US President Donald Trump introduced tariffs under Liberation Day to address unfair trade practices. The tariffs include a 10% universal tariff on most imports, with higher rates for certain countries like India at 27%. This move is expected to have serious implications for India’s trade and economy, affecting various industries and potentially causing ripple effects in global markets.
The Liberation Day Tariffs: What does it Signify?
The Liberation Day tariffs signify a significant change in the US trade policy. The Trump administration believes these tariffs are essential to safeguard American industries and encourage more equitable trade.
Key aspects of the Liberation Day Tariffs:
- Universal 10% Tariff: Applied to almost all imports in the US.
-
Country-Specific Tariffs:
-
- India: 27%
- China: 34%, taking the total import tax to over 50%
- European Union: 20%
Imposing 27% tariffs on Indian exports is a response to India’s high tariffs on US goods. This decision may greatly affect the nation’s trade relationship with the US.
Impact of Liberation Day Tariffs on Indian Export Sectors
India is a major exporter to the US and this tariff will impact many key industries:
- Gems and Jewellery: The gems and jewellery sector in India exports goods worth $9 billion annually to the US. The new tariffs will raise prices for American consumers, which might reduce demand and cause losses for Indian exporters.
- Pharmaceuticals: Indian pharmaceutical exports, valued at $9 billion yearly, were not affected by the tariff increase. As a result, Indian pharmaceutical stocks increased after the announcement.
- Automobiles and Auto Parts: India’s auto industry, along with its parts manufacturers, depends on the US market. If Indian vehicles and components are more expensive in the US, it could decrease exports and lead to revenue losses.
- Textiles and Footwear: India’s textile and footwear industries have slim profit margins. Higher export costs may reduce competitiveness in the US market, leading to lower exports and job cuts.
- Chemicals: The chemical industry is a major Indian export sector impacted by the Liberation Day tariffs. Higher costs will reduce competitiveness, making it harder for Indian chemical manufacturers to maintain their US market share.
Economic Consequences for India
Trump’s tariffs could have severe economic consequences for India’s trade and economy.
- Reduction in Exports: Economists predict India’s exports to the US could decrease by $2 billion to $7 billion in the financial year 2025-26 because of tariffs.
- Disruptions in Global Trade Flows: The US has imposed high tariffs on many countries and this might cause global trade patterns to change.
- Stock Market Volatility: Stock markets worldwide experienced high fluctuations after the Liberation Day tariffs were announced.
Impact on Global Markets
Here’s how the Liberation Day tariffs would impact global markets:
- European Union: The European Union is planning to challenge the US tariffs at the WTO due to a 20% tariff. It may also impose retaliatory tariffs on American goods.
- China’s Response: China is dealing with tariffs over 50% and may retaliate. This could lead to a trade war affecting global trade.
- Effects on Emerging Markets: Countries like Brazil, Vietnam, and Mexico could benefit from companies seeking suppliers beyond India and China in response to these changes.
India’s Strategic Response to the Liberation Day Tariffs
India will likely take strategic actions to reduce the impact of Liberation Day tariffs and enhance its economic position. The government may prioritise trade diversification, retaliatory tariffs, and supporting domestic industries. This is aimed at decreasing dependence on the US market and protecting key sectors like pharmaceuticals, textiles, and IT.
Increasing Imports from the US to Reduce Trade Imbalance
India’s key strategy could be to increase imports from the US in specific sectors. This may help balance the bilateral trade deficit and improve trade relations between the two countries.
- Energy Imports: India’s increasing energy demand creates a chance to import more LNG and crude oil from the US. This helps reduce reliance on other suppliers and tackle trade imbalances.
- Aerospace and Defence: Increasing defence purchases in areas like aircraft, drones, fighter jetus, and missile systems could enhance India’s security and improve diplomatic relations with the US.
- Semiconductor: India can buy semiconductors from the US due to the global chip shortage. This can help support its electronics and tech industries by ensuring steady supply chains.
Strengthening Trade with Other Global Partners & Boost Self-Reliance
India is working to diversify its trade partnerships to reduce dependence on the US market. Moreover, India aims to boost domestic production to reduce dependence on U.S. imports and ensure economic stability in the long term.
-
Imposing Retaliatory Tariffs on US Goods
The government can impose retaliatory tariffs on American products. This tactic was used in 2019 when India imposed duties on US apples, almonds, and motorcycles in retaliation to American tariffs on Indian steel and aluminium. These tariffs aim to push the US administration to negotiate, prevent unfair trade practices, and ease India’s economic burden.
Conclusion
President Trump’s tariffs have led the way in a new era of global trade protectionism. India is now facing a 27% tariff on its exports, which could have significant economic consequences. These tariffs will impact various industries in India, requiring strategic policy changes to get through the evolving trade landscape. India needs to focus on diplomatic negotiations, trade diversification, and domestic industry growth to counter the economic effects of these tariffs. As global markets respond to these changes, it is uncertain how India and other affected nations will adjust to the new trade realities brought by Trump’s tariffs.
