What are Reciprocal Tariffs? How Will It Impact India?

Reciprocal tariffs are levies that a nation imposes on imports from another nation, equal to the tax rate that the other nation imposes on its goods. The principle is to create a system in which "if they charge us, we charge them -- an eye for an eye, a tariff for a tariff, same amount".

What are Reciprocal Tariffs?

Tariffs are levies imposed on products imported from other countries. Reciprocal tariffs refer to the US taxing the importing nation by the same tax rate with which they are taxing the US. This system would bring US tariffs on imports in line with other nations' tax rates. There is no official definition for 'reciprocal tariffs' in international trade, but rather a term applied to customs revisions that are aimed at being reciprocal and equitable in trade.

To achieve this reciprocal tariffs can be increased on imports to the level at which other nations impose on American products. Tariff equivalence across various products could raise the average tariff rate of the United States by about two percentage points.

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Possible Impact on India

Financial analysts in major financial institutions have cited India as uniquely vulnerable to possible dangers under the scheme.

• Higher tariffs: India is one of the countries with significantly higher relative tariff rates and hence is vulnerable to retaliatory tariffs. India's weighted average effective tariff on US exports to India is 9.5% compared with a 3% tariff rate on India's exports to the US, Nomura said.
• Weak sectors: Tariffs reciprocal to the US could hit India's automobile, textile, and other industries. For instance, if India were to slap a 25% tariff on US automobiles, the US would then slap a 25% tariff on US imports of Indian autos.
• Wider impact: Tariffs reciprocal would lead to the door opening to "a general tariff increase" on emerging economies that charge high tariffs on US goods.

Historical Context

The Reciprocal Tariff Act of 1934 permitted the U.S. president to negotiate tariff pacts with other countries to lower tariffs in exchange for reciprocal tariff reductions in the United States. From 1934 to 1945, the U.S. entered into 32 reciprocal trade agreements with 27 nations. The Act was an institutional reform aimed at empowering the president to negotiate with other countries to lower tariffs in exchange for the mutual lowering of tariffs in the United States by up to 50%.

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Challenges

Having a product-based approach has its intricacies. Although the U.S. has comparatively low average tariffs, it has higher tariffs in "very politically sensitive" sectors like clothing, sugar, and pick-up trucks.