Mains (GS II) – Effect of policies and politics of developed and developing countries on India’s interests

Why in news?

Recently, US President Donald Trump celebrated America’s Liberation Day on April 2 by announcing reciprocal tariffs against all major trading partners.

What are the tariffs announced by Trump?

• Reciprocal tariff – It is a tax or trade restriction that one country places on another in response to similar actions taken by that country.
• If one country raises tariffs on goods from another, the affected country might respond by imposing its own tariffs on imports from the first country.
• USA discounted reciprocal tariffs – In the context of USA it is termed as USA discounted reciprocal tariffs.
• USA calculates Reciprocal tariff by estimating the tariff each country charges on American imports and then halving that amount.
• There were two sets of tariffs announced,

• Base tariff
• Country-specific tariff

• Base tariff – It is 10% on all imports and it is common for all countries that is imposing tariffs on US goods.
• This base rate of tariffs will go into effect on April 5.
• Country-specific tariff – It is specific for each country and is calculated by estimating tariffs each country charges on US goods.
• It also took account on factors such as currency manipulation, lax pollution and labor laws and harsh regulations that create difficulties for the US in global markets.
• These country specific tariffs will be enforced from April 9 onwards.
• Tariff structure on India – According to US trade department, India imposes a 52% tariff on U.S. imports, and in response, the U.S. has levied a reciprocal tariff of 26% on Indian goods.

Why is USA imposing such tariffs?

• Addressing trade deficit – The tariffs aim to address a $1.2 trillion trade deficit and revive local manufacturing in the US.

Trade deficit is the gap between the value of a countries imports and exports.

• Reduce reliance on foreign goods – It is believed that tariffs will incentivize companies to relocate production domestically.
• Economic benefits and debt reduction – The revenue generated by tariffs is expected to help reduce taxes and pay down the national debt, strengthening the U.S. economy.
• Attracting investment – It is estimated that tariffs will lead to $6 trillion in investments in USA.
• Bringing back manufacturing and jobs – By making foreign goods costlier, the policy aims to encourage both domestic and foreign companies to invest in U.S.-based manufacturing.

What are the impacts of the tariff for India?

What are the consequences of tariffs for U.S.A and global economy?

• Slow down in global growth – The speed and scale of these tariff hikes could further slow global growth, create market uncertainty, and pressure businesses worldwide.
• Higher inflation – Tariffs imposed on goods will be passed on to end user which raises the goods price resulting in inflation.
• Inflation can be avoided only if the dollar strengthens significantly (e.g., by 26% against the rupee, from 85 to 108), keeping import prices stable for U.S. consumers.
• Disrupts trade flows – Tariffs will increase the costs for importers in US which affects exporters globally, forcing them to either absorb losses or pass costs to U.S. consumers.
  • It will further reduce demand and alter trade volumes.
• Stagflation and recession in U.S – A combination of faltering growth and spiking inflation could lead to stagflation.
• Reduced demand combined with costlier imports, could shrink GDP further, and may lead to recession in US.

Stagflation — stagnant growth with persistent high prices (inflation).

• Supply chain reconfiguration – Exporting countries may seek alternative markets which will disrupt established supply chains.
• Risk of retaliation – Countries might retaliate back on US which will create an escalatory spiral that could further complicate global trade environment.

What lies ahead?

• The ongoing Bilateral trade agreement negotiations, provides a platform to address tariff concerns, potentially securing exemptions or reductions by offering U.S. market access in areas like agriculture or services.
• Tariff war needs to be avoided to prevent mutual economic harm as it would be self-defeating and will impose clear costs on both India and the U.S.
• India could de-escalate tensions and foster better trade relations by diplomatic negotiations.

References

1. The Indian Express| Trump’s reciprocal tariffs — impact on India
2. The Indian Express| Trump announces 26% reciprocal tariffs on India
3. The Indian Express | The silver linings for India Reciprocal tariffs