On the occasion of the country’s Liberation Day, the US administration—specifically Donald Trump—announced to impose reciprocal tariff on all its trading partners. The tariff imposed on Indian exports will stand at 26 per cent—10 per cent base tariff applicable to all trading nations and an additional 16 per cent for India, variable across other trading partners of the US. The stated aim behind imposing reciprocal tariffs is to reduce the exorbitant trade deficit the US faces with most of its trading partners, including India. Other underlying motives could be to boost revenue and curb the negative influence of rival nations like China and others. The intent behind Trump's move seems justified to an extent. The United States currently enjoys a trade deficit of USD 295 billion with China, USD 172 billion with Mexico, USD 123 billion with Vietnam, and USD 235 billion with the European Union. India stands 10th on the list with USD 45 billion.
But the more important question is: whether or not the US will be able to meet its desired objectives through reciprocal tariffs. Whatever be the answer, the cost and stakes for the US move could be much higher. The reciprocal tariff war appears to be a losing game for all the stakeholders involved, including the US. What is obvious is that US’ reciprocal tariffs will hurt its trading partners, but what needs greater focus is the fact that the US and global economy—gradually recovering from the quicksand of high inflation and slowdown—will also again be pushed back in the dark abyss. For how long, it is not certain. The high cost of living and borrowing—something that was responsible for the defeat of Democrats in the presidential election—will again pick an upward trajectory.
Outcomes will be adverse for India as well, hitting sectors like pharmaceuticals, aluminium and others. However, experts and even policymakers argue that there could be several silver linings for India. For one, they believe India still has an advantage compared to other economies competing for US market access. Countries like China, Vietnam, Bangladesh, and Thailand are facing even steeper tariffs—ranging from 34 per cent to 46 per cent. This means that Indian exporters, especially in textiles, pharmaceuticals, and engineering goods, could become more attractive to US buyers who are now looking for alternatives to costlier suppliers. In the past, Bangladesh benefited from preferential tariffs in Europe and grew its textile industry. A somewhat similar opportunity might now exist for India in the US market. There’s also room for negotiation. The US has suggested that these tariffs could be adjusted if certain trade concerns are addressed. India has often been criticised for its high tariff barriers—its average tariff rate is among the highest in major economies, and agricultural tariffs can go up to 300 per cent. If India makes strategic adjustments, it might be able to negotiate lower tariffs in return, particularly in industries like IT services, pharmaceuticals, and renewable energy. On the flip side, if India fails to diversify its exports, it could emerge as a victim of dumping from countries disincentivised in US markets. India would do well to avoid aggressive countermeasures and instead focus on strengthening trade ties with Europe and ASEAN nations. Free trade agreements with countries like the UK and the UAE can also help offset any losses from the US market.
At the same time, India needs to address internal inefficiencies that make its manufacturing sector less competitive. A smart approach would be to negotiate better terms with the US while also making policy changes at home. Reducing excessive tariffs on select goods, boosting domestic manufacturing, and diversifying export markets will help India navigate this challenge effectively. More importantly, India can bank on its rising services exports to the US, which remain relatively less curbed. Trade diplomacy is all about finding opportunities even in adverse scenarios!