U.S.’s Reciprocal Tariffs – An Indian Perspective

The announcement of reciprocal tariffs by former U.S. President Donald Trump marks a turning point in the trajectory of global trade dynamics. While the idea of such tariffs may seem novel in its framing, it is a reflection of the broader protectionist trends that have emerged across the world in recent years. India, along with other global economies, must now calibrate its response, balancing its trade interests with broader strategic and diplomatic considerations.

The Nature of the U.S. Reciprocal Tariffs

The reciprocal tariffs proposed by the United States comprise two components:

• Existing commodity-wise import tariffs
• An additional reciprocal country-wise tariff, applicable uniformly across commodities

The new structure thus creates a hybrid system—tariffs that vary both by commodity and by country of origin. Although currently capped at 10% for most countries for a period of 90 days, these measures are exclusionary of China, against whom higher penalties have already been imposed.

A unique aspect of this initiative is the method used to determine the reciprocal country-wise tariff rate. According to the formula:

U.S. discounted tariff rate = (-1) × (1/2) × (Exports from U.S. – Imports to U.S.) / Imports to U.S.

This mathematical construct reflects an attempt to ‘penalize’ countries with large trade surpluses with the U.S., while rewarding those with balanced trade. It is noteworthy, however, that this approach eschews economic parameters such as demand elasticities or commodity-specific sensitivities, reducing the formula to a simple expression of trade asymmetry.

For India, this formula results in a 26% additional tariff, based on its 2024 trade figures—$41.8 billion in exports from the U.S. and $87.4 billion in imports to the U.S. Importantly, this penal tariff is to be added to existing commodity-specific tariffs, creating a new layer of trade friction.

Certain critical commodities—like pharmaceuticals, energy minerals, steel/aluminum articles, semiconductors, and autos—have been temporarily exempted from this additional tariff. This reveals a recognition, perhaps, of domestic dependencies and global supply chain integration that make some imports essential, even to a protectionist administration.

India’s Trade Exposure and Immediate Impact

India’s exports to the U.S., though significant, are moderate as a proportion of GDP and have been declining. The overall macroeconomic impact of the additional tariff may therefore be limited. However, a granular analysis reveals a differentiated impact across sectors.

Indian exports most likely to be affected include:

• Electrical machinery
• Gems and jewellery
• Machinery and mechanical appliances
• Made-up textiles

The demand for items like gems and jewellery is relatively inelastic, so the 26% tariff may not have a significant effect on trade volumes. On the other hand, sectors like electrical and mechanical machinery, which face competition from countries like China, Vietnam, Cambodia, and South Korea, are more vulnerable.

A comparative tariff analysis reveals that India fares relatively better than several of its competitors. For example, China faces reciprocal tariffs of up to 245% on specific commodities, and South Korea is levied at 25%, close to India’s 26%. Thus, while India’s exports face new headwinds, the relative competitiveness in global markets could be preserved, at least temporarily.

Calibrating India’s Strategic Response

1. Maintain Prudence in Imposing Counter-Tariffs

Unlike China, which imposed reciprocal tariffs and received an aggressive escalation from the U.S., India must tread cautiously. Raising retaliatory tariffs on U.S. goods, especially essentials like crude oil, aircraft, and medical equipment, may hurt India more than the U.S.

2. Adjusting the Import Basket to Reduce Tariff Penalties

India could lower its reciprocal tariff rate by increasing imports from the U.S. For instance, increasing oil imports from the U.S. by $25 billion could reduce India’s penal tariff rate to 11.8%, just above the floor rate of 10%. Since this involves a substitution within India’s existing oil import basket, it would not worsen the current account deficit but would improve India’s trade balance with the U.S. This is a viable policy lever with significant economic and diplomatic benefits.

3. Trade Negotiations and Strategic Dialogue

India must expedite bilateral trade consultations with the U.S. to forge a comprehensive agreement that acknowledges the structural nature of trade asymmetries, supply chain integration, and the necessity of stable rules. The India-U.S. trade dialogue has already witnessed discussions on digital services, e-commerce, pharmaceuticals, and intellectual property rights. This momentum must be sustained.

4. Curbing Dumping from Third Countries

As countries like China face higher U.S. tariffs, they may redirect their exports to alternate markets like India. There is a real threat of dumping—the influx of cheap goods that harm domestic manufacturers. India must bolster its anti-dumping surveillance mechanisms, safeguard its domestic industries, and enforce WTO-compliant counter-measures where necessary.

A Call for Global Trade Reform

The current tariff gambit by the U.S. is emblematic of a broader weakening of multilateral trade institutions. The World Trade Organization (WTO), once a bulwark for free and fair trade, has struggled to respond to unilateralism and rising protectionism. In a globalised economy, such uncertainties in trade policies erode business confidence and hinder long-term investment decisions.

India, along with other like-minded economies, must push for reforms in the WTO. The goal should be to:

• Reinforce rules-based trade.
• Simplify dispute resolution mechanisms.
• Encourage gradual tariff reduction globally.
• Incorporate digital trade, environmental goods, and service flows into trade negotiations.

While regional groupings like the Indo-Pacific Economic Framework (IPEF) or the Regional Comprehensive Economic Partnership (RCEP) may offer short-term trade benefits, they are no substitute for a robust and fair multilateral system.

Conclusion

India must respond to the U.S. reciprocal tariffs with strategic foresight, not reactive posturing. Our focus should be on maintaining macroeconomic stability, preserving export competitiveness, and deepening bilateral trade dialogues with the U.S. Simultaneously, India must champion global trade reforms through the WTO, ensuring that the world moves towards a fairer, lower-tariff system.

Protectionist measures may serve immediate domestic political goals but are detrimental in the long run. India, with its growing economic clout and strategic ties with the U.S., is well-placed to negotiate from a position of strength. The need of the hour is calm, calculated diplomacy underpinned by sound economic rationale and global cooperation.