Treading the Razor’s Edge

US President Donald Trump has launched a wave of tariffs, reaching up to 99 per cent against some of the country’s trading partners. This move, a long-standing threat, aims to address the USD 1.2 trillion goods trade deficit and boost local manufacturing, but risks dragging the world into a trade war. Starting April 5, the US imposed a standard 10 per cent duty on all incoming foreign goods. From April 9, it switched to a reciprocal tariff system, imposing import tariffs equivalent to those other nations charge on American exports.

India faces a reciprocal levy of 27 per cent starting April 9, relatively lower than some Asian rivals like China (54 per cent), Vietnam (46 per cent), Sri Lanka (44 per cent), and Bangladesh (37 per cent), but higher than the EU (20 per cent) and slightly higher than Japan (25 per cent). The Trump tariffs are expected to have significant economic effects. However, the projected impact seems overly optimistic, with predictions of no reduction in US GDP and a mere USD 2 increase in federal tax revenues over the next decade.

Unpacking Trump’s Tariffs

Trump’s “reciprocal tariffs” are a misnomer, as they’re not truly reciprocal. Instead, they’re calculated based on the US trade deficit with each partner nation, divided by imports from that nation, and then halved. This approach prioritises reducing the trade deficit over mirroring tariff rates. The tariffs aim to address the US trade deficit by favouring nations that negotiate better terms. However, critics see this protectionist approach as potentially harming lower-income and marginalised countries by increasing costs for sustainable goods and climate-friendly technologies. The formula effectively incentivises partner nations to import more US goods while reducing their exports to the US to lower the reciprocal tariff. This creates an imbalance that may be challenging for some countries to navigate.

Hard-hit Indian Sectors

The new US tariff structure has significantly impacted various Indian sectors. The hardest-hit sectors include electronics and gems/jewellery, facing a 27 per cent tariff. In these sectors, electronics exports were valued at USD 14.5 billion and gems/jewellery exports at USD 9 billion, having previously faced duties of less than 0.5 per cent and 2.12 per cent, respectively. India’s USD 11 billion textile and apparel exports to the US will see tariffs triple from 9 per cent to 27 per cent. Competitors like China (46 per cent) and Vietnam (34 per cent) face even higher tariffs. The seafood industry, particularly shrimp exports, will face a tariff hike of 27.83 per cent, while agricultural products like dairy will see a 38.23 per cent increase. The footwear industry, with USD 457.66 million in US exports, faces a 15.56 per cent tariff hike, making Indian footwear more expensive in the US market. Notably, the pharmaceutical sector has been exempted, providing relief to USD 8 billion in exports to the US in FY24. Auto parts and aluminium manufacturers will continue to face a 25 per cent tariff. The tariffs may increase costs for US consumers, impacting the demand and competitiveness of Indian products. Some analysts believe the impact on India’s economy might be limited, as exports in the most vulnerable sectors account for only 1.1 per cent of India’s GDP.

Benefiting from the Tussle

India stands to benefit from the US-China trade war, potentially boosting exports of electronics and telecommunications equipment, including iPhones. As the fourth-largest beneficiary of trade diversions during the previous trade war, India is well-positioned to capitalise on this opportunity. However, the outcome depends on the US-China trade deal’s trajectory. The US tariffs on Chinese goods could benefit Indian sectors such as electronics, pharma, textiles, and auto components, increasing market share for Indian exporters as the US seeks alternative suppliers. The information and communication technology sector may also gain from the trade war, as US companies diversify their supply chains. Additionally, Indian e-commerce and outsourcing industries could see new opportunities. A potential USD 500 billion Bilateral Trade Agreement (BTA) between India and the US could further enhance India’s exports and attract investments, offering a significant boost to the economy.

Walking a Tightrope

India has adopted a cautious approach to the US-China trade war, refraining from imposing additional counter-tariffs and instead easing tensions through concessions. These include pledging USD 25 billion in US energy imports, strengthening defence ties with Washington, and exploring F-35 fighter deals. India has also made significant concessions, such as scrapping the 6 per cent digital ad tax, reducing bourbon whiskey tariffs from 150 per cent to 100 per cent, and cutting duties on luxury cars and solar cells. This approach is likely driven by India’s substantial trade relationship with the US, valued at over USD 190 billion in 2024. The threat of 100 per cent tariffs could severely impact key Indian export sectors like pharmaceuticals, IT services, and textiles. The US Trade Representative report expresses concerns about India’s trade practices, and Trump’s “discounted reciprocal tariff” approach aims to leverage India in trade talks. This move may also counter India’s growing ties with BRICS nations, which are exploring alternatives to dollar-dominated trade. As the rupee depreciates against the dollar and India’s foreign exchange reserves decline, the country will closely monitor the stock market. The market experienced a significant downturn on April 7, 2025, with the Nifty 50 falling 3.24 per cent and the Sensex dropping 2.95 per cent.

The Path Forward

India’s potential as a global manufacturing and export hub hinges on enhancing the ease of doing business, investing in logistics and infrastructure, and ensuring policy stability. The imposition of reciprocal tariffs is likely to have a short-term impact on India’s job market. To navigate the complex trade landscape, India must strike a delicate balance between strategic alignment with the US, resistance to certain aspects of Trump’s policies, and managing relationships with China and Vietnam. By doing so, India can capitalise on its economic interests and adapt to evolving global trade dynamics. Ultimately, India can position itself as a viable alternative to countries like China and Vietnam, potentially emerging as a major player in global trade.

Fr. John Felix Raj is the Vice Chancellor, and Sovik Mukherjee is an Assistant Professor of Economics in the Faculty of Commerce and Management, both at St. Xavier’s University, Kolkata. Views expressed are personal