Context

• The announcement of reciprocal tariffs by U.S. President Donald Trump has introduced significant volatility into global trade discourse.
• While not entirely unexpected, these tariffs mark a shift from conventional trade policy towards a more assertive, country-specific framework.
• The implications for global partners, particularly emerging economies like India, warrant a nuanced analysis of both the intent and impact of these tariffs. 

Understanding the New Tariff Regime

• The tariff announcement comprises two key elements: the existing commodity-wise import tariffs and an added reciprocal country-wise tariff applicable uniformly across all goods from each country.
• The reciprocal tariff, while presently capped at 10% for a 90-day review period (with China as an exception), is calculated using a unique formula:
  • 
• This formula, devoid of tariff elasticity or demand elasticity parameters, emphasizes trade imbalance over economic rationale.
• For India, this calculation results in a reciprocal tariff rate of 26%, derived from its $41.8 billion in exports to the U.S. and $87.4 billion in imports from the U.S.
• The 26% rate is to be added across all applicable commodity-specific tariffs, with a minimum floor rate of 10% for non-listed countries.
• Importantly, certain commodities, such as pharmaceuticals, energy, and specific metals, are exempt, suggesting a selective protectionist approach rather than a comprehensive one.

India’s Export Vulnerabilities

• India’s economic structure reveals moderate exposure to U.S.-bound exports.
• Despite a longstanding trade relationship, India’s exports to the U.S. have been in decline and remain a relatively small component of GDP.
• This dampens the overall macroeconomic impact of the 26% reciprocal tariff. However, sector-specific vulnerabilities persist.
• Key exports likely to be affected include:
  • Electrical machinery
  • Machinery and mechanical appliances
  • Made-up textiles
  • Gems and jewellery (minimal due to inelastic demand)
  • Mineral fuels (mainly re-exports)
• Crucially, India’s export competitors, China, Vietnam, Cambodia, and Bangladesh—are also subjected to high reciprocal tariffs, somewhat levelling the playing field.
• Notably, South Korea, another competitor in electronics, faces a comparable 25% tariff.
• This shared burden among major exporters may mitigate relative losses for Indian producers.

How Can India Calibrate Its Response to US Tariff

• A Multi-Dimensional Approach
  • A retaliatory tariff war, as witnessed in the U.S.-China standoff (with China facing tariff rates up to 245%), would be counterproductive.
  • India’s imports from the U.S. largely consist of essential goods. Levying additional duties would only raise domestic prices without significantly hurting the U.S.
  • Instead, India can tactically reduce its reciprocal tariff rate by increasing imports from the U.S., especially in non-sensitive sectors such as petroleum.
  • For instance, raising U.S. oil imports by $25 billion would bring India’s reciprocal tariff rate down to 11.8%, close to the floor rate.
  • This shift in the oil import basket would not inflate the current account deficit but merely alter its composition, offering a win-win solution.
• Proactive Consultations
  • Simultaneously, India should initiate proactive consultations with U.S. trade officials to explore a broader trade framework that accommodates the strategic interests of both nations.
  • Meanwhile, India must remain vigilant against ‘dumping’ from countries adversely affected by the U.S. tariffs, particularly China.
• Sector-Specific Protection and Prioritisation
  • India must also analyse which sectors are most vulnerable to the increased tariffs and act to cushion the impact.
  • For example, electrical machinery, mechanical appliances, and made-up textiles are likely to suffer due to the added tariff burden.
  • These sectors may benefit from short-term support through export incentives, diversification of markets, or improvements in domestic competitiveness.
  • On the other hand, sectors like gems and jewellery or pharmaceuticals are either less affected or currently exempt from the additional tariff, and could be prioritized in India’s export strategy to the U.S. 

The Role of the WTO and the Need for Global Reform

• The unpredictability ushered in by Trump’s tariff regime underscores a deeper crisis in the global trading order.
• A fragmented tariff system governed by bilateral skirmishes threatens the stability of international commerce.
• The World Trade Organisation (WTO), as the custodian of multilateral trade, must take the lead in restoring equilibrium.
• A movement toward universally low and rational tariff structures is imperative for fostering global economic growth.
• While regional trade blocs may offer temporary relief, they are inherently suboptimal compared to a cohesive global trading system.
• The WTO must spearhead reforms that reinforce the principles of fairness, transparency, and cooperation.

Conclusion

• President Trump’s reciprocal tariffs reflect a growing trend of nationalistic trade policies, signalling a shift from multilateralism to transactionalism.
• For countries like India, which are integrated into global supply chains yet maintain moderate trade exposure to the U.S., the response must be pragmatic rather than confrontational.
• By intelligently recalibrating imports, engaging diplomatically, and aligning with global trade norms, India can turn this challenge into an opportunity for strategic repositioning in the global economy.
• In the long term, reinforcing multilateralism through WTO reform remains the best antidote to rising protectionism.