Trump’s tariff frenzy

The extraordinary step that US President Donald Trump has taken on April 2 by imposing “reciprocal tariffs”, which he described as the “declaration of economic independence”, has thrown the global economy in the throes of severe uncertainties that have never been seen since the Great Depression during the 1930s. Trump unveiled the “reciprocal tariffs” through the Executive Order, “Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits”. As many as 57 countries were targeted through the imposition of “reciprocal tariffs”, ranging from 11 per cent to 49 per cent, which were to be introduced on April 9. But a few days earlier, on April 5, an additional ad valorem duty of 10 per cent was imposed on all imports from all trading partners. The “reciprocal tariff” on India was 26 per cent, implying that all exports to its largest export market are facing 36 per cent tariffs. These are sufficiently steep to seriously impinge on export prospects of several key industries for whom the US is a major market.

India’s South Asian neighbours have been slapped “reciprocal tariffs” that are much higher. Sri Lanka faces the highest “reciprocal tariff” of 44 per cent (54 per cent overall), while for Bangladesh and Pakistan the overall tariff burden would be 47 per cent and 40 per cent respectively.

China, which has been Trump’s prime target ever since he took office for the first time in 2017, faces a “reciprocal tariff” of 34 per cent, and an overall tariff burden of 54 per cent. On February 1, additional import tariff of 10 per cent was imposed on China, along with US’ two immediate neighbours, Mexico and Canada, whose imports were subjected to additional tariff of 25 per cent. However, Trump spared his two neighbours from “reciprocal tariffs”. With steel and aluminium imports to the US from all countries facing tariffs of 25 per cent, as per an announcement made on March 12, the American President has declared an all-out tariff war on his partner countries.

It is not difficult to fathom that these tariffs would have far-reaching implications for the global economy and individual countries having significant levels of trade with the world’s largest economy. The global economy is already bracing for a rocky road ahead as has been evident from the upheavals witnessed in the stock markets around the world. Even as Trump took charge of the Oval Office, growth prospects for the global economy looked uncertain since he was elected the 47th President of the US, having promised to usher in protectionism. On the first day of his second term as US President, Trump announced the “America First” Trade Policy, the most partisan and protectionist trade policy since President Herbert Hoover signed into law the Smoot-Hawley Tariff Act in 1930. This legislation had two adverse consequences. First, it deepened the economic crisis caused by the stock market crash of 1929, culminating in the Great Depression, the worst and the longest economic downturn in modern history. Second, it triggered a trade war as most major economies then imposed tit-for-tat tariffs, more commonly known as “beggar-thy-neighbour” policies.

A similar tariff war seems to be in the offing as China and the EU have announced retaliatory tariffs against the US. Several other countries are considering the possibilities of retaliating against the US. Trump’s ill-conceived “reciprocal tariff” plan is, therefore, threatening to push the economy to the brink of another downturn that it can ill afford, when the adverse effects of the COVID-19 pandemic are still being felt. Trump’s first wave of trade policy measures, namely, additional tariffs on imports from China and on two critical intermediates, steel and aluminium, have already adversely affected global economic expectations for 2025 and beyond. The Organisation for Economic Co-operation and Development’s (OECD’s) Interim Economic Outlook, unveiled recently, predicted that increased trade restrictions which the “America First” Trade Policy is expected to trigger, could contribute to higher costs both for production and consumption, resulting in an economic slowdown. Though “reciprocal tariff” was an integral part of the “America First” trade policy, the idea germinated during Trump’s Presidential election campaign. In Trump’s manner of speaking, “reciprocal tariff” means, “if they [trade partners] tax us, we tax them the same amount”. This implies that if the tariff imposed by a foreign country on a particular good imported from the US is higher than the tariff the US imposes while importing the same product from the foreign country, the American President can either force the foreign country to reduce its tariff or impose additional tariff on imported goods from the foreign country. “Reciprocal tariff” was formalised through the “Fair and Reciprocal Plan” announced on February 13, and was introduced primarily to “reduce the trade deficit” vis-à-vis US’ trade partners “to the benefit of American workers, manufacturers, farmers, ranchers, entrepreneurs, and businesses”.

Imposition of “reciprocal tariffs” on India could imply forcing it to reduce its tariffs and to increase its imports from the US. This scenario seems likely, as Trump has repeatedly expressed his displeasure over the fact that India has maintained a consistently rising trade surplus vis-à-vis the US. In other words, the US President is likely to use his “reciprocal tariffs” plan to pry open India’s markets for the major commodities in which the world’s largest economy has considerable export interests. The “Fair and Reciprocal Plan” that provides the basis for imposing “reciprocal tariffs” identifies two sets of products in which India’s tariffs were considerably higher compared to those maintained by the US. It states that India’s average tariff on agricultural products is 39 per cent, but on the same set of products, US’ import tariff is, on an average, 5 per cent. The Plan also states that India imposes 100 per cent import tariffs on motorcycles, while US’ import tariffs on Indian motorcycles is only 2.4 per cent. The importance of agricultural trade was also emphasised in the Joint Leaders’ Statement issued at the end of Prime Minister Narendra Modi’s recent visit to Washington, wherein it was mentioned that the two countries would work together to increase trade in agricultural goods.

“Reciprocal tariffs” could impact some of the major industries, especially electronics, pharmaceuticals, gems and jewellery and textiles and clothing. The electronics industry, the largest exporter to the US, making up for nearly 15 per cent of India’s total exports, would face considerable headwinds posed by the reciprocal tariffs. The US has, of late, been the largest export market for India’s telecommunication industry, accounting for 35 per cent of its total exports.

The pharmaceutical industry is the second largest exporter to the US, accounting for nearly 12 per cent of India’s total exports to its largest export market from April 2024 to January 2025. The US accounted for more than 38 per cent of India’s exports of formulations and about 10 per cent of exports of active pharmaceutical ingredients, or over a third of its total exports. This is the result of the significant presence of the generic pharmaceutical industry in the US, which has been providing affordable medicines to those who do not have the benefit of insurance cover. Some of India’s biggest pharmaceutical companies, including Sun Pharma and Dr. Reddy’s Laboratories, have been more reliant on exports and hence on the US market.

However, India should be most concerned about the imposition of “reciprocal tariffs” as its agricultural sector is being targeted. Using this policy instrument, the Trump administration is seeking to pry open India’s agricultural markets for US’ agri-business companies. These companies dominate the global agricultural markets, especially with the help of high levels of government subsidies. This would raise the spectre of unfair competition between India’s small farmers and large agri-business companies. This could sound the death knell for the already crisis-ridden Indian agriculture, causing economic disruption in rural India and large-scale loss of livelihoods. Imports of agricultural products could threaten India’s hard earned self-sufficiency in food grains, which helped the country not only overcome its dependence on imported wheat from the US, but also escape from the US’ unwarranted interference in India’s domestic policies.

Since the mid-1960s, every government in India has steadfastly protected the country’s agriculture and the large workforce dependent on agriculture, and the Modi government must ensure that maintenance of the status quo. The economic and political costs for not doing so could be considerable.

(Biswajit Dhar is Distinguished Professor, Council for Social Development, New Delhi)

This was first published in the 16-30 April, 2025 print edition of Down To Earth