Context
U.S. President Donald Trump’s imposition of reciprocal tariffs on various countries including India has triggered economic unease globally. In response, India has engaged in tariff cuts and bilateral negotiations. But should India go further and reduce tariffs more broadly, even unilaterally? Economists Ajay Shah and Laveesh Bhandari weigh in during a discussion moderated by Prashanth Perumal J.
Do Tariffs Hurt Economic Growth?
Key Takeaway:
There is a strong consensus that lower tariffs promote economic efficiency and consumer welfare.
- Laveesh Bhandari (LB): Tariffs distort economic incentives and hurt consumers. Lowering tariffs enhances efficiency and global competitiveness.
- Ajay Shah (AS): Heterogeneous tariffs cause greater distortions. Even when tariffs are necessary, fewer and more uniform rates are better for efficiency.
Should Tariff Policy Prioritize Consumers?
AS’s Argument:
High tariffs increase consumer prices and shield uncompetitive domestic producers.
- Example: A 20% car duty inflates a ₹5 lakh car to ₹6 lakh, burdening consumers and rewarding inefficiency.
- Core idea: India should focus on sectors where it holds global competitiveness, importing the rest.
Trump’s Tariffs: Strategic Tool or Economic Weapon?
LB: Trump’s approach, though aggressive, was perhaps the only viable tool with WTO’s ineffectiveness.
AS: The end goal of Trump’s tariffs remains ambiguous. Targeting all countries, including allies like India, may have long-term disruptive effects without a clear resolution strategy.
Are Reciprocal Tariffs Effective in Changing Global Behavior?
LB:
- WTO is ineffective; Trump’s aggressive strategy was perhaps the only practical alternative.
- Expected to soften after early gains materialize.
AS:
- Blames China’s systemic distortions for undermining the global trade order.
- Trump’s wide-target approach lacks clarity and predictability, risking global production efficiency.
The Hidden Challenge: Non-Tariff Barriers
LB:
- Non-tariff barriers (NTBs) are rampant and opaque, existing across nearly all sectors.
- These include quality standards, regulatory benchmarks, and administrative delays.
AS:
- NTBs are harder to quantify and often masquerade as quality or safety requirements.
- Example: EU’s strict sanitary standards for grape imports — formally equal but practically burdensome.
How Should India Respond Strategically?
LB:
- India should reduce tariffs gradually, with clear long-term timelines to allow industry adaptation.
AS:
- Cites Yashwant Sinha’s phased tariff liberalization as a model.
- Predictable, gradual tariff reductions can boost investment and confidence.
- Advocates for comprehensive FTAs with the U.S., EU, U.K., and Japan to unlock competitive pressure and global access.
A Path Forward for India’s Trade Policy
India must balance domestic competitiveness, consumer welfare, and strategic autonomy in its tariff decisions. The U.S. approach under Trump may lack long-term clarity, but it has catalyzed long-overdue questions around India’s own protectionist tendencies. Moving toward uniform, lower tariffs, supported by bilateral agreements and transparent non-tariff practices, could unleash a new era of efficiency and global integration for India.
BS
