Impact of Reciprocal Tariffs Announced by President Trump

On April 24, 2025, U.S. President Donald Trump announced reciprocal tariffs, causing notable economic repercussions globally.

Economic Impact

• Commodity and Market Reactions:
  • Crude oil prices have decreased by nearly 14%, driven by fears of a slowdown in global trade.
  • Stock markets are experiencing volatility and downturns.
• Economic Uncertainty:
  • The announcement heightens concerns about a full-scale global trade war.
  • New trade tensions could result in higher inflation and slower economic growth.
• Challenges for Policy Making:
  • Lower-income economies face challenges adapting to the new global order while managing domestic issues.

Reciprocal Tariffs Explained

• Definition: A reciprocal tariff is a tax imposed by one country in response to similar actions from another country.
• Purpose: To protect local businesses, preserve jobs, and address trade imbalances.
• Short-term vs. Long-term Effects:
  • While benefiting local industries in the short term, they can disrupt supply chains and elevate consumer prices.

Regional Impact

• South Asia and Southeast Asia:
  • Economies heavily reliant on exports to the U.S., such as Vietnam (30% GDP) and Cambodia (25% GDP), are significantly affected.
  • High tariffs have been imposed on Vietnam (46%) and Cambodia (49%).
• Cambodia's Garment Industry:
  • The industry is significant for employment, with 750,000 workers; job losses are expected.
• Negotiation Challenges:
  • Smaller economies struggle to retaliate and largely depend on negotiations influenced by U.S. interests.

Tariff Calculation Formula

• Formula Use: Based on the trade deficit with the U.S. and elasticity assumptions.
• Criticism:
  • Uses a generalized approach not considering specific country trade barriers.
  • Excludes services, benefiting countries with higher service exports.

Impact on India

• Export Reduction: Predicted $7.76 billion (6.4%) drop in exports to the U.S. if tariffs are implemented.
• Strategic Responses Needed:
  • Secure balanced trade deals with the U.S.
  • Fast-track trade agreements with the EU, U.K., and Canada.
  • Strengthen ties with Russia, Japan, South Korea, ASEAN, and UAE.
  • Manage relations with China strategically.
• Potential Opportunities: India could leverage the situation, similar to the success of Apple’s iPhone exports (54% increase).

Recommendations for India

• Trade Policy Reforms:
  • Rationalize tariffs and simplify GST.
  • Improve trade processes and ensure fair quality standards implementation.