THE CONTEXT: The announcement of reciprocal tariffs by the United States under President Donald Trump—imposing additional tariffs on a country-wise and commodity-wise basis—marks a significant deviation from the multilateral trade order championed by the WTO. For India, this development is both a diplomatic challenge and an opportunity to recalibrate its external trade strategy, especially as it navigates its goals of export promotion, energy security, and a balanced current account.
UNDERSTANDING THE STRUCTURE OF U.S. RECIPROCAL TARIFFS
a) Nature and Calculation
-
- The U.S. has introduced an additional reciprocal tariff calculated by the following formula:
Reciprocal tariff = (-1 × ½) × [(Exports to U.S. – Imports from U.S.) / Imports from U.S.]
-
- For India in 2024=−21×87.4(41.8−87.4)=26%
- This is over and above existing commodity-wise tariffs and applied uniformly across all products unless exempted.
b) Commodities Exempted
-
- Includes pharmaceuticals, steel/aluminium, auto components, energy, semiconductors, and other U.S.-strategic resources.
SECTORAL IMPACTS ON INDIA: A TARGETED DISRUPTION
-
- India’s exports to the U.S. comprise a diversified basket. The main sectors likely to be impacted include:
-
-
- Electrical machinery
- Mechanical appliances
- Textiles (made ups)
- Refined petroleum products
-
-
- Pharmaceuticals and gems and jewellery, due to either exemption or inelastic demand, are relatively insulated. Importantly, India’s key competitors in these sectors—China, Vietnam, Bangladesh, Cambodia, South Korea—face equal or higher tariff burdens, potentially offering India a relative competitive cushion.
INDIA’S STRATEGIC DILEMMA: RETALIATE OR RECALIBRATE
India is confronted with a strategic choice: whether to retaliate with counter-tariffs or recalibrate trade policy to reduce exposure.
A. Why Aggressive Retaliation is Risky
-
- China’s experience is instructive. Its retaliatory stance led to U.S. tariffs as high as 245% on certain Chinese goods.
- Given India’s relatively modest export dependency on the U.S., such retaliation may lead to disproportionate consequences.
B. Trade Realignment: The Smarter Option
India can reconfigure its import basket by sourcing more goods—especially energy imports—from the U.S. For example:
-
- Increasing oil imports from the U.S. by $25 billion would bring down the reciprocal tariff to just 11.8%, close to the floor rate of 10%.
- This move would not affect the overall Current Account Deficit (CAD) but would alter the trade imbalance, resulting in lower penal tariffs.
This strategy is economically efficient and diplomatically viable.
WATCHING FOR COLLATERAL FALLOUT: RISK OF DUMPING
-
- Countries facing high U.S. tariffs—particularly China—may attempt to redirect exports to third countries, including India. This can result in:
-
-
- Market distortions
- Undercutting of domestic manufacturers
- Increased trade deficits
-
-
- India must remain vigilant by:
-
-
- Leveraging anti-dumping mechanisms under WTO rules
- Strengthening domestic quality standards and testing infrastructure
- Actively using the Directorate General of Trade Remedies (DGTR) for swift action
-
STRUCTURAL CONCERNS UNDERMINING THE WTO
1. Violation of the MFN Principle (Art. I, GATT 1994)
-
- U.S.-led discriminatory tariffs (e.g., Section 301 tariffs, reciprocal penalty rates) bypass Most-Favoured Nation (MFN) obligations, thereby fragmenting trade rules.
- Emergence of “weaponized interdependence” is replacing rule-based trade with power-based bargaining.
2. Paralysis of the Appellate Body
-
- Since 2019, the U.S. has blocked judicial appointments, rendering the WTO’s appellate mechanism dysfunctional.
- Over 26 pending cases (as of 2024) await resolution, undermining the WTO’s credibility as a fair adjudicator.
3. Rise of Preferential Trade Agreements (PTAs)
-
- Over 300 PTAs are now active globally, signalling a shift toward regionalism.
- India’s exit from RCEP in 2019 and its tilt toward bilateral FTAs (e.g., UAE, Australia, UK) is indicative of this realignment.
INDIA’S STRATEGIC ROLE IN REVITALISING THE WTO
A. Championing a ‘Development First’ Reform Agenda
-
- Advocate Special and Differential Treatment (SDT) for developing countries in new trade rules, especially in fisheries, subsidies, and agriculture.
- Push for recalibration of the TRIPS Agreement, especially for public health emergencies (e.g., COVID-19 IP waiver proposal backed by India and South Africa).
