Trump Tariff – Impact & Way Forward – Explained Pointwise

President Donald Trump signed an executive order on August 6 announcing the imposition of an additional ad valorem duty of 25% on Indian imports starting from August 27 for “directly or indirectly importing Russian oil”. This was in addition to the 25% reciprocal tariff that took effect on August 7. These tariffs are among the highest ever levied by the US on a major trading partner and target a wide range of products & are going to have a major impact on Indian economy & India-USA relationship in broader term.

What are the key features of these tariffs?

1. 50% Tariff Rate: The tariff rate has been doubled to a flat 50% on most Indian goods, making this one of the highest general tariffs imposed by the US in recent years.
2. Sectors impacted: Major affected sectors include textiles, gems & jewelry, footwear, furniture, chemicals, leather, and seafood. These are labor-intensive industries, accounting for significant portions of Indian exports to the USA.
3. Exemptions: Steel, aluminum, copper, passenger vehicles, pharmaceuticals, and electronics are largely exempt. Shipments in transit before the cut-off, humanitarian donations, and informational materials like books are also spared under specific conditions.
4. Implementation Timeline: All Indian goods entered for consumption in the US after August 27 face the new tariffs, unless the shipment left India before that date and is cleared in the US before September 17.

What are the reasons behind imposing these tariffs?

1. India’s Acquisition of Russian Oil: The US administration explicitly stated that the punitive tariffs are a response to India’s large-scale importation of Russian crude oil, defying international efforts to isolate Russia economically. Indian companies, including government-backed refiners, have continued these purchases despite Western calls for sanctions.
2. Lack of Progress in Trade Negotiations: Negotiations for a bilateral trade agreement have stalled, and the tariffs are seen as a way to pressure India back to the negotiating table. By making it difficult for Indian goods to compete in the U.S. market, the U.S. aims to force concessions from India in other areas of trade.
3. Trade Deficit: US leadership has long argued that persistent trade deficits with other countries indicate unfair trade practices. While India’s exports have grown rapidly, the US administration wants to ‘level the playing field’ and saw tariffs as a way to address perceived imbalances.

What will be the impact of these tariffs?

1. Economic Impact:
   1. Decline in Exports: The most immediate and direct impact will be a sharp decline in India’s exports to the U.S. in the affected sectors. With tariffs as high as 50%, Indian goods will become prohibitively expensive for U.S. consumers and retailers.
   2. Job Losses: The tariffs disproportionately target labor-intensive industries like textiles, gems, and jewelry. This could lead to massive job losses in these sectors, affecting millions of workers and their families, particularly in rural and semi-urban areas.
   3. Reduced GDP Growth: A fall in exports and shrinking markets may dampen economic growth, with ripple effects through supply chains and supporting services for e.g. the textiles & apparel manufacturers in Tirpur, NOIDA & Surat have reportedly stopped production.
   4. Impact on US Consumers & Businesses: American consumers may face price hikes on affected Indian goods due to these tariffs, which may force U.S. buyers to shift their sourcing to other countries with lower tariffs, such as Vietnam, Bangladesh, and Mexico, which would benefit India’s competitors.
2. Geopolitical & Diplomatic Impact:
   1. Strained Relationship: The tariffs could strain the strategic partnership between India and the U.S. While both nations have emphasized their shared values and common interests, the tariffs signal a growing economic and diplomatic rift over issues like trade imbalance and energy policy.
   2. Reduced Influence: The tariffs could reduce India’s leverage in future trade negotiations with the U.S. The U.S. may use the tariffs as a bargaining chip to push for a more favorable trade agreement on its terms.
3. Domestic Impact:
   1. Pressure on Domestic Market: With export markets becoming less viable, affected industries will be forced to sell their products domestically. While this could help to lower prices for Indian consumers, it could also lead to oversupply and a further squeeze on profit margins for businesses.
   2. Pressure on Government: The Indian government will be under pressure to provide support to the affected industries. This could involve new financial packages, subsidies, or a push for a more comprehensive strategy to diversify export markets and boost domestic consumption.

What can be the way forward?

1. Diplomatic Engagement & Non-Retaliation: India has made it clear that it will not impose retaliatory tariffs. Instead, the focus is on maintaining open channels of communication with the U.S. The goal should be to convey India’s national interest in purchasing Russian oil and to argue that the tariffs are not an effective or fair way to address the issue.
2. Market Diversification: Recognizing the risk of being overly dependent on a single market, India is accelerating its efforts to diversify its export destinations. This can be done by:
   1. Targeting New Markets: The government is working on a “40-country outreach” to push exports, especially in the textile and apparel sectors, to new and existing markets in Europe, the Middle East, Latin America, and other regions.
   2. Leveraging FTAs: India is actively pursuing and finalizing Free Trade Agreements (FTAs), such as the one with the UK and the European Free Trade Association (EFTA) nations, to make its exports more competitive in these regions. 
3. Boosting domestic resilience: To cushion the impact of the tariffs on affected industries, the Indian government should focus on domestic reforms and support:
   1. GST Rationalization: The government is considering a comprehensive overhaul of the GST system to simplify tax slabs and reduce the tax burden on businesses. This would help lower the cost of goods and stimulate domestic demand, offsetting some of the losses from exports.
   2. Financial and Policy Support: The government should provide support to affected sectors through various measures, including credit lines, regulatory support, and the extension of duty-free cotton imports to maintain the cost-competitiveness of the textile industry. 
4. Addressing the issues stalling the progress on India-USA Trade Deal: India remains firm on protecting farmers, fishermen, and MSMEs, refusing compromise on tariff reductions for agricultural and dairy imports. While, the US seeks more market access for American products such as apples, corn, soybeans, almonds, ethanol, and dairy. Solutions require a balanced approach to rural welfare and reciprocal concessions.
5. Reform Trade Policies & Address Non-Tariff Barriers: Imposition of tariff by a country with which India has have trade surplus should push the government to bring out domestic reforms in trade policies & address the non-tariff barriers which have been the main contentious issue of several trade partners with India.
6. Continued focus on Strategic Autonomy: The tariffs have reinforced India’s commitment to strategic autonomy. The government’s message is that while the U.S. is a crucial partner, India will continue to make decisions that are in its own national interest. This includes maintaining its energy relationship with Russia and protecting its key sectors from external pressure. This approach signals to the global community that India will not be a junior partner in any alliance and will chart its own course based on its strategic needs.

Conclusion:
Thus, a balanced & phased approach to address issues stalling the trade deal, boosting domestic resilience & bringing domestic reforms should be followed by India while protecting the interest of Indian businesses especially of small & micro enterprises.