Trump’s tariffs poised to hurt India

ABOUT 2,000 years ago, when the Roman Empire was at its peak, merchant ships entering from ports outside the Mediterranean had to pay a standard tax on everything they brought in. Within a few centuries, as the Romans lost control and the region split up into scattered kingdoms and smaller empires, traders were faced with a bewildering array of charges as they moved from port to port.

So, a convention developed, giving merchants advance notice on exactly how much tax would be levied on each good. The Arabs called it taa’rifeh or a notification. The word entered other languages, becoming tarifa in Spanish, tarrifa in Italian and later, tariff in English.

Today, thanks to US President Donald Trump, this word is threatening to disrupt the world order that reigned for the past four decades. In a couple of days, Trump’s ‘reciprocal’ tariffs will hit every country. The US will mirror the import duties any country imposes on American-made goods.

We will be affected by it too. Our exports to the US stood at $78 billion in 2023-24, and in the first six months of this fiscal, it already crossed $60 billion. The most important of these were medicines — our pharmaceutical companies export cheaper versions of important drugs to the US and earn big bucks. Then came telecom products, like reassembled iPhones, and other electronic and electrical gadgets and machines.

Although we don’t sell too many cars to American consumers, we do export a lot of auto parts. The US market accounts for 27 per cent of our automobile exports. We also export auto parts to other countries, which are then used in finished automobiles that are shipped to the US.

Another big export is diamond and gold jewellery. In 2024, we exported $12 billion worth of gems and jewellery to the US. We also export textiles and clothing. Last year, we sold $11 billion worth of readymade garments, yarn and textiles to America.

India also exports a wide variety of seafood to the US. We also sell different kinds of rice to American consumers. In all, we sold more than $6 billion worth of agricultural products, seafood, fish and processed foods in the US market, in 2024.

Currently, India’s exports to the US are worth $45 billion more than what we import from there. Trump believes that a big reason for this gap is that India imposes much higher tariffs on imports from the US, which makes US-made goods more expensive in India. On an average, India levies 12 per cent as tariff on goods coming into our domestic economy from outside. That is more than five times what the US imposes.

The gap is even more stark when we take specific items. On agricultural products, India imposes a 37.8 per cent average tariff — the US levies just 5.4 per cent. Our tariff on US-made automobiles and auto parts is more than 24 per cent. Till recently, the US charged just 1 per cent on our auto exports.

The gap between India’s tariffs and that of the US, till now, was 32.4 per cent on agricultural products, 23.1 per cent on auto parts, 13.3 per cent for diamond and gold jewellery, 8.6 per cent on pharmaceuticals and 7.2 per cent on electronic, electrical and telecom products.

This is what Trump is targeting. His decision to mirror India’s tariff regime will either make Indian exports uncompetitive or force India to bring tariffs down to US levels to continue to access the American market. Both options are bad for India.

Trump’s reciprocal tariffs will make Indian agricultural products, seafood and processed foods 31 per cent more expensive in the US. That will be enough for an American consumer to switch to a cheaper alternative — from basmati to ‘Texmati’, for instance. Auto parts will become 23 per cent dearer. Medicines and other medical products will cost 7 to 9 per cent more in the US market while gems and jewellery will become 13 per cent more expensive.

This could drive Indian products off US shelves. The only way our exporters would be able to compete is if they reduced their selling price. So, Indian shrimps and spices might have to be sold for 17 per cent less so that they cost the same in a US supermarket even after higher tariffs.

In the past few years, Indian pharma companies have increased their share of retail drug sales in the US, making India the third largest pharmaceuticals exporter to the US, behind Ireland and Switzerland. When Trump’s reciprocal tariffs come into play, Indian drug companies might have to reduce their prices by 6-8 per cent to ensure the US consumer doesn’t pay more. Otherwise, they might switch back to Irish and Swiss drug manufacturers, who have been losing market share to Indian companies.

In fact, Trump has indicated that he will announce higher tariffs on pharmaceuticals very soon, which might well go beyond reciprocal rates. In that case, Indian drug companies might find their market share shrinking and their profits getting squeezed.

What would happen if India were to cut tariffs on US-made goods? In that case, US agricultural products — like nuts, cheeses and meats — would cost 24 per cent less here. American cars will cost almost half of what they do right now. US-made auto parts will become 19 per cent cheaper on an average. Other US-made products will become 5-12 per cent cheaper in the Indian market.

What Trump is trying to do is to revive US manufacturing by raising tariff walls. The logic is that if US consumers have to pay more for imported goods, they will switch to goods produced at home. On the other hand, if foreign exporters are willing to reduce prices, then the US government will earn from duties while American consumers will continue to pay the same prices. Again, if foreign governments reduce tariffs to match what the US charged till now on imported goods, it will increase the sale of US-made goods in foreign markets, such as India.

In each case, the US gains by beggaring the rest of the world.