B. Pushing for New Trade Disciplines
-
- Lead negotiations on digital trade, cross-border data flows, e-commerce taxation, and platform neutrality, where norms remain underdeveloped.
- India’s Data Empowerment and Protection Architecture (DEPA) can serve as a model for ethical, sovereignty-based data governance.
C. WTO 2.0: Institutional Rebuilding
-
- Support reform of dispute resolution through a Multi-Party Interim Appeal Arbitration Arrangement (MPIA) with like-minded countries (EU, Canada).
- Propose the establishment of a Permanent Trade Facilitation Ombudsman for LDCs and small economies.
INDIA’S REGIONAL AND SOUTH-SOUTH APPROACH
1. Building South-South Trade Sovereignty
-
- Promote BIMSTEC–IMEC–IPEF as alternative regional value chains to counter de-globalization pressures.
- Anchor digital public infrastructure (DPI) partnerships with the Global South under the India Stack model (endorsed by World Bank, G20).
2. Strategic Use of IPEF (Indo-Pacific Economic Framework)
-
- While IPEF lacks tariff elements, India can shape rules in supply chain resilience, digital economy, and clean tech, reflecting its Act East and Indo-Pacific strategies.
THE WAY FORWARD:
1. Bilateral Engagement
Initiate negotiations with USTR for sectoral relief and flexibility
-
- Leverage the existing India-U.S. Trade Policy Forum and Commercial Dialogue to build consensus on non-tariff barriers (NTBs), IPR, pharma regulations, and digital services.
- Explore a “Targeted Tariff Suspension Agreement” for priority export sectors (e.g., electronics, textiles, gems & jewellery) drawing from the U.S.-Japan model of mutual exemption.
2. Import Rebalancing
Increase imports of U.S. oil, LNG, and machinery to reduce penal tariffs
-
- Utilize the tariff formula logic (reciprocal tariff = trade imbalance ratio) to strategically increase high-value imports such as U.S. ethane, LNG, crude oil, and capital goods.
- Helps lower India’s reciprocal tariff rate from 26% to potentially 11–12%, without impacting the current account deficit, as it’s merely a trade basket rebalancing.
- This aligns with India’s energy security diversification strategy and supports ‘Just Energy Transition’ pathways through cleaner U.S. fuels.
3. Export Diversification
Reduce overdependence on U.S. market by expanding into Africa, ASEAN, and EU
-
- India must rebalance its export strategy via Trade Infrastructure for Export Scheme (TIES) and Market Access Initiatives (MAI) to push into Africa’s AfCFTA bloc, ASEAN, and EU GSP+ frameworks.
- Key sectors: engineering goods, pharma, processed food, IT services, and renewable tech components.
- Reflects the “China+1” strategy and “Neighbourhood First” approach, reducing India’s vulnerability to single-market shocks.
4. Institutional Response
Use DGTR and WTO mechanisms to counter dumping and unfair trade practices
-
- Strengthen the capacity of Directorate General of Trade Remedies (DGTR) to deploy anti-dumping, countervailing duties, and safeguard mechanisms swiftly and transparently.
- Actively invoke Article XX of GATT (General Exceptions) to justify temporary import curbs where necessary to protect strategic sectors.
- Use real-time surveillance tools (Customs ICEGATE, GSTN intelligence) for early warning on dumping patterns — especially in electronics, chemicals, and solar panels.
5. Multilateral Advocacy
Lead coalition of developing countries to push for WTO revival and dispute reform
-
- Reinforce India’s leadership in the G-33 coalition, LMDCs (Like-Minded Developing Countries), and Africa Group to demand the revival of the WTO’s Appellate Body and reform of subsidy rules (especially in agriculture and digital).
- India’s G20 Presidency (2023) already initiated the Global South Narrative on rebalancing trade and climate justice; this momentum must be institutionalised at WTO MC14.
- Champion development-linked digital trade rules, resisting premature liberalisation of e-commerce and data localisation, protecting digital sovereignty.
THE CONCLUSION:
India’s trade strategy must reflect a calibrated synthesis of strategic autonomy, multilateral engagement, and pragmatic economic diplomacy. In a world of economic unilateralism, India’s “multi-alignment” doctrine in trade must ensure domestic competitiveness, inclusive growth, and systemic resilience through smart diversification, targeted realignments, and global rule-shaping.
UPSC PAST YEAR QUESTION:
Q. How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? 2018
MAINS PRACTICE QUESTION:
Q. In the backdrop of rising unilateral tariff actions and weakening multilateral trade norms. How can India balance bilateral pragmatism with multilateral leadership in safeguarding its trade interests and industrial resilience?
SOURCE:
Spread the Word