Why in News: Reciprocal tariff pause expires July 9. A new deadline of August 1 provides a small window for critical trade agreements—especially the India–US interim deal
Definition:
A reciprocal tariff is a tax a country imposes on imports from another country in direct response to that country’s tariffs or trade restrictions. It’s based on the principle of mutual treatment in trade.
Example:
If Country A imposes a 25% tariff on steel from Country B, then Country B may respond with a 25% (or higher) tariff on key exports from Country
Purpose:
- To protect domestic industries from unfair foreign competition
- To preserve and generate local jobs
- To address trade imbalances or retaliate against discriminatory practices
- To push other countries toward fairer trade terms
Economic Impacts of Reciprocal Tariffs-
Higher consumer prices & inflation
- Tariffs increase the cost of imported goods; these costs are often passed on to consumers. Example: Tariffs on electronics and apparel mean families pay noticeably more for everyday goods.
Government revenue boost
- Tariffs raise customs duty receipts, increasing government revenues.
Negative effects on exports & retaliations
- Imported goods become costlier; targeted countries often retaliate with their own tariffs.
Disrupted supply chains & investment uncertainty
- Tariffs can fracture intricate global trade networks and deter investment.
Challenges for Policy Making:
- Lower-income economies face challenges adapting to the new global order while managing domestic issues.
Concerns for India-
Sector Specific Impacts
- Electronics Sector: Nearly $14 billion worth of electronics exports from India may be hit by new US tariffs.
- Gems and Jewellery: Over $9 billion worth of exports could be affected.
- Auto Parts & Aluminium: Not impacted by the new 26% tariff, but still face an existing 25% tariff announced earlier by Trump.
- Pharma & Copper at Risk: Potential 200% pharma and 50% copper tariffs could decimate margins for suppliers to the U.S. market.
- Auto Exports: $2.9 billion in exports face jeopardy; India has launched a WTO challenge.
Strained Trade Negotiations
- U.S. pressure to liberalize agriculture and GM crop tariffs during talks could force India to compromise on sensitive sectors.
Rupee Volatility & Financial Market Pressure
- Trade-related uncertainty has weighed on the rupee (~₹85.7–85.9/USD) and caused declines in export-heavy sectors due to bearish foreign investor sentiment.
SMEs & Exporters Hit from Rising Costs
- Small businesses across textiles, gems, chemicals, and electronics face sudden, disproportionate cost surges, reducing competitiveness.
Geopolitical & Strategic Consequences
- Trade strife could strain India–U.S. relations, risking strategic cooperation in the Indo-Pacific region.
Economic slowdown
According to some experts, the reciprocal tariff could shave off India’s GDP growth rate by up to 50 basis points to 6 %.
Positive Impacts on India
Boost to Export Competitiveness & Market Share
- Example: With U.S. tariffs higher on Bangladesh (35%) and China (~20–46%), U.S. buyers are shifting to more cost-effective Indian suppliers.
Encouraging Supply Chain Realignment
- Global investors are increasingly prioritizing India as an alternative, driven by U.S.–China trade tensions.
Strengthening Domestic Manufacturing & High-Tech Partnerships
- Tariff dynamics push India to adopt advanced technology partnerships and boost local production.
Conclusion
- Tariff war needs to be avoided to prevent mutual economic harm as it would be self-defeating and will impose clear costs on both India and the U.S.
- India could de-escalate tensions and foster better trade relations by diplomatic negotiations.