Why in news?

On April 2, US President Donald Trump marked "Liberation Day" by announcing reciprocal tariffs on major trading partners.

President Trump’s tariffs mark a protectionist shift more intense than the 1930s Smoot-Hawley Act, which had worsened the Great Depression. The reciprocal tariff logic implies more hikes if other nations retaliate. Experts fear there is only two paths from here: either negotiation or escalation.

What’s in Today’s Article?

• Announcement of Reciprocal Tariffs
• Analysis of the Tariffs: Kindness or Economic Strategy
• India and the US Tariffs
• Silver Linings for India Amidst Trump’s Tariff Storm
• Broader Takeaway: The Impact and Implications of Trump’s Tariffs

Announcement of Reciprocal Tariffs

• 
• Base Tariff
  • A 10% base tariff will be imposed on all countries.
  • This is a significant increase from the pre-Trump tariff rate of 2.5%.
  • The base tariff will take effect from April 5.
• Country-Specific Tariffs
  • Additional tariffs will be applied based on how much each country charges on US goods.
  • These tariffs are set at half the rate of what the US estimates other countries impose.
  • President Trump cited American "kindness" as the reason for this discounted approach.
  • These tariffs will be enforced from April 9.

Analysis of the Tariffs: Kindness or Economic Strategy

• Disproportionate Impact on Low-Income Countries
  • Cambodia, with a low per capita income of $2,950 and contributing just 1% to the US trade deficit, faces the highest tariffs.
  • Bangladesh, with an even lower per capita income and only 0.5% of the US trade deficit, faces a 37% tariff.
• Lighter Tariffs on Major Deficit Contributors
  • China, which accounts for 25% of the US trade deficit, faces a 34% tariff.
  • The EU, responsible for 20% of the deficit, faces a 20% tariff.
  • Only three regions (China, EU, and Vietnam) contribute double-digit shares to the US trade deficit.
• Wealthier Nations Not Exempt
  • Countries richer than the US per capita (Switzerland and Singapore) also face tariffs.
• Trade Surplus Countries Also Affected
  • Even countries where the US enjoys a trade surplus—like the UK, Brazil, Singapore, and Colombia—face sharp tariff increases.

India and the US Tariffs

• India has been smacked with a tariff rate of 26%.
• Key Concerns Raised by the US
  • High and Unpredictable Tariffs
    • India’s WTO-bound agricultural tariff rates average 113.1%, going up to 300%.
    • Frequent tariff hikes without prior notice create uncertainty for US exporters.
    • Tariffs were increased in multiple budgets on solar products, telecom equipment, and consumer electronics.
  • Regulatory and Policy Barriers
    • Lack of transparency in tariff announcements and trade regulations.
    • No uniform government procurement policy, leading to inconsistent practices.
    • Inadequate intellectual property (IP) enforcement.
  • Foreign Investment and Market Access Restrictions
    • FDI restrictions in retail and dominance of state-owned banks (holding 60% market share).
    • Unequal competition in the insurance sector, with state-owned firms enjoying government support.
  • Agriculture and Subsidies
    • Extensive subsidies (credit waivers, crop insurance, and input subsidies) distort market competition.
  • Digital and Trade Barriers
    • Frequent internet shutdowns disrupt commercial operations and hinder digital trade.
    • Lack of transparency in regulatory changes, often without proper WTO notification.

Silver Linings for India Amidst Trump’s Tariff Storm

• Comparative Advantage Over Key Export Rivals
  • Initially, President Trump announced a 26% reciprocal tariff on India. However, the final executive order’s annexure later revised this to 27%, reflecting a slight upward adjustment in the tariff rate.
  • This is significantly lower than tariffs imposed on China (34%), Vietnam (46%), Bangladesh (37%), Thailand (36%), and Indonesia (32%).
  • India's key export sectors like textiles and garments may gain a competitive edge over these nations in the US market.
  • Though some nations like Japan, South Korea, and the EU face lower tariffs, they don’t compete directly with India in most export categories.
  • Moreover, pharmaceuticals — India’s biggest export to the US — are exempted under the executive order.
• Scope for Bilateral Negotiation
  • The Trump administration has left room for revision of tariffs if trade concerns are addressed.
  • India is already in talks with the US for a bilateral trade deal, aiming to finalize the first phase by October.
• India’s Pragmatic Non-Retaliatory Approach
  • While countries like EU, Japan, Australia, and China may retaliate, India is unlikely to do so given its relatively lower tariff burden and ongoing trade talks.
  • Retaliation could trigger a damaging tariff war, which India appears keen to avoid.
  • Instead, India could use this opportunity to:
    • Reduce its own high tariffs
    • Negotiate trade concessions with both the US and other partners
    • Dismantle arbitrary non-tariff barriers recently imposed
• Conclusion
  • The tariffs may act as a wake-up call to make domestic policy more transparent and predictable, especially in areas like tariffs, FDI, IP enforcement, and digital regulation.