Global payments
Posted on Apr 4, 2025
What is a Reciprocal Tariff
A reciprocal tariff is a duty that is levied by one country on another as a response to similar tax actions taken by that country. This is done to maintain the trade relations between the two countries and to protect the importers of the respective countries.
Suppose one country increases the duties on the goods imported from another country; then, in response, the country that has been affected by the increased tariff might increase the duty on the imported products of the first country. This is known to be a reciprocal tariff. If done in an unhealthy manner, this can increase the trade tensions between two countries by negatively affecting their economies. This can disrupt the supply chains, increase the prices for consumers and slow the growth of a country.
What Reciprocal Tariff has been Laid by the US
On the ‘liberation day’ trump has announced reciprocal tariffs for various counties where a lot of countries were hit by higher reciprocal tariffs. US president Donald Trump has announced a reciprocal tax of 26%, giving a major setback to Indian exporters. This new announcement has given a major trade blow to the Indian economy as it has been hoping for some trade concessions instead of a new trade barrier.
India has been charging 52% to the US for years, and Trump mentioned in his speech that the US has charged almost nothing from India for years and decades.
How will it Impact the Indian Industry
As the trade tariffs have been increased, it will become difficult for Indian exporters to sell their products in the American market. this is because due to the increased tariff the costs of Indian products will increase in the American market hence making it difficult for American consumers to buy it. This can eventually lead to the decline in the demand of the Indian products in the American market.
Some of the major sectors that have been impacted the most by increased reciprocal tariffs are such as textiles, chemicals, gems, electronics, auto parts etc. Industries like steel and automotives, which are already dealing with a 25% tariff are impacted severely by the increased tariff.
These industries, being worried about their future prospects, still have a competitive edge as other competitors' countries have suffered higher reciprocal tariffs.
Countries like China, Vietnam, Cambodia and Bangladesh have been hit by higher reciprocal tariffs, making it more difficult for them to sell their products in the US market. India is in the middle of the tariff rate, that is, 26%, and has some competitive edge in the market. This is the space where India can compete with its competitors in the US market.
This can encourage Indian exporters and manufacturers to focus more on domestic manufacturing capabilities. This could lead to a shift in more local productions and finding new market space in the US market, fostering a more resilient economic environment.
New Reciprocal Tariff Structure
India, along with other countries, has been severely affected by the reciprocal tariffs imposed by the US president. The US has also imposed 34% on China, 46% on Vietnam, 37% on Bangladesh, and 36% on Thailand.
Why has the US Imposed the Reciprocal Tariffs
The US has aimed at increasing the reciprocal tariffs for several factors. Firstly, the US government wants to boost the US economy by increasing local production and manufacturing so that the American market is flooded with local products rather than global products. The US government wants american consumers to use more local products.
Secondly, the aim behind imposing tariff was to reduce the trade deficit that stood out at $35.31 billion with India in 2023-24. The US is trying to promote fair trade practices and bridge the gap by implementing such tariffs.
The US has also mentioned that some countries are benefiting from unfair trade advantages that can distort competition.
Conclusion
As the countries are facing a major setback with the increased reciprocal tariffs, some countries like India are somewhere seeing this as an encouraging factor to increase domestic production and manufacturing to capture the space that will be created due to the higher tariff restrictions imposed on other countries.
The basis for calculating these reciprocal tariffs were on the basis of the tariffs imposed by the partner countries, but it also seemed to have involved trade deficit as a factor that the US has with these countries.
Other than the trade tariff reduction, the US has also been asking India to address other non-tariff barriers such as quality checks, restrictions on imports and other sanitary norms.
