The reciprocal tariffs imposed by the Trump administration have been the talk of the town since Trump took office. The Indian Government sought to placate the situation by offering import concessions on some items of interest to the United States of America ('US'), however, it was not enough to stop Trump from a show of force. On 02 April 2025, coined as Liberation Day, the US imposed discounted 'reciprocal' tariffs on various countries across the globe with a threat to increase these tariffs further if these countries in response levied any retaliatory tariffs. A basic tariff of 10% has been imposed on all imports into the US effective 02 April 2025 with incremental tariffs coming into effect from 09 April 2025. While China, many Southeast Asian countries, Sri Lanka, and Bangladesh were some of the worst hit, India was saddled with a 26% tariff. These announcements created an upheaval in the market worldwide and led to stress among investors.
The instability that resulted from these actions, led the US within hours of the incremental tariffs taking effect, to halt their imposition, with a 90-day respite to all countries except China. China on the other hand now faces an increased tariff of 125% for its imports. Mind you the 10% base-line tariffs continue, which in the case of countries like India, are double the average rate of tariff initially paid for importing into the US. While this may allow the Indian exporters to export their products in the interim, there is a great deal of uncertainty on who will bear the burden of the 10% tariff. So, is this reprieve for India and the other countries an act of partial absolution or is it another power move to arm-twist the importing countries into submitting to the US wish list? From the statements given by the US administration, it appears that most Countries are ready to sit across the table with the US and negotiate; however, the chain of events leading to the negotiations indicates that by doing what they have they now believe they have the power to dictate what they want in return for lowering or doing away with the import tariffs imposed by India and other countries.
What are the reciprocal tariffs imposed on India?
The US Government in its 2025 National Trade Estimate Report on Foreign Trade Barriers ('NTE') has recorded that India has some of the highest tariffs in the world, with an average applied tariff rate of 13.5% for non-agricultural goods and 39% for agricultural goods. The average World Trade Organization ('WTO') bound tariff rate of India is around 17% in comparison to the 3.3% charged by the US. Per Annex I to the Executive Order ('EO') 14257 dated 02 April 2025, India on average applies a tariff rate of 52% on the goods imported from the US. Accordingly, a 26% reciprocal tariff was introduced by the US to restore the trade balance between the US and India. These tariffs were to be implemented in a staggered manner, with a 10% baseline tariff coming into effect immediately and the balance (16%) was to be made effective from 09 April 2025, which has now been pushed further by a period of 90 days.
This tariff would, for now, not apply to various items exempt under Annex II, which includes copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, and energy and energy products. However, the US can, on a case-by-case basis, remove these items from the exemption list. Items like steel, aluminium, and auto parts which were already subject to higher tariffs under previous orders would continue to be governed by those orders and would be exempt from the application of the EO dated 02 April 2025. Furthermore, this application of reciprocal tariff is not absolute, and there is a provision to exempt from this tariff the US component contained in the imported goods, provided that such component exceeds 20% of the value of the imported goods. The EO authorizes the US Customs and Border Protection authorities to collect relevant information and documents to establish whether the >20% criteria has been met before allowing any claim for exclusion.
Countering the levy of reciprocal tariffs
The EO dated 02 April 2025 provides that any trading partner who retaliates against the US in response to the reciprocal levy would face an increase or expansion in the scope of the duties imposed. Also, where a trading partner takes steps to remedy non-reciprocal trade arrangements and align sufficiently with the US on economic and national security matters, the US may decrease or limit the scope of the duties imposed under the EO. In continuation to the said sections, the US, in response to the retaliatory duties imposed by China (close to 84%), vide Executive Order dated 08 April 2025, increased the reciprocal duties imposed on China from 34% to 84%, which was further enhanced to 125% vide the amendment Executive Order dated 09 April 2025, corresponding changes have been made to the other provisions on the de minimis tariff provisions as well. As regards, the other nations, the EO dated 09 April 2025, suspended the country-specific tariffs, over the 10% baseline tariff, until 09 July 2025, thereby providing a short reprieve to the market. As is evident the US is following a systemic strategy of bending the nations to their will through the "carrot or stick" method.
This game of power play is not new for the US Government. The U.S. Commerce Department in 2018 decided that the low prices of steel due to global overproduction was a threat to the US Steel production and imposed higher tariffs on imports of steel and aluminum into the US. Similar to the present day, this move was justified by stating that US steel production was essential to the national security of the country. India in response imposed retaliatory tariffs on various US goods, which in turn led to the US Government withdrawing the preferential trade treatment for India under the Generalized System of Preferences (GSP) programme, which had previously allowed Indian exporters to undertake duty-free exports to the US, thereby bringing in an average tariff between 2-5% for Indian goods. India to pacify, increased its crude oil imports from the US and also entered into an MOU to store and increase its stockpile of crude oil in the US. There are many more such examples in the past. While India in the past chose to retaliate, this time around diplomacy is the tool that India wishes to deploy.
It is common knowledge after the withdrawal of the GSP status, India has been in talks with the US to reinstate its preferential treatment. India is currently also in a dialogue with the US on entering into a bilateral trade agreement ('BTA'). A Trade Agreement allows parties to negotiate tariffs at a rate much lower [than the WTO bound / applied rates] amongst themselves, without being hit by the Most Favoured Nation (MFN) criteria. The WTO members have committed that they will not discriminate against other members in terms of tariffs, quotas, and trade barriers. Thus, special treatment accorded to one member has to be given to another. The exceptions to this rule are lower tariffs through trade agreements allowing for regional economic integration or special treatment / status to developing countries. Thus, lowering tariff / duty rates by India for US imports may only be possible through a BTA with the US.
