A tariff is a kind of percentage of tax levied on the value of the goods which are being imported from other countries. Recently U.S. Government introduced Reciprocal Tariff on 2nd April 2025 on 50+ countries. Lets understand deeper what are reciprocal Tariffs, reasons, and why it doesn't impact much on indian economy

What is Reciprocal Tariffs?

Reciprocal tariffs are basically when one country puts a tax on another country’s products in response to that country doing the same to its products.

For example, if Country A charges a 15% tax on Country B's steel, Country B might do the same to Country A's cars.

The idea behind these tariffs is fairness. The goal is either to protect the country’s own industries or to pressure the other country into lowering its taxes or restrictions.

These tariffs are a way to negotiate. If both sides keep fighting with tariffs, it can turn into a full trade war, like the one between the U.S. and China recently. But, if both sides are willing to back down, they could end up talking things out and reducing tariffs.

Reasons for Reciprocal Tariffs

Protectionism:

Reciprocal tariffs are often a tool to shield domestic industries from foreign competition, especially when other countries impose high tariffs or subsidies that give their producers an edge.

The idea is to level the playing field by mirroring those barriers, protecting American jobs and manufacturing. 

Economic Liberty in the USA:

This angle is trickier, but it could tie into the argument that reciprocal tariffs preserve the U.S.’s ability to control its economic destiny. By not letting other nations flood the market with cheap goods (often due to lower labour costs or government support), the U.S. maintains flexibility to prioritize its own workers and businesses.

It’s framed as a defence of free markets domestically, ensuring American companies aren’t undercut by unfair practices abroad, though critics might argue tariffs themselves distort liberty by meddling with trade.

To Ensure Fair Trade Practices:

This is a big driver. Reciprocal tariffs signal that the U.S. will not tolerate what it sees as exploitative or unbalanced trade policies, such as selling below cost to kill competition or currency manipulation.

The goal is to pressure other countries into negotiating better deals or dropping their own barriers. Think of it as a tit-for-tat strategy If you play fair, we’ll play fair; if not, we’ll match your game.

It’s been a recurring theme in U.S. policy, especially when dealing with trading partners accused of skewing the rules.

The table illustrates the tariffs imposed on goods from various countries, highlighting the discounted tariffs provided by the United States.

Here, most Asian countries, such as China, Japan, India, and others, are subject to relatively high counter-tariffs, which reflect their trade policies and economic relations with the U.S. These higher tariffs can be attributed to various factors, including trade imbalances, the need to protect domestic industries or other political and economic considerations.

The significant discounts provided to the U.S. (often around 50%) demonstrate the ongoing trade negotiations and efforts to promote favourable trade relations with these countries, despite their higher base tariffs.

Example: China faces a tariff of 68%, which is discounted to 34% for U.S. imports, while Japan has a tariff of 48% reduced to 24%. Similarly, India, with a tariff of 52%, sees a discounted rate of 26%.

BRICS Countries to be Focused Heavily

The USA is imposing reciprocal tariffs on various countries, with particular attention given to the BRICS nations “Brazil, Russia, India, China, and South Africa.” China, India, and South Africa stand out in terms of their tariff structures.

China, with a counter tariff of 67%, sees a significant discount, lowering the tariff to 34% for U.S. imports. Similarly, India faces the same tariff of 52%, reduced to 26%, while South Africa's tariff is 60%, discounted to 30%.

These figures reflect the trade dynamics between the United States and these emerging economies, which are key players in the global market. The higher base tariffs on BRICS countries, especially China and India, underscore their importance in the global supply chain and the U.S.'s strategic economic relations with these nations.

As major economic powers with growing markets, these countries attract significant attention in trade discussions, leading to policies that seek to balance protectionism with trade facilitation.

The discounted tariffs reflect ongoing efforts to encourage stronger trade ties despite the high base tariffs, showcasing the complexities of international trade relations within the BRICS group.

Reciprocal Tariffs Impact on India

Let’s break this down step-by-step to analyze India’s export composition, the sectors within the 18% of exports directed to the U.S., and the potential impact of recent U.S. reciprocal tariffs on the automobile and electronic sectors, while addressing your specific points.

India’s Export Composition Stands at 18% to the U.S:

• India’s total merchandise exports in FY 2023-24 were valued at approximately $437 billion (based on Ministry of Commerce data).
• The U.S. is India’s largest export destination, accounting for about 18% of this total, which equates to roughly $78.66 billion in exports to the U.S.
• This 18% encompasses a variety of sectors, with key ones including engineering goods, electronics, gems and jewellery, pharmaceuticals, textiles, and automobiles, among others.

Here’s an approximate breakdown of the major sectors contributing to this 18%, based on available data from the Ministry of Commerce and recent trade analyses:

These percentages are approximate and derived from aligning Ministry of Commerce data with the $78.66 billion total for U.S. exports. The “18% of India’s exports to be exported” seems to reflect the share destined for the U.S., which is already a realized figure rather than a future projection.

Let’s explore each major sector within this 18% U.S. export share:

Engineering Goods ($17.63 billion, 22%):

• This sector includes industrial machinery, electrical equipment, and steel products. 
• The U.S. tariffs impose a 25% duty on steel and aluminium, which could increase costs for Indian exporters. 
• However, India’s limited exposure to the U.S. in steel exports (compared to domestic consumption) may cushion the blow.

Electronics ($10.05 billion, 13%):

• This sector has grown significantly, driven by smartphone exports (e.g., Apple iPhones assembled in India). 
• The U.S. reciprocal tariff of 27% applies here, raising costs and potentially reducing competitiveness against rivals like Vietnam or China, which face higher tariffs (46% and 54%, respectively).

