Trump's 'Liberation Day' Tariffs — Impact On India And Possible Response

US President Donald Trump has recently targeted India, calling it the 'tariff king' due to its high import duties on American goods. In his upcoming speech, he is expected to announce a series of tariff measures aimed at narrowing the US trade deficit and boosting domestic manufacturing.

Significance of US-India Trade Relations

The United States is a crucial trading partner for India, with Indian exports to the US reaching $81 billion in 2024. This figure represents 17.7% of India’s total exports, highlighting the importance of this trade relationship. During his first term, Trump criticized India for its tariff policies, noting that India imposes an average tariff of 12% on American products, while the US maintains a lower rate of just 3% on Indian imports.

In February, Trump and Indian Prime Minister Narendra Modi agreed to strive for an ambitious target of $500 billion in bilateral trade by 2030.

Understanding the Tariff Differences

India's higher tariffs afford protection to several sectors within its economy, shielding them from American competition. For instance, the tariff on animal products is significantly higher in India, creating a 30 percentage point disparity compared to the US rates. This protective measure has implications for industries employing millions in rural areas.

Identifying Vulnerable Sectors

In light of the potential for reciprocal tariffs, certain sectors in India stand out as more vulnerable to the consequences of Trump's proposals. Notably, electrical machinery and electronics, including mobile phone exports (like iPhones), could face significant restrictions. India currently charges a 15% duty on fully assembled phone imports, whereas the US does not impose tariffs on these products.

With the US implementing existing 40% tariffs on Chinese imports, companies like Apple Inc. may consider increasingly shifting production to India, given the environment of rising tariff tensions.

India's Potential Responses to Tariff Changes

To counter Trump's tariff measures, India could take several steps, including increasing its imports of oil and natural gas from the United States. Trump has committed to enhancing US energy production, which aligns with this potential strategy. Previously, India aimed to address trade imbalances by purchasing more liquefied natural gas (LNG), committing to boost energy imports significantly.

Additionally, India can consider reducing tariffs on various goods, such as:

Automobiles

• Lowering taxes on auto imports to foster trade relations.

• This move is complicated by the significant 67.5 percentage point difference in tariffs between two-wheelers and cars.

• Reducing auto taxes could impact ancillary exports worth $2.1 billion.

Textiles and Apparels

• The US accounts for 28% of India's textile exports, creating a vulnerable position for India if tariffs increase.

• However, India can still compete against countries like China, which experiences a higher tariff rate from the US.

• Mitigating challenges could involve reducing tariffs on US cotton imports, as over half of textile imports in India are derived from US cotton.

Pharmaceuticals

• Pharmaceutical imports are valued at $800 million, where tariff disparities stand at 7.6 percentage points.

• Lowering tariffs on pharmaceuticals may create a more competitive market.

Food Products

• High tariffs protect domestic agricultural production; however, India can consider easing tariffs on certain food items, including alcohol and prepared foods.

In summary, India's diverse options could serve as potential pathways to balance the impacts of the proposed US tariffs, promoting a win-win outcome in trade relations.

Tariffs, India, Trade