Mint Explainer: Have India-US trade talks blunted Trump’s threat of reciprocal tariffs?

India is one of the buyers of Venezuelan oil but its purchases are tiny compared to those of the US and China. It is also less than 1% of India’s total petroleum crude and product imports by value.

White House introduced the punitive secondary tariff as it believes Venezuela was ‘purposefully and deceitfully’ sending criminals and murderers into the US. This tariff will come into effect on 2 April along with reciprocal tariffs on major trading partners.

Meanwhile, there are indications that the 2 April measures may not include industry-specific tariffs such as on pharmaceuticals and semiconductors. Trump has said tariffs on automobiles would be announced in the next few days, possibly before 2 April.

Besides, he indicated some softening in his earlier stance on reciprocal tariffs during an interaction with reporters at the White House on 24 March. “We may give a lot of countries breaks… They charge us so much that I am embarrassed to charge them what they charged us. But it will be substantial."

This likely softening of stance has given India and its exporters a glimmer of hope in terms of the severity of reciprocal tariffs that’s likely to hit them, as India imposes some of the highest protectionist taxes. The Trump administration is yet to provide some clarity on the shape and form these tariffs will take.

Some estimate the reciprocal tariff to be imposed on the ‘Dirty 15’ will be equivalent to the simple average of tariffs a country levies on American goods. Dirty 15 is a reference to the 15 largest trading partners of the US with which it has the largest merchandise trade deficit.

Already, Indian steel and aluminium exporters are feeling the impact of the 25% duties on their products. Proposed duties on pharmaceuticals, too, will hurt.

As India and the US kick off negotiations for a bilateral trade agreement in New Delhi today, 26 March, Mint scans the measures announced by Trump since his inauguration on 20 January and how the world and India have reacted.

What tariff measures have the Trump administration announced so far?

The Trump administration is using tariff actions to address trade and non-trade issues, reduce trade deficits with the largest trading partners, encourage a pick-up in industrial activities in the US to protect factory jobs, and raise more revenues for the government. The initial set of measures targeted China, Canada and Mexico. Also, a 25% duty was imposed on all steel and aluminium products imported into the US.

The tariff action against China came in phases. A 10% tariff was imposed on all imports from China through an executive order on 1 February (Imposing Duties to Address the Synthetic Opioid Supply Chain in the People’s Republic of China). This was raised to 20% on 3 March, ostensibly because China failed to curb the flow of synthetic opioids such as fentanyl into the US. This was in addition to the 25% duties levied on certain categories of goods imported from China and 100% on electric vehicles.

Action against Canada and Mexico involved 25% additional tariffs, again to hold them accountable to their promises of halting illegal immigration and stopping fentanyl and other drugs from flowing into the US. As Canada announced retaliatory duties on American goods and Mexico threatened action, Trump postponed tariffs on many goods from these two countries for a month. Goods from the two countries that complied with the US-Mexico-Canada trade treaty were exempted from the 25% duty.

The European Union has also announced retaliatory tariffs on $28 billion worth of goods imported from the US and a 50% duty on American whiskey. These are intended to come into effect in April.

Trump’s reciprocal tariffs would be more broad-based than the measures announced so far.

Will these tariff actions hurt India?

Higher tariffs on China could lead to diversion of some Chinese goods away from the US to other regions including India. Indian industry fears cheaper Chinese steel and aluminium may find their way into India, threatening the business of domestic manufacturers.

Amid these apprehensions, the Directorate General of Trade Remedies has proposed a 12% provisional safeguard duty on imports of non-alloy and alloy steel flat products for 200 days. It could be imposed on imports from countries such as China and Vietnam only after consultation with industry and stakeholders.

The US tariffs on steel and aluminium will also hurt Indian exporters of these products if American demand for India-made steel and aluminium products falls as prices rise or their economy slows as a result of Trump’s tariff action. About 30% of Indian exports of ‘articles of iron and steel’ go to the US.

Also read | America’s reciprocal tariffs will exacerbate the problems of Indian farmers

What is India doing to protect its interests and placate the US?

