA) during Trump’s first term, and he scrapped it after becoming the US president for a second term.
The steep tariffs will first impact the cost of living in the US. The cost of basic goods and consumables like fruits, vegetables, groceries, will shoot up immediately. These were basically imported from Mexico and Canada. This will not only burden the people but will spike the inflation rate.
Impact on India
The impact of US’s trade tariff on India is totally different, and tricky. In his address to the Congress, Trump explicitly named India, saying, “It’s very unfair. India charges us auto tariffs higher than 100%” and India is a very high-tariff nation.
Trump even went to the extent of stating that countries charging high tariffs on US exports will have to be ‘punished’ and has warned India of levying reciprocal tariffs.
On Friday, 7 March, the 78-year-old Republican said India had agreed to lower tariffs.
“India charges us massive tariffs. Massive. You can’t even sell anything in India… They have agreed, by the way, they want to cut their tariffs way down now because somebody is finally exposing them for what they have done,” Trump told reporters at the White House.
The US decision to levy ‘reciprocal tariffs’ on India — which it earlier said will kickstart from 2 April — was a tactical move with diplomatic intent.
Reciprocal tariffs by the US on its exports to India goes against us as our tariffs are very much higher than not only the US but of any other country. We enjoy trade surplus to the tune of $46 billion with 17.5% of our total exports to the US which is quite substantial and cannot afford the impact of reciprocal tariffs.
Average tariffs on our exports of manufacturing goods to the US are as high as 13.4% vis-a-vis 3.6% more than levied by the US. Tariffs on agricultural products are even worse — 40% against 7.1% levied by the US.
To add to the steepness in tariff rates, there is uncertainty too. We have the freedom and flexibility to charge additional Cess.
The crux of the issue is the weighted average of our import tariffs on US goods is 8.5% as against 3.5% levied by US on our exports.
This is not an enviable position as Trump’s reciprocal tariffs — if the US moves ahead with its plan — will severely affect our exports, adversely impact current account deficit (CAD), deplete forex reserves, impacts global investors confidence resulting in flight of capital by the Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) to better pastures who are fair-weather friends.
From the standpoint of our exports to the US, sectors which get deeply impacted if reciprocal tariff is implemented are: apparels and textiles, pharmaceuticals, gems and jewellery, manufacture and machinery, automobiles, electrical items and IT services.
Pharma companies in Andhra Pradesh/Telangana and Karnataka, apparels and textile exporters from Tirupur, Erode and from few districts in Karnataka, export companies of automobile ancillary parts from Tamil Nadu and Karnataka will get affected from the revenue/profitability standpoint and more so when such companies have their presence in Mexico, Canada and China too.
On the other hand, our imports from the US are basically motorcycles/cars, chemicals, agricultural products/machinery and liquor on which we are levying very high tariffs.
We cannot afford ‘trade war’ with Trump and get our lucrative exports disrupted, that too when we are enjoying trade surplus to the tune of $46 billion.
Commerce Minister Piyush Goyal is in the US to deliberate on this critical issue and to convince the administration there to enter in a ‘bilateral’ trade agreement (BTA) and not to precipitate for implementation of the draconian ‘reciprocal tariffs’.
Keeping our average export tariff of 8.5% and 3.5% of the US, Goyal will perhaps strike a middlepath of convincing Trump administration for a weighted average tariff of 5% – 6% across the board to save from retaliatory tariff effect on our crucial imports of crude oil, gems and jewels, agri-products, machinery, AI, defence capabilities and innovation from the US.
To show our positive intent and conviction, we have already slashed import duties on Harley-Davidson motorcycles from 50% to 40% and on the popular Bourbon whiskey from 150% to 100% (accounts for 1/4th of our alcohol imports). The government may show similar favourable dispensation for importing Tesla too.
The only disagreement can be regarding our exports of agri-products (to protect farmers’ interests and vagaries of monsoon) where our average Most-Favoured Nation (MFN) is around 39% while that of the US on agricultural goods is 5%.
The Indian government’s mood is to deliberate, negotiate and arrive at a consensus for a win-win situation to strike the deal for BTA and not for a ‘reciprocal tariffs’ arrangement, to achieve $500 billion value trade with the US by 2030 as envisaged by Trump and Prime Minister Narendra Modi.
(S Narendra is a Bengaluru-based Banker, Economist and guest columnist. Views are personal. Edited by Majnu Babu).
