India prepares response to US tariff changes

Source: The post India prepares response to US tariff changes has been created, based on the article “Shaping a response to the U.S.’s reciprocal tariffs” published in “The Hindu” on 17 April 2025. India prepares response to US tariff changes.

UPSC Syllabus Topic: GS Paper2-International Relations-Effect of policies and politics of developed and developing countries on India’s interests.

Context: President Donald Trump’s announcement of new reciprocal tariffs has surprised many. These tariffs combine existing commodity-wise duties with a new country-specific tariff structure. Though currently capped at 10% for most countries for 90 days, the tariffs are aimed at reducing U.S. trade imbalances and have significant implications for India.

For detailed information on India must respond wisely to Trump’s trade read this article here

Structure and Calculation of Reciprocal Tariffs

1. The new tariff system introduces a uniform country-wise tariff on all goods, applied alongside existing commodity-specific tariffs.

2. The formula used is:
   Discounted Tariff Rate = (-1) × (½) × (U.S. exports – U.S. imports) / U.S. imports
3. This formula does not consider elasticity or specific duties and can be misleading. A column titled ‘charged to the US’ doubles the discounted rate, giving a distorted picture.
4. For India, based on 2024 data (exports: $41.8 billion, imports: $87.4 billion), the reciprocal tariff rate is 26%.
   5. This will be added to existing tariffs, except for certain exempted commodities like: Pharmaceuticals; Steel and aluminum articles; Autos and auto parts; Copper, energy, semiconductors, bullion, and select minerals
5. For countries not on the reciprocal tariff list, a default 10% rate will apply.

Impact on Indian Exports to the U.S.

1. India’s export dependence is moderate, and exports to the U.S. have been declining. Hence, the economic impact of the 26% tariff will be limited but uneven across sectors.

2. Major Indian exports likely to be affected: Electrical machinery; Machinery and mechanical appliances; Made-up textiles
3. Items like gems and jewellery will be less affected due to inelastic demand. Pharmaceuticals remain exempt.
4. Competitor countries such as China, Vietnam, Bangladesh face higher reciprocal tariffs, offering India a relative advantage. South Korea faces a similar tariff at 25%.

Recommended Indian Response

1. India should not retaliate aggressively like China, whose reciprocal action led to a U.S. tariff hike up to 245% on some items. Instead, India should adopt a balanced, multi-pronged approach:

2. Increase Imports from the U.S.: Boosting imports from the U.S. could lower India’s reciprocal tariff rate. For example, shifting $25 billion of oil imports from other countries to the U.S. would reduce India’s reciprocal tariff from 26% to 11.8%, just above the 10% floor.
3. Engage in Dialogue: India should begin trade consultations with the U.S. to work out a long-term agreement that reflects mutual interests.
4. Monitor Dumping Risks: India should be vigilant about possible dumping by countries like China that are more adversely affected by U.S. tariffs.

Global Trade Outlook and WTO’s Role

These tariff changes indicate that global trade will face instability in the near future. The WTO must take leadership in promoting a global system based on low tariffs. While regional trade deals may offer temporary relief, they are no substitute for comprehensive multilateral solutions

Question for practice:

Examine how India can strategically respond to the United States’ new reciprocal tariff policy announced by President Donald Trump.