India Should Keep An Eye On Impact Of US Reciprocal Discounted Tariffs On World Trade

His optimism stems from a feeling that most countries will make suitable amendments in their policy and come forward for discussions on mutually acceptable grounds for foreign trade

There were expectations that US President Donald Trump would take action against its trading partners by imposing higher tariffs so as to reduce its trade deficit with most of the major countries.

It is his firm opinion that all the trading partners or countries were unfaithful and unreasonable in charging higher tariffs on US imports into such countries whereas USA has been reasonable and fair in its tariffs policy on imports into USA. This over a period of time has resulted in an advantageous position for these countries to do larger trade with Washington even as the United States has been carrying a huge trade deficit.

Meanwhile, USA Study has found that their trading partners also have non-trade barriers, which is an impediment for USA exports. The study has found that these trade restrictions are resorted by these countries to protect the local manufacturers and the said countries were not fair in international trade. While international trade calls for fairness and reciprocity, USA feels that the same is lacking. Trump has repeatedly warned that these trade partners or countries cannot continue to carry with such practices at the cost of USA, which faced an overwhelming $1.2 trillion trade deficit in 2024.

It is also of the opinion that US manufacturing sector has suffered in the process and their consumers are more dependent on imported goods.

The share of USA manufacturing output as a share of global manufacturing output was 17.4 per cent as on 2023, down from a 2001 peak of 28.4 per cent. This has also resulted in loss of jobs for Americans.

One must recall that Trump has also taken steps to substantially reduce illegal immigration to safeguard the livelihood of the local labour.

Trump is of the view that imposing higher tariffs on such countries will see global manufacturing giants from the US and elsewhere to shift to USA, which boost their manufacturing and enhance opportunities for local labour. Apparently, he believes that bearing the short-term pain no will help correct the imbalance and unfair trade and lack of reciprocity. His optimism stems from a feeling that most countries will make suitable amendments in their policy and come forward for discussions on mutually acceptable grounds for foreign trade. Charging higher tariffs on imports can result in a reduced consumer demand, especially in the wake of the inevitable price rise. In hindsight, this will impact the GDP growth of the US, to one per cent this year. Another study points out that there is a 60 per cent chance that US is heading towards recession.

All these developments show that they will impact the world GDP growth. Both IMF and the World Trade Organisation (WTO) have warned that these high tariffs will lead to trade war and if not halted immediately they will have massive consequences on global trade and economy.

Moreover, there is also a threat of inflation rising high in USA in view of the price rise of imported goods. US Federal Reserve Governor Powell has mentioned that the steps being taken by Trump will have far reaching consequences on inflation and growth. Fed Reserve which has earlier paused in their rate action with the current danger of inflation may resort to increasing the interest rates to combat inflation.

President Trump has imposed a 10 per cent universal tariff on all imports effective from April 5. These rates will be replaced by higher reciprocal tariffs between 11 per cent and 50 per cent on products from 69 countries starting April 9 which has already resulted in global equity market turmoil and also resulted in the dollar index getting depreciated. The subsequent appreciation in the currency of many countries will hit exporters.

China, which is a major trading partner, has retaliated with equal tariffs on US imports apart from putting restrictions on some US-based companies with offices in China.

The US President had earlier stated that India, among others, charge high tariffs on some of the items imports to India and also listed various non-tariff barriers which need to be corrected.

During Prime Minister Narendra Modi's visit to the US and his meeting with Trump resulted in a mutually acceptable and beneficial trade agreement and the trade going up to $500 billion.

India has been charged the reciprocal discounted tariffs of 26% on Trump executive order and there is a need to expedite the US Trade Agreement towards which talks are already underway.

In a way, it is binding on India to have excellent trade relations with the US with flexibility and reciprocity, without much adversity. The FTA will critical role towards this end.

(The author is former Chairman & Managing Director of Indian Overseas Bank)a