It is however relevant to note that the US has a long list of demands. The NTE highlights that India has consistently been raising duties / tariffs on imports, which has impacted US exports in agricultural, information and communication technology, medical devices, paper products, chemicals, and automotive parts sectors. The NTE also highlights the introduction of non-tariff barriers, like licensing / certification conditions quality control, quantitative restrictions for agricultural goods, and price control on medical devices which are some of the major deterrents for US exporters. Another area of grouse is the intellectual property laws in India and their operation, which repeatedly finds mention in the NTE.
Given the above, it is important for India to do its homework and understand where the real interest of the US lies and how this impacts the domestic traders, especially the vulnerable farmers / small medium enterprises etc., as India may not be able to pull out all the stops to please US. The US has been pressurizing India to open up its dairy and agricultural market to the US exporters. However, subsidizing these imports could adversely impact Indian farmers. Instead, of giving in India should explore the possibility of allowing subsidized import of agricultural produce that is not grown in India and will not impact the Indian farmers, as was done in 2023. India should also maintain and keep some crucial arsenal handy, especially where the pharma industry is concerned. In spite of all the gambit in imposing the reciprocal tariffs, the US has strategically kept the pharma products out of the incremental tariffs (as of now), as it understands the significance of increasing costs on life-saving drugs and its direct impact on the American population. Thus, it is critical for India to not compromise on any IP demands of the US that would directly impact the pharma industry. Ultimately, all these mutual benefactions should come with safeguards from the imposition of unilateral reciprocal duties or any other adverse actions in the future. As markets change, India, going forward should ensure that it does not become victim to the vagaries of the US. As a middle ground India has indicated that it is also open to zero duty on imports from US in PLI and some other sectors.
The endgame
The situation created by the US, may not be all bad and more like a mackerel gale, where some may opportunistically be able to exploit the situation to their benefit. For instance, the massive tariffs imposed on China will make the US importers / industries look for cheaper alternatives. Indian exporters can step in to fill these gaps. Further, the vacuum created by the US in other markets, through reciprocal tariffs resulting in retaliatory tariffs from impacted nations, will make it expensive for US exporters to sell to these countries, thereby again creating opportunities for Indian exporters. Therefore, it is important for the Indian exporters to keep their ears on the ground and strike where the opportunity presents itself, through this it is possible that some [if not all] Indian exporters may come out smelling like roses from this ordeal. Additionally, even though the ultimate objective of the US is to turn and bring the manufacturing units back to the US, it is not an easy task. US today is largely a service-oriented market, the US companies have tactically over a period relocated to cheaper jurisdictions as setting up in the US has not been conducive. Hence, strained relationships with some jurisdictions may not necessarily mean that the prodigal will return, instead they might look for sunnier shores to reposition themselves. In such a market, considering that India has been wooing foreign investments in various sectors, the current muddy waters could maybe help them catch some fish.
One of another important aspects of the Tariff play will be a shift in the global supply chain patterns across the world. Countries such as China which has been imposed with heavy duties for all their products imported into the US could look at other countries to sell their products. Similarly, suppliers in the US could look at markets other than China for selling their products. There is news of Tesla refusing to take orders in China for two of its imported US models. This could also mean that the trade agreements, both Bi-lateral trade agreements and Free Trade Agreements, and its rigid monitoring will gain significance. Countries that are saddled with higher tariffs could start using lower tariff jurisdictions to route their products, and a key question for determination will be the country of origin for the products that are being imported from such lower tariff countries. Clearly, as a step forward, India needs to strengthen its house to ensure that the certificate of origin for goods that are claimed to be manufactured in India are not issued in a casual manner and appropriate verification and checks are carried out.
Eventually, the most fundamental factor is that tariffs on imports are borne by the importer of goods [in this case the US importer]. Thus, any increase in tariffs directly impacts their costs and their progress. Where possible Indian exporters, who are suppliers of essential items or in a monopolistic position, would be able to create contractual safeguards for themselves. It's really the vulnerable and small / medium players that would need the extra boost to weather the storm. However, all players need to look or relook at certain elements in the contracts, one such being the scope of the force majeure clauses and whether it covers geopolitical conditions like the present to provide any protection to the exporters on delivery delays or allow them to terminate / suspend the contracts where the price derived from the supply is no longer viable. Also, going forward, parties should ensure to evaluate and consider various benefits like duty drawback available to US importers, trading on first sale rule [where duty is paid on the sale value of the first sale and ultimate value charged to the US exporters], sale through FTZs etc, to minimize the impact of duty fluctuation on their exports. Ultimately, parties should have inbuilt mechanics in their contracts, to allocate increased costs [from enhanced tariffs] between parties in pre-identified ratios, depending on which party has a higher risk appetite. Doing all this may not wipe out risk but will at least ensure continuity of business even in difficult times. As for the small and medium businesses that have very little power in the market, have no option but to look inward and the Government would need to step in and provide the necessary subsidy / support to counter the impact of such a rise in tariffs for them. One such step could be bringing back the export incentives and benefits that were discontinued earlier because of a complaint filed by the [none other than] US before the WTO.
Originally published by Taxsutra on 14 April 2025
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