Editorial 1: Shaping a response to the U.S.’s reciprocal tariffs

Context

New Delhi should take a multi-sided approach, remembering that buying more goods from the U.S. will help lower the tariff rate the U.S. puts on India.

Introduction

President Donald Trump's plan for reciprocal tariffs was shocking, but not completely unexpected. The new tariffshave two parts: one is the current tax on specific products, and the other is an extra tax on goods from certain countries. So, the final tariffs depend on both the product and the country. These reciprocal tariffs are now paused, and limited to 10% for 90 days, except for China.

Calculation of reciprocal tariffs

• The U.S. reciprocal country-wise tariff is calculated using a specific formula.
• The formula is:
  U.S. discounted tariff rate = (-1) × (½) × (U.S. exports - U.S. imports) / U.S. imports
• This formula does not use details like individual tariffs or import demand elasticity.
• The formula is not a proper method to determine actual tariff rates.
• The table shared by President Trump has a misleading column called "charged to the US".
  • This column is not the actual tariff imposed by other countries.
  • It is just twice the discounted reciprocal tariff rate.
• Example: For India (2024 data):
  • Exports from U.S. to India: $41.8 billion
  • Imports to U.S. from India: $87.4 billion
  • So, India’s discounted reciprocal tariff rate = 26%
• This 26% penalty tariff will be added to the current commodity-wise tariffs for India.
• Countries not on the reciprocal list will face a minimum (floor) rate of 10%, added to their normal tariffs.
• Some commodities are exempted from this extra tariff:
  • Steel/Aluminium items
  • Autos/Auto parts
  • Copper
  • Pharmaceuticals
  • Semiconductors
  • Lumber
  • Bullion and energy
  • Certain rare minerals not found in the U.S.

• The reciprocal tariff is an extra charge and is common across all goods from that country unless exempted.

India's Export Situation & Immediate Impact

• India’s exports to the U.S. are:
  • Moderate as a share of India’s GDP
  • Low in total volume, and have been falling in recent years
• India is not heavily dependent on exports.
• The impact of the 26% additional tariff by the U.S. will be small overall, but will vary across products.

Main Indian Exports Affected by the 26% U.S. Tariff

Global Competitors & Tariff Comparison

• India’s competitors in these export categories:
  • China, Vietnam, Cambodia, Bangladesh
  • These countries face even higher reciprocal tariffs than India
• South Korea, a competitor in electronics, faces a 25% tariff, very close to India’s 26%

Global Trade Reactions: A Caution for India

• China has imposed reciprocal tariffs on U.S. goods.
• The U.S. retaliated strongly, raising China’s overall tariff rate to 145%, and up to 245% for some goods.
• This shows that a confrontational approach may not be good for India.

Recommended Indian Strategy: Multi-Pronged Approach

1. Understand India's Imports from the U.S.

• India mainly imports essential goods from the U.S.
• Putting extra tariffs on these could make them more expensive domestically.

2. Adjust Import Sources to Lower Reciprocal Tariff

• If India increases imports from the U.S. where it makes economic sense:
  • The reciprocal tariff rate India faces will reduce.
• Example:
  • Increase imports from the U.S. by $25 billion (e.g., shift oil imports from other countries to the U.S.)
  • New reciprocal tariff rate = 11.8% (close to the floor rate of 10%)
  • This helps improve competitiveness without increasing the current account deficit

Policy Suggestions for India

• Start quick consultations with U.S. trade officials to build a comprehensive trade deal.
• Keep an eye on “dumping” (selling goods at low prices) from countries like China, which may try to redirect exports to India due to U.S. tariffs.

Conclusion: WTO must take the lead

It is clear that the U.S. tariff move is just the first step. The rules on global trade and tariffs will likely stay uncertain for some time, which is bad for international trade and economic growth. Going ahead, we need a global trading system with low tariffs. The World Trade Organization (WTO) should take strong steps to make this happen. Regional trade groups are only a second-best option, but they should still be encouraged.