US President Donald Trump’s announcement Wednesday of a 26 per cent reciprocal tariff on India may current some challenges within the short-term, but it surely may not be all that unhealthy. There are no less than three silver linings:
Comparative benefit
One, that tariffs work on a comparative foundation, and whereas the levy imposed by one nation on one other is essential, what’s much more important is the tariff charge utilized on the latter’s rivals. So, whereas the tariff slapped by the US on India is consequential, what may very well be extra essential is the tariff charge proposed on say China, Bangladesh or Vietnam. As per the announcement from the White Home, the US will impose a ten per cent base tariff on all international locations from April 5, and an individualised reciprocal increased tariff from April 9 on international locations with which Washington, DC has the most important commerce deficits.
In India’s case, after the primary part of the common 10 per cent tariff takes impact on April 5, a 16 per cent tariff will kick in after April 9, bringing the entire responsibility to 26 per cent. This charge of 26 per cent on India is way decrease than the 34 per cent imposed on China, 46 per cent on Vietnam, 37 per cent on Bangladesh and 36 per cent on Thailand, all of that are rivals for Indian exporters whereas accessing the American market in some commodity section or the opposite. Tariffs on India are additionally decrease than these on different Asian rivals, together with the 36 per cent proposed on Thailand and 32 per cent on Indonesia.
Whereas the tariffs imposed on India had been increased than the 24 per cent responsibility on Japan, 25 per cent on South Korea, 24 per cent on Malaysia, 20 per cent on the European Union, or the ten per cent on the UK, it’s only Malaysia that actually competes with India in some sectors and most of those developed nations with decrease tariffs usually are not usually competing with India in the identical product classes. In any case, a ten per cent base charge is relevant in case of all international locations, and so the efficient incidence is 16 per cent for India. So, New Delhi may truly be higher off in comparative phrases. Within the case of sectors equivalent to textiles and clothes, as an illustration, India may now have a comparative benefit of kinds whereas accessing the American market compared to key rivals equivalent to Vietnam, Bangladesh and China. This may very well be of the type of benefit that Bangladesh had whereas accessing the European Union market, the place it had zero responsibility entry on account of its LDC standing, whereas international locations equivalent to India needed to pay an obligation.
Potential to barter
The second constructive for India is that the Trump administration has indicated that if a rustic had been to handle American commerce issues, these reciprocal duties may very well be doubtlessly revised or reversed. India and the US are already negotiating a bilateral commerce settlement, with either side aiming to finalise the primary part of the deal by October this yr, and a lot of the discussions from India’s facet would give attention to diluting a number of the antagonistic results of those tariffs.
Additionally, since an important USTR (United States Commerce Consultant) report had famous simply earlier than the reciprocal tariff announcement that India’s common Most-Favored-Nation (MFN) utilized tariff charge was 17 per cent in 2023, which “was the best of any main world economic system, with a mean utilized tariff charge of 13.5 per cent for non-agricultural items and 39 per cent for agricultural items, it was solely a query of time when Washington’s hearth obtained directed at New Delhi. In that sense, India has gotten off fairly evenly, and that marks a diplomatic win for the Indian authorities.
Response to American tariffs
Lastly, how the tariff scenario progresses from right here on would rely upon how America’s commerce companions react to those tariffs on April 2. International locations or groupings which have historically had a decrease tariff regime, such because the EU or Japan or Australia, and even China, can be tempted to retaliate. That might end in an escalatory spiral. In India’s case, which may not be the case, since New Delhi has gotten off evenly, and has scope to get these tariffs lowered with the proposed bilateral deal.
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Any tariff warfare can be self-defeating with a transparent value to either side, and that’s greatest averted. It’d, as an alternative, be prudent for India to give attention to getting concessions by pruning its personal excessive tariffs, which is significant for the nation’s manufacturing sector to regain competitiveness. America’s tariffs additionally current a chance for India to barter with its different commerce companions to deliver down the boundaries that exist at present to commerce, tariff boundaries and an more and more giant variety of arbitrary non-tariff boundaries that India has resorted to in latest months.
American reciprocal tariffs — base charge of 10% on all international locations
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