Trump’s Reciprocal Tariff Threat

President Donald Trump’s threat to impose reciprocal tariffs on India does evoke certain economic concerns. Beyond that, such a threat seems to provide an opportunity for India to revisit its protectionist trade policies and adopt a more liberal approach toward enhancing manufacturing and exports.

Challenges in the Indian Trade Regime Today

High Tariffs & Protectionism

• India has one of the highest tariff structures in the world.
• Manufacturing tariffs: 13.4% greatly over 3x higher in comparison to the US (3.6%) and EU (3.8%).
• Agricultural tariffs: 40%, far exceeding that of the US (7.1%) and EU (9.4%).
• Many goods are subject to tariffs greater than 50%, restricting the Indian trade policy.

Unpredictable Trade Policies

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• India would hardly ever raise applied tariffs less than WTO bound rates.
• The passing of dated Quality Control Orders (QCOs) on various items, polyester and viscose included, creates non tariff barriers that add uncertainty to the business climate.

Complexity & Administrative Drudgery

• 65 different ad valorem tariff rates and 145 unique specific tariffs as per 2024.
• These issues are compounded by an array of cess and duties.
• Recent cases like Volkswagen’s $1.4 billion penalty for classification issues highlight complexity costs.

Possible US Retaliations and Consequences

• To retaliate, Trump has imposed 100% tariffs on Indian export, which can effectively cripple these industries like textile, engineering goods, and auto components.
• This might result in eroding investor confidence, thereby damaging India’s global trade reputation.
• This might put India’s China+1 opportunity in jeopardy: Global firms will be discouraged from diversifying their supply chains into India.

Two Possible Options for India

An Approach of Bargaining Using Transactions (Risky)

• Proceed with bilateral negotiations to reduce some tariffs and give concessions to the USA.
• This, on the other hand, could trigger a sustained period of uncertainty, postponing investment decisions.
• Increased risk of post agreement monitoring by the USA, which will burden the businesses with compliance.

Structural Trade Reforms (Recommended Course)

• Tariffs should be unilaterally rationalized to uplift competitiveness and manufacturing exports.
• Key Reforms Required
  • Introduce a uniform tariff in the range of 5 10%% to simplify the structure.
  • Remove QCOs and non tariff barriers restricting imports.
  • Make low cost inputs accessible, enhancing competitiveness for Indian exports.