The global economy is at a crossroads as the US introduces a disruptive reciprocal tariff model, challenging the foundation of global trade. This shift threatens developing nations, including India, by undermining WTO principles
The world is facing an uncertain and challenging time. The reciprocal tariff model introduced by the new Trump administration’s economic policies has disrupted the seamless flow of global trade and commerce. This poses a significant economic challenge for developing nations, as it undermines the World Trade Organization (WTO) model, which upholds the principle of higher tariffs imposed by developing nations on imports from developed nations to protect their domestic industries.
The immediate consequences include the crippling of these industries, creating an unequal playing field. Rising unemployment and a slowdown in export-driven growth appear inevitable. India is not immune to this trade war, where global cooperation is being overshadowed by forced trade negotiations favoring the stronger party. A new world order is taking shape, and India must navigate this landscape not cautiously, but courageously.
Between April 2024 and November 2024, India, the second-largest trading partner of the US, exported goods worth USD 52.89 Billion while importing USD 29.63 Billion, resulting in a trade surplus of USD 23.26 Billion in India’s favor. This trade imbalance is at the heart of the issue. India’s key exports include diamonds, medical appliances and accessories, jewelry, agricultural products, refined petroleum, rice, textiles and apparel, automotive components, chemicals and petrochemicals, and machinery. Meanwhile, India’s imports from the US primarily consist of mineral fuels and oils, pearls, precious and semi-precious stones, nuclear reactors, boilers, machinery, electrical equipment, crude petroleum, petroleum products, electronic components, and gold.
A closer look at these product categories reveals that India has room to further expand its market share in these sectors by enhancing cost efficiencies and quality standards. In contrast, the US has limited options for increasing its exports to India, apart from pushing crude oil and defense products-both heavily supported by the US government. This is due to the cost and consumption limitations of US goods in the Indian market. Consequently, the US, in its bid to reduce the trade deficit, will likely attempt to penetrate new segments currently dominated by Indian domestic industries, such as automobiles.
This is not just a trade negotiation, it is a full-fledged trade war aimed at capturing market share with little regard for global cooperation or diplomatic considerations. The reciprocal tariff strategy is a veiled attempt to lower tariffs and open new markets for the US. The true agenda is now apparent.
The concept of reciprocal tariffs, introduced under the Trump administration’s “Fair and Reciprocal Plan,” seeks to impose high import duties on trade partners in an effort to reduce trade deficits. The administration argues that exporting countries impose high tariffs on US products. However, this is not a
product-to-product reciprocity but a nation-to-nation policy. The term “reciprocal” itself is misleading, as there is no defined framework governing its application. Instead, it grants the US government the flexibility to impose tariffs arbitrarily, leaving exporting countries guessing about their potential impact and forcing them to react after the tariffs are already in place. In a world marked by unequal wealth distribution, economic development, and technological progress, these tariffs are more punitive than reciprocal, disproportionately harming developing nations.
In international trade, the true meaning of reciprocal tariffs, as governed by the WTO, differs significantly from what the US administration is advocating. Under Article 22.4 of the WTO’s Dispute Settlement Understanding, reciprocity serves as the basis for tariff retaliation when a country fails to comply with a WTO ruling. Additionally, Article XXVIII of the General Agreement on Tariffs and Trade (GATT) establishes legal guidelines for recalibrating trade agreements and calculating compensation. What the US is currently promoting deviates from these principles.
As global trade policies continue to be shaped by dominant economies, the US’s reciprocal tariff strategy is expected to cause significant disruptions until countermeasures emerge to stabilise the situation. However, the key question remains: Will this retaliatory tariff policy achieve its intended goal for the US? The likelihood is low. A closer analysis reveals that the US trade-to-GDP ratio stands at just 26.9 per cent, compared to 38.4 per cent for China, 46.8 per cent for Japan, and 50 per cent for India. Moreover, US import intensity is nearly three times higher than its export intensity. The real issue behind the US trade deficit is not high foreign tariffs but the poor performance of US merchandise trade, which accounts for only 8.3 per cent of global exports. In contrast, the US enjoys a USD 200 Billion trade surplus in the services sector, making it the global leader in both imports and exports of services. The primary constraints on US merchandise exports stem from supply-side limitations and a failure to achieve economies of scale, not unfair tariff structures. Given the strong global demand for US service exports, why should the US merchandise trade struggle to compete?
With a population of 1.4 Billion, India must support its citizens through various welfare programs funded by budgetary allocations. These expenditures rely heavily on trade and commerce, with export-driven industries playing a crucial role. India’s ability to produce low-cost goods sustains its economy and provides employment to millions. Protecting these industries is imperative.
Allowing an influx of US products into new market segments could disrupt domestic industries in the short term and erode supply chains in the long run if US manufacturers fail to achieve economies of scale in affordable segments. While India can afford to reduce its diamond exports to the US, it cannot risk destabilising its domestic industries.
It is time for India to adhere strictly to WTO guidelines and advocate for a globally accepted trade policy to counter coercive trade deficit measures. A production-linked incentive (PLI) scheme to boost domestic industries, along with stronger ties with alternative trading partners, can help mitigate the impact of reciprocal tariffs. India must remain vigilant-this phase is temporary, but its long-term economic stability depends on strategic resilience.
(The writer is an investment banker. Views expressed are personal)