India has been quick to make incremental changes to calm the US after the inauguration of Trump. To begin with, the government used the Union budget to announce a reduction in duties on Harley-Davidson motorcycles imported into India to 40%. Subsequently, duties on bourbon whiskey were reduced to 50% from 150%. Lowering of duties on both these items may translate into slightly lower prices in the domestic market.

Indian manufacturers will not be affected as both products have a niche market in India. However, lowering duties signals that India is ready to reduce tariff barriers and allow American goods easier market access. Access to a market like India, where consumption is set to rise, is what Trump wants, given the US’ trade war with China.

The US administration may also demand greater access for American farm produce during trade negotiations currently underway in Delhi.

Another significant move by the Indian government was a decision to scrap the 6% equalisation levy, better known as Google tax, from 1 April. This was a measure to strategically demonstrate to the Trump administration India’s seriousness to address pain points in bilateral trade relations and extract concessions on reciprocal tariffs.

The equalisation levy, introduced in 2016, is a charge on the revenues of offshore entities such as Google, Meta and Amazon from offering online advertising services to entities domiciled in India. The scrapping of this tax appears to have been prompted by a February Presidential memo in the US for possible tariff retaliations against countries that imposed a digital services tax on American tech companies. Incidentally, India was not named in the memo.

Also read | If ending Google Tax is quid, what is quo, for which quid is being given away?

Is India downplaying reciprocal tariffs by focussing on bilateral trade pacts?

From the US standpoint, the threat of reciprocal tariffs has paid off. The US has brought many of its trading partners to the negotiating table to cut bilateral deals, allowing Trump to soften his position on reciprocal tariffs. The administration clearly wants market access in all countries that gained from exporting to the US to balance its trade. The US has relatively low tariff barriers compared to most other countries.

The US is India’s top trading partner, and it cannot afford to antagonise the leadership of the world’s largest economy. But as India is bound by its commitments to the World Trade Organisation, it cannot offer lower tariffs to American goods as demanded by Trump until the two nations enter into a free trade agreement (FTA).

The decision of the two nations to start negotiations to finalise the first tranche of a bilateral trade agreement (BTA) by late September is a step towards working out an FTA. Negotiations for a possible FTA were abandoned after making significant progress during Trump’s previous administration between 2017 and 2021.

A US delegation led by assistant trade representative Brendan Lynch is currently in India for talks on the bilateral trade agreement. The timing is significant as these talks could spare India some harsh reciprocal tariffs.

Also read | India’s US trade deal at risk without fast-track authority

A bilateral trade agreement would also offer India an opportunity to extract commitments from the US on lowering its non-tariff barriers such as sanitary and phytosanitary measures and regulatory restrictions. Exporters have often complained about consignments getting rejected for not meeting these conditions.

For the US, India is a relatively less important source of imports, its biggest sources of imports are Germany, Japan, South Korea and Vietnam, Mexico, China and Canada. However, commitments by India to buy more American farm products and crude petroleum may work in India’s favour.

India is among the largest importers of cooking oil and crude petroleum, both of which can be sourced from the US. The US is among the largest producers of soyabean and corn, which are used for extracting oil. India can also lower tariffs on nuts such as almonds, walnuts, pistachios and pecans, which are produced in abundance in the US.

Also read | India’s confidence in gaining from Trump’s trade distortions is misplaced

What happens if reciprocal taxes kick in on 2 April?

If the reciprocal tariff kicks in on 2 April, Indian exports will become expensive for American consumers. Demand for Indian goods may fall. But part of the American industry that depends on Indian inputs will see its costs rise. Worse, the US will be at risk of inflation and a slowdown due to higher tariffs on several trading partners.

However, given the flip-flop on implementing tariffs already announced and recent statements of Trump indicating softening of stance on reciprocal tariffs, measures taken by India unilaterally to placate the US and the personal bond Trump shares with Prime Minister Narendra Modi, there is hope that those tariffs will not badly hurt India.

Besides, much can change in a week, as we have seen since 20 January.

Also read | Looming US tariffs could be bad news for India’s Big Five