 "US President Donald Trump gestures during a joint press conference with Prime Minister Narendra Modi at the White House in Washington, DC, on, February 13. Trump has ordered a plan to impose reciprocal tariffs on trading partners including India. Reuters")
Tariffs. That has been a big concern as Prime Minister Narendra Modi visited the United States for a meeting with Donald Trump. Ahead of the bilateral, the US president warned of what was coming: Reciprocal tariffs.
Sticking to one of his campaign pledges, Trump on Thursday pushed for a more balanced trade, instructing agencies to investigate a plan for new reciprocal tariffs to boost the country’s revenue, reports CNN. This probe is expected to be complete by April 1.
“They charge us a tax or tariff and we charge them the exact same,” Trump told the media in the Oval Office before signing the “Fair and Reciprocal Plan.” “Nobody knows what that number is unless you go by country.”
India is going to be no exception. “India has more tariffs than nearly any other country,” Potus said while singing the executive order. “We will charge them no more, no less. They charge the US tax or tariff, and we will charge them the exact tax and tariff, very simple.”
So what happens next? We tell you about reciprocal tariffs and their possible impact on India and the world.
What are reciprocal tariffs?
Tariffs are taxes imposed on imported goods. Reciprocal tariffs are levying these taxes on trading partners that are equal to the ones that they have set on American goods. It would mean the US would hike the rates of imports to match the level that other countries apply to their products and officials said that the levies could be imposed country by country.
Imposing reciprocal tariffs was one of Trump’s big promises during the election campaign.
“An eye for an eye, a tariff for a tariff, same exact amount,” he had said back then. It’s what he has implemented now.
“It doesn’t matter whether it’s strategic competitors like Communist China or allies like the European Union or Japan or Korea,” a White House official told reporters Thursday. “Every one of those countries is taking advantage of us in different ways, and the president characterises this as a lack of reciprocal trade.”
But besides considering the tariff rates other countries impose on US goods, Trump’s plan will also look into non-tariff factors like value-added taxes (VATs).
How and when will reciprocal tariffs be implemented?
Trump ordered the US Commerce Department and the US Trade Representative’s office to recalculate US tariff rates for each country, product by product. This will be in consultation with the Treasury and the Department of Homeland Security.
This is a massive undertaking, aiming rapidly to examine more than 17,000 import tariff product codes, potentially for each of the 186 countries that now enjoy Most-Favored Nation trading status with the US.
Trump’s order calls on the Office of Management and Budget to report within 180 days on all fiscal impacts of the tariff actions on the finances of the federal government.
According to Howard Lutnick, Trump’s Commerce Secretary nominee, this exercise will be complete by April 1. It is then up to Trump to decide, as of April 2, when to enact any of the new recommended tariffs, he was quoted as saying by CNN.
However, a White House official said that Trump would not have to wait for that report to begin imposing tariffs, taking weeks not months, as the administration will examine tariffs on a country-specific basis, and there is a lot of existing data that will speed the process, reports Reuters.
How will India be affected?
Trump announced the reciprocal tariffs ahead of his meeting with Prime Minister Narendra Modi at the Oval Office.
Addressing reporters, the president said that India is a “hard place to do business” because of their high tariffs. “But again, whatever they charge us, we’re charging them. So it works out very well. It’s a beautiful, simple system, and we don’t have to worry about charging too much or too little,” he said.
India’s tariff rates are the highest among the top 15 US trading partners, according to the World Trade Organization, with a simple average 17 per cent rate for all products compared to 3.3 per cent for the US.
Economists at global banks from Morgan Stanley to Nomura Holdings Inc have identified India and Thailand as among the nations most exposed to risks from Trump’s vow to impose reciprocal tariffs on trading partners, reports Bloomberg.
When questioned if the US was worried that India would shift their trade to China, Trump replied, “No, I’m not concerned about anything… I’m just doing what’s fair.”
The US president said that India could potentially avoid new tariffs if they bring more production to the US. “If you build here, you have no tariffs whatsoever. And I think that’s what’s going to happen. I think our country is going to be flooded with jobs.”
Trump and Modi had a detailed discussion on tariffs and trade, raising concerns on both sides about market access. They spoke about ways to address these issues and instructed the teams to work together on a trade deal to address these concerns and conclude such an agreement before the fall of this year, according to sources.
Which other countries will be hit by reciprocal tariffs?
Reciprocal tariffs might open the door to a broad tariff hike on emerging market economies that have high duties on US products, JPMorgan analysts expect.
Apart from India, the White House referred to countries like Brazil as it unveiled the latest tariff plan. It pointed to America’s ethanol tariff at 2.5 per cent while Brazil charges an 18 per cent rate on US ethanol exports, for example. Under Trump’s plans, the US rate could be raised to match Brazil’s or the Brazilian rate could be lowered to the US level.
Southeast Asian and African countries will be badly hit as they have a vast difference in tariff rates on US imports compared to what America charges them. A White House official said that countries with large US trade surpluses or especially “egregious” cases could be targeted first. China, Mexico, Vietnam, Ireland and Germany had the five largest goods trade surpluses with the US, according to the country’s Census Bureau.
The European Union collects a 10 per cent tariff on vehicle imports, four times the US passenger car tariff rate of 2.5 per cent, although the US tariff on highly profitable pickup trucks is 25 per cent.
Officials also hit out at the European Union over its 10 per cent tariff on imported cars in contrast to America’s 2.5 per cent levy, as Trump called the bloc “absolutely brutal” on trade.
Why does Trump want to impose reciprocal tariffs?
Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics (PIIE), said that Trump’s policy appears to be aiming to get countries to “discriminate” in favour of the US. “Suppose that Brazil drops its tariffs on US autos, but keeps its tariffs the same on all foreign autos” for example, he added.
Tariffs are a big part of Trump’s plan to raise revenue to pay for the extension of his 2017 tax cut on top of other promised tax cuts, reports CNN.
Trump has also used the tariff threat to arm-twist nations. After he announced tariffs on Mexico and Canada, he struck deals to delay the levies. In exchange, Mexico increased the number of Mexican national guard forces at the southern US border. Canadian Prime Minister Justin Trudeau agreed to clamp down on migration and the flow of the deadly drug fentanyl.
What does the new tariff plan mean for the US and the world?
Analysts also note that the threat of tariffs creates uncertainty as a negotiating tactic. This contributes to a situation that ultimately weighs on American and foreign businesses.
There is fear that the new reciprocal tariffs could trigger a global trade war.
When Trump was asked if prices could rise because of tariffs, he said that they “could go up somewhat” at first, but then “prices will also go down.”
However, economists warn that American consumers, already facing inflation, could feel the heat of reciprocal tariffs.
Right now tariffs have been imposed on Chinese goods. There is a strict 25 per cent tariff on steel and aluminium that was imposed earlier in the week and the 10 per cent across-the-board tariffs introduced last week. Trump has paused the 25 per cent tariffs on Mexico and Canada until March 1.
The total direct cost of the import taxes on Chinese, Mexican and Canadian goods would equate to a tax hike of more than $1,200 (Rs 1.04 lakh) per year for the typical American household, Peterson Institute researchers have found, reports CNN. Reciprocal tariffs will only add to this.
With inputs from agencies