Trump’s aim may be to force India to lower tariffs, not reciprocate rates

The ultimate objective of using reciprocal tariffs against India would be commit India to import more.

President Donald Trump’s “America First” trade policy, the most partisan and protectionist trade policy in almost a century, includes the contentious proposal of “reciprocal tariffs”, which is scheduled to be implemented from 2nd April.

The stated objective of this proposal is to “reduce [US’] large and persistent annual trade deficit in goods and to address other unfair and unbalanced aspects of [US’] trade with foreign trading partners”.

Days after unveiling the “America First” trade policy, President Trump introduced the “Fair and Reciprocal Plan”, which specified that the “non-reciprocal trading arrangements with trading partners” would be countered by “determining the equivalent of a reciprocal tariff with respect to each foreign trading partner”.

Early glimpse into what lies ahead

But even before the “Fair and Reciprocal Plan” was announced, Donald Trump had set about implementing his proposal first by imposing additional tariffs on Canada, Mexico, and China, and then by imposing higher tariffs on US’ imports of steel and aluminium. When countries are expected to conduct trade on the basis of an agreed set of rules monitored by the WTO, unilateral imposition of reciprocal tariffs would be tantamount to gross violation of the multilateral rules.

How would the reciprocal tariffs plan be implemented? Cues in this regard have been provided by nine Republican Congressmen in their jointly tabled Bill, the “United States Reciprocal Trade Act”, which seeks to authorise the President to take actions relating to implementation of reciprocal tariffs.

Trump’s aim will be to push India to import more from US

This proposed legislation provides 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 President can either force the foreign country to reduce its tariff or impose additional tariff  on imports from the foreign country.

Given that the ultimate objective of using reciprocal tariffs against India would be commit India to import more and, therefore, reduce its high and progressively increasing trade surplus vis-à-vis the US, the more likely scenario is that US President would force India to reduce its tariffs.

The Fair and Reciprocal Plan that set the reciprocal tariffs agenda going mentioned two sectors while targeting India, namely agriculture and motorcycles. Subsequently, in his address to the Joint Address to Congress, President Trump argued that India imposed higher than 100 percent tariffs on automobiles. Thus far, these are the two sectors that are likely to be targeted when the reciprocal tariffs are invoked. It seemed logical for the Trump Administration to focus on these two sectors, given its substantial economic interests.

US was the second largest producer of passenger cars in 2023, and although it was the fifth largest exporter of cars, in recent years, the US passenger car industry was the largest contributor to the country’s exports, next only to the civilian aircraft industry. With China enjoying a dominant presence as the largest producer of passenger cars and the European economies dominating the export market, the Trump Administration seems to have put its bet on reciprocal tariffs as a strategy for strengthening its domestic industry, enabling it to compete with the market leaders. This strategy would help in forcing countries like India to lower their high automobile tariffs, which could then be a handy option to create additional demand for its products, and, of course, fuelling the growth of the industry.

India’s agricultural tariffs will come under scrutiny

As regards agriculture, the US has been among the major exporters of most cereals, including wheat, maize, and soybeans. For a significant period, the US was among the top two exporters of wheat, a position that it lost after the pandemic. But it retains market dominance in maize and is the second largest exporter of soybeans after Brazil. Not surprisingly, US’ agri-business has been targeting large markets to further consolidate its position in international agricultural markets, and it is here that President Trump’s policy of prying open India’s market using reciprocal tariffs seems to be a logical option.

It may be pointed out that the use of reciprocal tariffs may not remain confined to the two sectors mentioned above. Several other sectors, especially the ones in which the US has large export interests could well be included in Trump Administration’s reciprocal tariffs plan. Electronics and pharmaceuticals seem eminently qualified in this regard, and this could also be because tariff differentials between India and the US in these sectors are not insignificant.

For India, these two sectors are of critical importance for they are not only driving the country’s exports but are also helping in labour absorption. India’s pharmaceutical industry is the provider of cheap generics, an imperative to keep healthcare costs down to affordable levels. But more importantly, Indian pharmaceutical industry is also a major supplier of generic medicines to the developed world.

According to the consulting firm IQVIA, nearly half of all generic medicines consumed by American patients are of Indian origin. In 2022, the consequent savings in healthcare costs from Indian generics was a staggering $219bn. Thus, the use reciprocal tariffs would certainly hurt the US, yet again confirming the adage that in a trade war, there are no winners.