Open Forum

New Delhi, 9 April 2025

Tariff Wars

EFFECTS ON INDO-US TRADE

By Dhurjati Mukherjee 

The US has announced 26 per cent across-the-board reciprocal tariffs on India but these are substantially lower than most countries. It was 34 percent levied on China (effectively about 54 percent), 46 percent on Vietnam, 49 percent on Cambodia, and 37 percent on Bangladesh. This gives India some comparative advantage though estimates suggest around two-thirds of India’s exports to the United States will bear the impact of the tariffs. 

One may point out here that the Trump administration does not club India with countries like China, Mexico and Canada. “The US has serious issues with China, Mexico, and Canada related to currency manipulations, illegal migration and other security concerns. But with India it has only tariff issue and there are high expectations that negotiations would start towards arriving at a broad tariff structure.” 

Experts feel that US tariffs have created a somewhat chaotic environment and there isn’t a consistent strategy visible. Countries at the receiving end of tariff firing have already responded differently. There have been counter retaliatory measures with say the European Union and Canada targeting US political constituencies and daily consumption items to put back pressure through higher domestic prices. 

Retaliation has also come from China, which has imposed a 34 percent tariff on all imports from the US, which will match the so-called reciprocal tariffs on Chinese products, besides rolling out a slew of export control measures. The US and China, the two biggest economies in the world, have a lot of interdependence though the balance is tilted in favour of China. Experts think that Trump’s sweeping tariffs will have a significant effect – around 2 percentage points -- of the GDP of the Chinese economy. 

Regarding the farm sector, agriculture will be hit with a decline projected in dairy products and marine products like shrimp while rice exports remain largely unaffected. There are reports of India reforming its MSP system for rice and wheat though this may take sufficient time and lower tariffs on farm products. In this sector, India’s average tariff on US imports is 41.8 percent compared to the US tariff of 3.8 percent on Indian imports, with India exporting $7.1 billion versus US exports of $1.6 billion. 

The Gem & Jewellery Export Promotion Council (GJEPC) stated that in the short run “we foresee a reshaping of global supply chains and anticipate challenges in sustaining India’s current export volume of $10 billion for the US market”. After the steep tariff hike, the jewellery market does not look bright as there may be a sharp decline in demand in the US market. It could also lead to job cuts in the industry that depend largely on manual labour for diamond cutting, polishing and making expensive jewellery. Out of the total $33 billion worth of gems and jewellery exports from India, a third was to the US. However, metal exporters heaved a sigh of relief as the US exempted steel and aluminum from additional 27 percent duty. Last month, it had imposed 25 percent tariff on these metals. 

However, the textile sector holds out promise as India is at a relative advantage compared with countries such as Bangladesh and Vietnam. “India competes globally for textile exports with countries such as Bangladesh, Vietnam, Cambodia, Sri Lanka and China. Compared with around 26 percent tariff for Indian imports, these countries have been hit harder by US tariffs”, according to EY India sources. The US imports around $10 billion of textiles and clothing from India and there is a possibility of securing further strategic advantage by including textiles in potential “zero for zero” trade deal. Regarding auto components, it will be subject to a 25 percent import tariff in the US and the list of items is expected to be finalized shortly. 

Exemption of pharmaceuticals and semiconductor industries from the ambit of tariffs, at least for the time being, has been of great help to Indian exporters. Indian Pharmaceutical Alliance stated that this decision underscores the critical role of cost-effective, life-saving generic medicines in public health. India exported $8 billion of pharma products to the US in 2024, which accounted for 40 percent of the generic drugs consumed in the US and this is expected to increase this year. This shows the popularity and acceptability of Indian generic medicines, more so due to the present drug shortages in the US. Though some believe that the pharma sector is not out of the woods and that a tariff is expected to be imposed later, it will not be big enough and the manufacturers and consumers will be in a position to share the burden and India’s export to the US market will not be affected. 

Similar patterns exist in transport equipment (Indian tariff: 14.9 percent, US tariff: 0.9 percent). However, though not automobiles but auto components are a serious matter as India exports are around $2.2 billion to the US. Tariffs may affect exports of auto components, but the bigger worry is whether US manufacturers may produce more locally and outprice imports. With labour costs quite low in India – even after 25 percent tariffs – it remains to be seen whether labour-intensive auto components would be cheaper than those produced locally. 

A section of experts is of the opinion that reducing the trade surplus with the US may be by curbing exports with high import content such as smartphones, solar panels, gold jewellery and diamonds. These goods make up over $15 billion in exports but out of this money, the country has to pay a lot of foreign exchange. It is expected that in the coming years, indigenous electronic manufacturing would be boosted up to become competitive in the global market. 

There are expectations that there could be a high-level trip to the US by the Union Finance Minister Nirmala Sitharaman sometime this month. The finance minister’s US visit may build upon the on-going talks but may not be limited to trade and tariff alone. India and the US are, no doubt, committed to strengthen their overall economic relationship, both bilateral and multilateral, as strategic partners. 

The tariff has put an extra burden on most Indian products to the US with marine products, dairy, medical equipment, machinery and carpets being the hardest hit. Given that these are all labour-intensive sectors, the government may evolve a strategy to push them aggressively however, much depends on the proposed Indo-US Bilateral Trade Agreement and, according to Niti Aayog’s experts, the final such treaty will aim to enhance the potential gains during the next five years or so. Some expect that the agreement may facilitate the possibility of increasing Indo-US trade in the coming years and may strengthen the Indian economy. 

Meanwhile, the tariff war will drag down global investments and growth. The OECD has cut down its growth projections, noting that trade disruption will take a significant toll on the global economy, which is expected to slow down this year. Even the WTO has forecast that world trade will shrink as a result of these tariffs while the IMF has termed it sluggish. Obviously, the question before most analysts the world over is whether Trump wants to destroy the global economic order. ---INFA 

(Copyright, India News & Feature Alliance)