IAS/UPSC Coaching Institute  

25 Apr 2025 : Where tariffs trump economics

Editorial 2: Where tariffs trump economics

Context

The planned tariffs are likely to hurt India’s goods exports to the U.S.

 

Introduction

The new tariffs announced by U.S. President Donald Trump have caused a drop in prices of important items like crude oil, increased market volatility, and led to a fall in stock markets. Since the announcement, crude oil prices have gone down by about 14%, mainly due to worries about a slowdown in global trade and lower demand for oil.

 

Escalating Trade Tensions

  • The reactions to the announcement have strengthened fears that a global trade war may have truly begun.
  • Rising trade tensions could cause higher inflation, slower growth, and more conflicts between countries.
  • More importantly, it has brought a period of uncertainty, making economic policymaking harder. While richer countries can respond to U.S. actions, poorer nations face added pressure from both global changes and their own economic problems.

 

The role of reciprocal tariffs

  • A reciprocal tariff is a tax one country puts on another in response to a similar tax from that country.
  • The goal is to:
    • Protect local businesses
    • Save jobs
    • Correct trade imbalances
  • While meant to make trade fair, reciprocal tariffs can start a cycle of increasing trade barriers, hurting both countries.
  • These tariffs began when countries used them to:
    • Support local industries
    • Grow their economies
    • Push for better trade deals
  • In the short term, they may help local industries.
  • But in the long run, they can:
    • Raise prices for consumers
    • Disrupt supply chains
    • Slow down economic growth
  • Tariffs were once a big income source for governments, but now they are mainly used for protection and negotiation.

 

Impact on South Asia and Southeast Asia

Region/Country

Impact

South Asia & Southeast Asia

Heavily affected by recent tariffs. Economic growth was largely driven by exports to the U.S.

Vietnam

Exports to the U.S. contribute 30% of GDP.

Cambodia

Exports to the U.S. contribute 25% of GDP.

Tariffs on Vietnam & Cambodia

Both countries have been hit with high tariffs (46% for Vietnam and 49% for Cambodia).

Other Affected Countries

Thailand, Indonesia, Malaysia, Philippines, and Singapore face varying degrees of tariffs.

Cambodia’s Threat

The garment industry (employing 750,000 people) is at risk, leading to potential job losses.

Smaller Economies

Cannot retaliate like China; they can only negotiate based on U.S. interests.

 

Tariff Calculation and Issues

Area

Details

Tariff Calculation Formula

Based on a country's trade deficit with the U.S., divided by its exports, and then divided by two.

Baseline Tariff

A 10% baseline tariff is applied to almost all countries.

Elasticity Issue

The formula assumes a 0.25 elasticity for import prices in response to tariffs, which economists feel should be closer to 1.

One-Size-Fits-All Approach

The formula applies the same method regardless of the country’s trade barriers or market openness.

Focus on Goods

Only considers the trade deficit in goods (shippable items) and not in services (e.g., technology, banking).

Advantage for Some Countries

Countries with fewer goods exports but more services exports benefit from this formula.

 

Prospects for India

  • The proposed tariffs are expected to significantly impact India’s merchandise exports to the U.S.
  • If the tariff plans are implemented after the current pause, India could face a $7.76 billion drop (6.4%) in exports to the U.S. this year, according to the Global Trade Research Initiative.
  • In 2024, India exported $89 billion worth of goods to the U.S.
  • This highlights the urgent need for India to diversify its trade base, requiring swift trade policy actions.
  • Key actions for India:
    • Secure a balanced trade deal with the U.S. through continuous negotiations.
    • Fast-track trade agreements with the European Union, U.K., and Canada.
    • Strengthen ties with Russia, Japan, South Korea, ASEAN, and the UAE.
    • Handle ties with China strategically and with clear intent.
  • Some view the situation as an opportunity, partly inspired by the 54% growth in Apple’s iPhone exports from India last year.
  • However, behind this success, India’s total goods exports for 2024-25 were $437 billion, the same as last year.
  • To capitalize on the current situation, India will need substantial preparation and strategic planning.

 

Conclusion

The recent tariffs announced by President Trump are expected to hurt India’s goods exports to the U.S. These tariffscould make Indian products more expensive in the U.S. market, leading to a drop in demand and a decline in export earnings for Indian businesses.