President Donald Trump’s announcement of reciprocal tariffs has come as a shock, although it isn’t a shock. The new tariffs include two components: the present commodity-wise import tariff and a further reciprocal country-wise widespread tariff for all items. The resultant tariffs are country-wise in addition to commodity-wise. The reciprocal tariffs introduced at the moment are on maintain and restricted to 10% for 90 days, apart from China.
Calculation of reciprocal tariffs
The calculation of the reciprocal country-wise tariff relies on the following method:
U.S. discounted tariff fee = (-1) * (1/2) * exports from U.S. – imports to U.S.)/imports to U.S.
The parametric assumptions are such that no particular person tariff or import demand elasticities seem on this method. The method in substance is just not the approach to decide the tariff fee. In addition, the desk introduced by Mr. Trump has a column ‘charged to the US’. This is deceptive. This is just not the tariff fee imposed by varied nations. It is solely double the discounted reciprocal tariff fee. India’s reciprocal tariff is labored out under utilizing magnitudes of exports and imports in billion {dollars} for 2024.
India’s discounted reciprocal tariff fee = (-1) * (1/2) * (41.8 – 87.4)/87.4 = 26.1% = 26%
This penal tariff fee is to be added to the tariff that’s presently relevant for varied commodities. The 26% fee can be a widespread further factor for all commodities. For nations that aren’t listed in the reciprocal tariff checklist, a ground fee of 10% has been introduced. This will probably be added to their particular person commodity-wise tariff charges.
Some commodities have been presently exempted from the levy of the further discounted reciprocal tariff. These embody metal/aluminium articles, autos/auto components, copper, prescribed drugs, semiconductors, lumber articles, bullion and power and sure different minerals that aren’t obtainable in the U.S.
Calibrating India’s response
We want to discover now what our reactions needs to be. As indicated in the Table, India’s complete exports of products and its exports to the U.S. as a proportion of GDP are average.
India’s exports to the U.S. are usually not solely fairly low however have additionally been falling lately. The affect of the further 26% tariff can be small however completely different for various exported items. India is definitely not a nation that’s closely depending on exports.
An evaluation of main exports to the U.S. by way of their share in complete exports to the U.S. signifies that the principal Indian exports that might be affected by the imposition of the further 26% tariff can be electrical equipment, gems and jewelry, equipment and mechanical home equipment, mineral fuels and articles of iron and metal. Pharmaceuticals are usually not but topic to the further tariff. Mineral fuels are refined oil merchandise which might be re-exported to the U.S. after processing in India. The affect on gems and jewelry is probably going to be minimal as its demand is comparatively inelastic. The principal objects that might due to this fact be affected embody electrical equipment, equipment and mechanical home equipment and made-up textiles. However, India’s rivals in these three commodity teams comparable to China, Vietnam, Cambodia and Bangladesh have additionally been subjected to reciprocal tariffs that are increased than that of India. South Korea can also be a competitor in digital items however has been subjected to a 25% reciprocal tariff, which may be very shut to that of India.
Some nations comparable to China have began levying reciprocal tariffs. However, this has elicited an aggressive response from the U.S., leading to a revised general tariff fee for China at 145%, which has been raised up to 245% for sure commodities. From India’s angle this isn’t a good method.
India’s method should be multi-pronged. An evaluation of the main imports of India from the U.S. signifies that the majority of those are ‘essentials’. Any levy of further tariffs on them will make them costlier. If India will increase its imports from the U.S. wherever potential and advantageous, the penal reciprocal tariff fee on India will come down. For instance, in the method described above, if we enhance the magnitude of India’s imports from the U.S. by $25 billion, say, by substituting the import of petroleum from different sources to the U.S., India’s reciprocal tariff fee will come down to 11.8%, simply above the ground fee of 10%, making India much more aggressive. This doesn’t have an effect on India’s general present account deficit. This outcomes solely in a change in the composition of India’s oil imports basket. This could also be even fascinating.
India ought to velocity up consultations with the U.S. commerce authorities to work out a complete commerce association taking into consideration the issues of each nations. In the in the meantime, we must also be careful for ‘dumping’ in India by different nations comparable to China that are significantly affected.
WTO should take the lead
It is obvious that the U.S. tariff initiative is simply its opening gambit. Global commerce and tariff constructions would stay topic to appreciable uncertainties in the close to to medium time period, that are unhealthy for world commerce and development. As we transfer ahead, we want to create a world buying and selling system marked by low tariffs. The World Trade Organization ought to transfer strongly on this path. Regional groupings are solely a ‘second best’ answer which, nonetheless, should be pursued.
C. Rangarajan is Former Chairman, Economic Advisory Council to the Prime Minister and Former Governor, Reserve Bank of India. D.Ok. Srivastava is Honorary Professor, Madras School of Economics, and Member, Advisory Council to the Sixteenth Finance Commission. The views expressed are private
Published – April 17, 2025 12:08 am IST
