Trump’s ‘Reciprocal Tariffs’: The shifting sands of global trade

While recent headlines have focused on India’s increased procurement of defence equipment and energy resources from the US, a far more significant global development, and a key driver behind India’s latest trade agreements, is the former US President’s threat of “reciprocal tariffs”. This policy, if implemented, represents a fundamental challenge to the established order of international trade, potentially rewinding decades of progress towards freer markets.

What are reciprocal tariffs?

Tariffs are essentially taxes levied by an importing nation on goods entering its borders. For example, if an Indian consumer purchases a product from the US, the US import tariff increases the product’s price, ultimately borne by the Indian consumer. Tariffs act as a barrier to trade, increasing costs for all parties involved.

Over the past century, the world has progressively embraced freer trade. This movement stemmed from a broad consensus, particularly among developed nations, that open, or at least liberalized, trade is mutually beneficial. However, the framework of global trade, as codified in agreements like the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), recognized the need for “special and differential treatment” for developing countries. This acknowledged that these nations often lacked the industrial strength or robust economies to compete on equal terms with developed countries. Consequently, developed nations, like the US, were expected to maintain lower tariffs compared to developing countries like India.

The former US President’s “reciprocal tariffs” policy fundamentally discards these established principles. In essence, it proposes that the US will impose the same level of tariffs on goods entering the US as other countries impose on US exports. The justification is that this system promotes “fairness”.

The mechanics of calculation

The precise calculation of these reciprocal tariffs is a complex undertaking, currently being conducted by the US trade department. It is expected that the final figures for each country will be determined in the coming months.

Crucially, the US approach extends beyond simply mirroring existing tariff levels. The former US President suggested that his administration would consider the full spectrum of subsidies and other forms of support provided by countries to their exporters when competing with the US. This implies that if India, for instance, provides export subsidies, these would likely be factored into the US tariff calculations to achieve complete equivalence.

If this approach becomes the standard for US tariffs, developing countries like India, which often employ various export subsidies, could face a substantial tariff burden. This has significant implications for India, as it could impact its ability to compete in the US market.

The motives behind the policy

The former US President’s motivations for pursuing this policy are multifaceted. While China is undoubtedly the US’s primary economic competitor, the initial tariff threats were directed towards close trading partners and allies like Canada and Mexico. Furthermore, the European Union has also faced criticism, with claims of unfair treatment of US companies. Additionally, tariff threats against Canada and Mexico were linked to issues like illegal immigration and drug trafficking.

A central driving force behind this policy is the former US President’s aversion to “trade deficits”. A trade deficit represents the difference between the value of imported goods and exported goods. The US maintains a significant trade deficit with the world, while China, conversely, has a substantial trade surplus.

The former US President views trade deficits as not only unfair but also as an indication that other nations are violating the rules of international trade. His objective is to eliminate these deficits, either by compelling other countries to import more US goods or by encouraging them to establish manufacturing facilities within the US.

The impact on India

The former US President’s visit was widely regarded as a test case for his reciprocal tariff policy. He specifically identified India as a country that “charges tremendous tariffs,” citing the example of Harley Davidson motorcycles facing high import taxes.

India is likely to respond by increasing its purchases of US goods, such as defence equipment and oil and gas, in an effort to balance trade. This could lead to lower prices for certain US products in India.

However, this strategy could have implications for the Indian rupee, potentially weakening it against the US dollar due to increased demand for dollars to purchase US imports.

Furthermore, recent tax breaks implemented by the Indian government to stimulate domestic consumption could inadvertently benefit US GDP growth if affluent Indians choose to spend their tax savings on cheaper US goods.

While cheaper US goods could ultimately benefit Indian consumers and strengthen ties with the world’s largest economy, this policy could potentially hinder India’s “Atmanirbhar Bharat” (self-reliant India) initiative if the US pressures India to increase imports of specific goods.

In conclusion, while increased economic cooperation with the US can offer long-term advantages for India, particularly in its pursuit of becoming a developed nation by 2047, the current US administration’s approach to trade, as evidenced by its treatment of allies like Canada and European countries, necessitates a cautious and measured approach to bilateral relations.