Trump’s tariff proposal opens opportunity for India: Virmani

Trump had proposed during his campaign an additional 10% import tariff on all goods imported into the US and a 60% tariff on goods from China. 

According to Virmani, the economic effect of a uniform additional tariff on all US imports will be offset by an appreciation of the US dollar. 

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“When a country puts, let's say, a 10% tariff uniformly on every item it imports, which increases tariff protection by 10% on every item uniformly, economic theory tells you the exchange rate will just adjust to offset it, more or less. So there is actually zero effect on outsiders," said Virmani.  

“Theory says it could be offset fully, but even if it is offset by 80-90%, the effect will be marginal on outsiders. So, that is not a big concern for you," said Virmani. 

Relative disadvantage

Virmani, who had previously served as the Chief Economic Advisor in the finance ministry, explained that when there is a 10% tariff on imports from every country into the US and a 60% tariff on Chinese goods, the relative tariff disadvantage of Chinese goods is of 50%. 

“I am not saying this (increase in tariff) is going to happen, but if it happens, this is the economic effect. There would be a whole bunch of short-term effects, but in the medium term, US importers will look for alternative sources—South East Asia, India and Mexico. Recent history shows that Vietnam, Thailand, Mexico and India have been the biggest beneficiaries of the taxes imposed by the US on Chinese imports in 2018. So, US imports could go up from these countries if it happens. Our biggest opportunity and challenge is to get as much of that extra as possible," said Virmani.

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Experts said attracting businesses looking for alternatives to China requires focused, hard work and that India should work towards avoiding its access to the US market getting dented in any way.  

“We have to engage with the new US administration very effectively because we cannot afford to suffer any loss in the US, which is the largest market. We have to keep our market access intact," said Biswajit Dhar, Distinguished Professor at the Council for Social Development. India had a trade surplus of about $35 billion with the US in FY24.  

“Secondly, to attract investors leaving China, we need to make ourselves the most attractive destination by creating the right kind of conditions in infrastructure and in the ease of doing business," Dhar said.

Eye on US president's moves

To be sure, it remains to be seen when and how far the next US president will go in implementing the promised tariff increases, but he had emphasised in the past that cutting trade deficit and reshoring jobs would be a priority and tariff measures were on the table. 

“If India, China, or any other country hits us with a 100 or 200% tariff on American-made goods, we will hit them with the same exact tariff. In other words, 100% is 100%. If they charge US, we charge them—an eye for an eye, a tariff for a tariff, same exact amount," he said in 2023. 

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The first Trump administration had in 2018 increased tariffs on steel and aluminium exports from India, to which India retaliated in the subsequent year by raising duties on items like apples, walnuts, almonds, lentils and chickpea imported from the US. India lifted these retaliatory duties ahead of President Joe Biden’s visit to India last year for the G20 meeting. 

A working paper published in 2021 by the US-based National Bureau of Economic Research on the extent to which tariffs get offset by exchange rates, said that about 22% of the dollar appreciation and 65% of the renminbi depreciation observed in 2018-19 can be ascribed to the tariffs implemented by the US on China.