The unfolding tariff standoff between the US and India has taken a significant turn as US President Donald Trump, in a move that coincided with Prime Minister Narendra Modi’s visit, declared reciprocal tariffs. Trump’s statement, in which he lambasted India for its high tariffs, signaled a direct response to India's trade policies.
This declaration, though bold, has not sparked widespread alarm in India. According to a report, released by State Bank of India's research unit, even if the US imposes tariffs ranging from 15 to 20 percent, the effect on Indian exports to the US would be marginal—estimated at just a 3-3.5 percent decline. India remains optimistic, believing the impact could be mitigated by diversifying exports, adding more value to products, and establishing alternative trade routes.
What is Reciprocal Tariffs
The Reciprocal Tariff Act was designed to empower the US President to negotiate tariff agreements with other countries, especially Latin American countries, in exchange for reciprocal tariff reductions of up to 50 percent. This policy aimed at fostering fairness in international trade, encouraging mutual reductions in duties between countries.
Fast forward to the Trump administration, and President Donald Trump has reignited this principle by ordering the development of reciprocal tariffs, staying true to his campaign promise of an "eye for an eye" approach in global trade. In a bold statement, Trump declared that the US would charge equivalent tariffs to those imposed on it by other countries, emphasising fairness—“No more, no less.”
This announcement came on the heels of several other tariff decisions, including a 10 percent tariff on Chinese imports and potential new levies on steel and aluminum. Additionally, Trump has threatened a 25 percent tariff on imports from Canada and Mexico, though negotiations have temporarily paused the implementation of this measure.
Trump's stance is rooted in his longstanding belief that the U.S. is being unfairly treated in global trade. He points to countries like India, which, according to Global Trade Alert, impose tariffs 5 to 20 percent higher than those the US charges on 87 percent of imports. For Trump, these imbalances are a glaring issue that he aims to address through reciprocal measures.
India's Evolving Export Strategies
India’s export strategy is evolving. Although the US remains India's largest export market, accounting for 17.7 percent of total exports in FY 2023-24, India is strategically reducing its dependence on any single country, say global trade experts.
This approach includes strengthening ties with regions such as Europe and the Middle East while optimising supply chain networks. Additionally, India has been shifting focus from exporting raw materials to finished goods and high-value products—an effort that not only enhances export revenue but also ensures competitiveness even in the face of rising tariffs.
India’s tariff policies have also seen significant shifts in recent years. While US tariffs on Indian imports have remained relatively stable (increasing slightly from 2.72 percent in 2018 to 3.91 percent in 2021 before dipping to 3.83 percent in 2022), India’s tariffs on US goods have been notably more volatile, rising from 11.59 percent in 2018 to 15.30 percent in 2022. This reflects India’s more assertive trade posture, aiming to balance relations while shielding domestic industries.
The US President, in one of his latest his remarks, made it clear that the US was adopting a "reciprocal" approach, essentially matching India’s tariffs on American goods. He acknowledged that past negotiations failed to secure tariff concessions and underscored that his administration would no longer accept India’s high tariff structures without reciprocal actions.
How India Reacted
Despite these tensions, India’s Foreign Secretary Vikram Misri downplayed the significance of the tariff dispute, framing it as a routine topic in ongoing discussions between the two nations. Misri hinted that the situation could potentially provide an opportunity for progress in trade talks, particularly regarding a bilateral agreement that had been discussed during Trump’s first term.
Global economists have taken note of the situation, with analysts from Morgan Stanley to Nomura highlighting India as one of the countries most vulnerable to the imposition of reciprocal tariffs. India’s relatively high tariffs on US goods, compared to the US tariffs on Indian exports, leave the nation exposed to retaliation. Yet, experts maintain that India's proactive trade policies, including export diversification, high-value manufacturing, and alternative trade routes, will help offset any potential losses.
In essence, while the US may introduce higher tariffs, India’s long-term strategies, including a more balanced and diversified trade approach, are expected to cushion the blow. India’s export ambitions are poised to continue their upward trajectory despite the challenges posed by these new tariffs.