India has become an important player in international trade post its integration with the global economy after liberalisation in the 1990s. At present, India has a trade-to-GDP ratio of about 40%. India mainly exports textiles, medicines and IT services while importing petroleum products and high-tech machinery. Reciprocal tariffs are used as tools either to retaliate or challenge the trade balance. The USA has announced it to impose 26% tariffs on Indian exports to the USA. Though the USA has pushed a 90-day pause button for most countries, barring China and a few countries which have responded to the 2nd April annulments of the US President.
Reciprocal tariffs are in alignment with mercantilist principles and aimed at protecting the domestic markets by matching the foreign trade barriers. According to the classical theory of trade (Ricardo), tariffs distort comparative advantage and increase consumers' costs lowering welfare. Reciprocal tariffs can, however, protect infant industries and balance out trade deficits. For India, an emerging economy with both mature and infant industries, the effectiveness of reciprocal tariffs would depend upon the extent, targeting, and tenure.
Economic Impacts
India's trade profile exposes it to counter tariffs. India's exports in 2023 were $450 billion, with major markets being the United States, the European Union, and China. When a trading nation such as the U.S. introduces a 10% duty on Indian textiles, India can respond by imposing similar duties on the U.S. agricultural produce or technology imports. However, India has not resorted to retaliatory tactics like China and the EU. Trade wars have ripple effects. As a result of the 2018 U.S.-China trade war, India experienced a 5% decline in steel exports to America as a result of diverted Chinese supply, while India responded with retaliatory tariffs on American almonds and walnuts.
In the short term, any country can shield its domestic producers through reciprocal tariffs. But in the long term, the benefits vanish with an increase in input costs for imported components and increased prices for the domestic consumers. Dixon Technologies is a classic example. India increased tariffs on Chinese electronics, which led to an increase in revenues of Dixon Technologies by 25%, but the prices of smartphones increased by 8-10%. Not only this, but such tariffs lead to inflated costs across supply chains, which eventually undermine the competitiveness of price-sensitive export markets.
Industrial Implications
India has a diverse industrial landscape with a lot of labour-intensive sectors like textiles on one hand and capital-intensive sectors like pharmaceuticals on the other hand. The reciprocal tariffs will affect different industries disproportionately. The sectors (pharmaceuticals and textiles) which are heavily export-oriented will feel the brunt of high reciprocal tariffs by the USA and other countries, and those sectors (pharmaceuticals and automobiles) which use imported intermediate products will feel the heat if India increases tariffs on imports. The automotive sector, contributing 7% to India's GDP, imports 30% of its components. Tariffs on steel or electronics from retaliating partners like Japan or South Korea could increase costs, eroding margins for firms like Tata Motors.
On the other hand, tariffs can trigger domestic substitution. India's "Make in India" policy reflects this reasoning, as has been observed in the solar panel sector. Following the imposition of 25% tariffs on Chinese panels in 2022, local production increased by 15%. However, quality and size continue to be issues, with Indian panels being 10-15% more expensive than imports (though transitional). This implies that while retaliatory tariffs can trigger self-reliance, this needs to be accompanied by complementary investments in technology and infrastructure.
Geopolitical Dimensions
Reciprocal tariffs are not merely economic tools but also geopolitical levers. India's trade policies reflect its strategic balancing between Western powers and regional rivals like China. The 2020 Galwan clash prompted India to impose tariffs on Chinese goods, signalling economic decoupling. By 2023, China's share in India's imports fell from 14% to 11%. However, this shift resulted in straining trade balancing with India importing from costlier alternatives such as the EU and Japan.
Not only this, India has participated in many multilateral negotiations, such as the Quad and RCEP, as an important party. This fact further complicates its tariff strategy. Some of the participants are not just commercial but also have vital security dynamics. Any reciprocal tariffs against a Quad partner like the U.S. may undermine security alliances, which may result in China weakening India's stance on regional dominance. Tariff choices, therefore, get inextricably linked to longer-term foreign policy objectives and have to be sensitively calibrated.
Long-Term Considerations
Reciprocal tariff sustainability relies on the capacity of India to absorb shocks. With a 2.5% of GDP current account deficit, sustained tariff wars can worsen foreign exchange pressures. Additionally, WTO norms restrict retaliatory tariffs, subjecting India to legal repercussions if actions are beyond agreed limits. A WTO decision against India's steel levies in 2022 illustrates this threat, resulting in $1.2 billion in lost exports. However, the relevance of the WTO would be in question if the world order shifts in this way after the USA imposes reciprocal tariffs.
Conclusion
Mutual tariffs pose a double-edged sword. They provide short-term protection for the local industries and geopolitical clout at the cost of export growth, industrial efficiency, and world trade relationships. For India to make its way through this maze, a sophisticated strategy blending calibrated tariffs with structural reforms appears to be necessary. While international trade tensions continue, India's tariff policy should move in such a direction that it, on one hand, turns India into a manufacturing hub for the world, defining its economic path for the next several decades and ensuring geopolitical dominance, on the other hand, rather than going for retaliatory reciprocal tariffs.
Dr Rajeev K Upadhyay
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