Trump’s reciprocal tariffs: Time for India to rethink its trade policy

In a press conference after his talks with India’s Prime Minister Narendra Modi, he promised to levy reciprocal tariffs. Whatever duties India levies on imports from the US of specific items (or classes of goods), the US would levy on imports from India. 

This would not be a big disaster for our US-bound shipments. According to former trade service official Ajay Srivastava, on 75% of the goods we export to the US, we levy an average tariff of 5% when the same are imported. On many labour-intensive goods like garments, textiles and leather, the US imposes tariffs ranging from 15% to 30%. 

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If reciprocal tariffs are levied, India stands to benefit from lower US levies on many items whose exports matter to our economy, especially small and medium enterprises that employ more people than capital, relatively speaking, to create the same value. So outcomes will go by differences in what gets shipped back and forth.

Which country makes what better (and/or cheaper) is the basis of trade. That will still hold. India would be happy to import high-end semiconductors from the US at nil duty, and it would be no sweat for the US to grant us tariff-free access to its market, since the only chips India has to export are banana chips. 

The same argument would largely hold for crude oil, natural gas, aircraft and weapons. If India were to drop barriers for US pistachios, pecans and almonds, reciprocal US action on these nuts would not matter. We do not export such items to the US. India’s trade-weighted average import duty for all products is some 12%; the corresponding figure for the US is 2.8%. 

If, under American pressure, New Delhi were to lower barriers, our economy and consumers would be better off. By revealing which producer is more competitive on what, it would nudge overall resources accordingly. A policy of protecting local producers from foreign competition contorts that effect. It also applies unevenly across various kinds of value addition. 

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Right now, Indian policy offers low or nil protection to sectors in which our output is small or non-existent, while shielding products that use low-duty goods as inputs. This stunts the growth of input sectors in India. We protect phones, for example, but let electronic components breeze in by paying little. This is likely to keep phone-makers reliant on China for these parts. Other twists and turns to join global supply chains could spell similar distortions. 

India has time till April, when US tariffs kick in, to finesse a strategic plan to cushion Indian exports from their impact. Negotiations must impress upon US officials that GST levied on imports is necessary to prevent our GST-paying producers from being put at an unfair disadvantage by import shipments that escape this charge.

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Globally, the first casualty of Trump’s idea of reciprocal tariffs will be the concept of ‘most favoured nation,’ which ensures that every country is treated on par with every other member of the World Trade Organization (WTO), except as part of a preferential trade pact among a subset of its members. 

To keep the WTO relevant, it might make sense for the rest of the world to revive its dispute settlement mechanism, sans the US, and retain the benefits of its rules. The broad principles that underpin them hold firm, regardless of one country’s whimsy.