Why in the News?

India faces lower U.S. tariffs than its rivals, making its exports more competitive. This can help expand market share and strengthen trade ties, possibly securing better terms through a future Bilateral Trade Agreement (BTA).

Why did Trump impose “reciprocal tariffs” on countries like India?

• Addressing Trade Deficits: Trump viewed large U.S. trade deficits as a national emergency and sought to correct them. Eg: India had a $30+ billion trade surplus with the U.S. in 2019, prompting higher tariffs.
• High Tariffs by Trading Partners: Claimed that countries like India imposed higher tariffs on U.S. goods while enjoying low tariffs in return. Eg: India’s 52% tariff on U.S. goods (as per Trump’s claim) led to a 27% tariff on Indian exports.
• Legal Justification Under IEEPA (1977): Used the International Emergency Economic Powers Act (IEEPA) to justify tariffs as a response to economic threats. Eg: Trump declared April 2 as “Liberation Day”, marking U.S. retaliation against trade imbalances.
• Targeting Specific Sectors with Unfair Trade Practices: Accused India of protecting key industries with high tariffs and non-tariff barriers. Eg: India’s high tariffs on motorcycles (100% in 2017, later reduced to 30%) were cited as unfair.
• Political Strategy for U.S. Domestic Industry: Aimed to protect American jobs and industries by reducing competition from low-cost imports. Eg: Tariffs targeted India’s gems, jewelry, and textiles sectors to favor U.S. producers.

Why was India’s response to the U.S. tariffs muted compared to others?

• Ongoing Bilateral Trade Agreement (BTA) Talks: India was engaged in negotiations with the U.S. for a Bilateral Trade Agreement (BTA) and did not want to escalate tensions. Eg: The Commerce Ministry stated that India values its Comprehensive Global Strategic Partnership with the U.S. and remained committed to BTA discussions.
• Lower Tariff Impact Compared to Regional Competitors: India’s 27% tariff penalty was lower than those imposed on Vietnam (46%), Thailand (37%), Bangladesh (37%), and Sri Lanka (44%), offering a slight comparative advantage. Eg: Indian exports faced less severe tariffs than competitors, reducing the immediate urgency for a retaliatory response.
• Focus on Exploring New Trade Opportunities: Instead of retaliation, India sought to leverage shifting global trade patterns and assess how the tariffs might create new export opportunities. Eg: The Commerce Ministry stated that it was studying “opportunities that may arise due to this new development.”
• Avoiding Direct Confrontation with a Key Strategic Partner: India prioritized maintaining strong diplomatic and strategic ties with the U.S., especially given their defense, geopolitical, and economic partnerships. Eg: Unlike China or the EU, which threatened countermeasures, India’s official statement was measured and non-confrontational.
• Selective Impact on Indian Industries: While some sectors like gems and jewelry were hit hard, others, such as automobiles and auto parts, were not significantly affected, reducing the immediate urgency for a strong reaction. Eg: The Gems & Jewellery Export Promotion Council (GJEPC) called for a quick resolution but did not demand aggressive retaliation.

Which Indian sectors are most affected by the 27% U.S. tariff?

• Gems & Jewelry Industry: The U.S. accounts for over 30% of India’s $32 billion annual gems and jewellery exports, making it the hardest-hit sector. Eg: The Gem & Jewellery Export Promotion Council (GJEPC) warned that sustaining India’s $10 billion export volume to the U.S. would be challenging.
• Textile & Apparel Sector: India is a major exporter of textiles and garments to the U.S., and higher tariffs could reduce price competitiveness against rivals like Vietnam and Bangladesh. Eg: The tariff increase could lead to order cancellations or a shift in sourcing to lower-tariff countries.
• Processed Food & Agricultural Exports: India exports rice, tea, spices, and processed food to the U.S., which are now subject to higher tariffs, making them more expensive for American consumers. Eg: Indian basmati rice and processed mango products could face a drop in demand due to higher costs.

How could India gain a comparative advantage? (Way forward) 

• Lower Tariff Impact Compared to Competitors: India’s 27% tariff is lower than Vietnam (46%), Thailand (37%), Bangladesh (37%), and Sri Lanka (44%), making Indian goods relatively cheaper in the U.S. market. Eg: Indian textile and leather exports could remain more competitive than those from Bangladesh or Vietnam.
• Potential Market Share Expansion: Higher tariffs on regional competitors may shift U.S. import preferences toward India, increasing Indian exports in affected sectors. Eg: If Bangladesh’s apparel exports become too costly, U.S. buyers may turn to Indian manufacturers for sourcing.
• Strengthened Trade Relations with the U.S: By maintaining a measured diplomatic response and continuing trade negotiations, India can secure long-term benefits through a Bilateral Trade Agreement (BTA). Eg: A favorable BTA could lead to tariff reductions or exemptions for key Indian industries like pharmaceuticals and IT services.

Mains PYQ:

Question: How would the recent phenomena of protectionism and currency manipulations in world trade affect the macroeconomic stability of India? [UPSC 2022]

Linkage: The potential impact of protectionist measures (like tariffs) on India’s economy.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now