Gems and Jewelry ($9 billion, 11%):

• A significant export to the U.S., this sector faces the 27% tariff, increasing prices for U.S. consumers. 
• India’s 30% share of U.S. jewelry imports could be at risk if buyers shift to alternatives, though competitors like China face steeper tariffs.

Pharmaceuticals ($8 billion, 10%):

• This sector is exempt from the reciprocal tariffs due to its strategic importance in global supply chains and public health. 
• It remains unaffected and could even see growth as India negotiates trade deals with the U.S.

Textiles and Apparel ($9.6 billion, 12%):

• With a 28% share of India’s textile exports going to the U.S., the 27% tariff applies, raising costs.
•  However, competitors like Bangladesh (37%) and Vietnam (46%) face higher tariffs, potentially giving India a relative advantage.

Automobiles and Auto Parts ($2.6 billion, 3%):

• This includes auto components and limited vehicle exports. 
• The U.S. imposes a 25% tariff on automobiles and parts (separate from the 27% reciprocal tariff in some analyses), which could impact profitability. 
• However, India’s low export volume to the U.S. in this sector limits the overall effect.

Other Sectors ($21.77 billion, 29%):

• Includes petroleum products, chemicals, and cereals. 
• Some, like oil and gas, are exempt from tariffs, while others face the 27% levy, with varying impacts depending on demand elasticity and competition.

Impact of Reciprocal Tariffs on Automobile and Electronic Sectors

The U.S. reciprocal tariffs, announced in April 2025, impose a 27% levy on most Indian goods, with specific 25% tariffs on automobiles, auto parts, steel, and aluminium, and exemptions for pharmaceuticals and semiconductors. More than 50-60% of indian exports are to be not impacted only 10-40% of auto and electronics exports are going to be highly impacted.

Electronics ($10.05 billion to the U.S.): 

• This constitutes 13% of India’s U.S. exports. If 10-50% of this sector’s exports are affected ($1-5 billion), and over 50-60% of that portion faces tariff-related cost increases ($0.5-3 billion), the impact is notable but limited in scope. 
• Over 50% of iPhone exports (a key component) could see higher prices, but India’s lower tariff rate compared to China (54%) and Vietnam (46%) may mitigate loss of market share.

Automobiles and Auto Parts ($2.6 billion to U.S.): 

• This is just 3% of U.S. exports. If 10-50% ($0.26-1.3 billion) is affected, and over 50-60% of that ($0.13-0.78 billion) faces the 25% tariff, the impact is even smaller. 
• India’s limited vehicle exports to the U.S. (no significant passenger car exports since Ford EcoSport) means auto parts bear most of the burden.

Overall Impact on India’s Export Trade

Despite the tariff impact on automobiles and electronics, India’s export trade is not likely to be severely affected for several reasons:

Limited Exposure: Exports to the U.S. account for 18% of India’s total exports, and automobiles and electronics together account for roughly 16% of that 18% ($12.65 billion out of $78.66 billion). Even if 50-60% of the affected portion is affected, this is a small fraction of India’s $437 billion total exports (roughly 0.2-0.3% of GDP, per some economist estimates).

Sectoral Resilience: Pharmaceuticals (10% of U.S. exports) are exempt, and textiles (12%) may gain from higher tariffs on competitors. Engineering goods and gems face challenges but have diverse markets beyond the U.S.

Competitive Edge: India’s 27% tariff is lower than those of China, Vietnam, and others, potentially redirecting U.S. demand to India in electronics and textiles.

Trade Negotiations: India is pursuing a Bilateral Trade Agreement with the U.S., potentially reducing tariffs on $23 billion of U.S. imports to offset losses and diversifying into markets like the EU and ASEAN.

How it is Going to be in India?

Let’s compare the tariffs imposed on goods from China, Taiwan, the European Union (EU), and India as they relate to U.S. importers, and evaluate why India might emerge as an attractive manufacturing alternative based on these tariff rates. 

The analysis will focus on the reciprocal tariffs announced by the Trump administration on April 2, 2025, as part of the "Make America Wealthy Again" trade policy, alongside broader trade dynamics.

Tariff Comparison on High Manufacturing Economy's

China: China faces a 34% reciprocal tariff, in addition to an existing 20% tariff tied to issues like fentanyl trafficking, bringing the total tariff rate to 54%. This significantly increases the cost of goods imported from China, a global manufacturing powerhouse.

Taiwan: Hit with a 32% reciprocal tariff. Despite some exemptions for semiconductor investments (e.g., TSMC’s $100 billion U.S. investment), most manufactured goods from Taiwan still face this steep levy, affecting its competitiveness.

European Union (EU): Subject to a 20% reciprocal tariff. While lower than China and Taiwan, this still raises costs for EU-manufactured goods, particularly in sectors like automobiles and machinery, where countries like Germany and Slovakia are key players.

India: India faces a 26% reciprocal tariff. This is notably lower than China (54%), Taiwan (32%), and even Vietnam (46%), another manufacturing hub, though higher than the EU’s 20%.

Additionally, all countries face a universal 10% baseline tariff on imports to the U.S., which stacks onto these reciprocal rates. For simplicity, let’s focus on the reciprocal tariffs as the primary differentiator, as they reflect the administration’s targeted approach to specific trade imbalances.

Manufacturing Context

China: 

• Historically the world’s manufacturing leader, China dominates electronics, textiles, and machinery. 
• However, the 54% total tariff makes its goods far more expensive for U.S. importers, potentially pushing them to seek alternatives.

Taiwan: 

• A key player in semiconductors and electronics, Taiwan’s 32% tariff impacts high-value exports. 
• While exemptions for firms like TSMC mitigate some damage, smaller manufacturers face the full burden, reducing Taiwan’s edge.

EU: 

• The EU excels in high-quality manufacturing, including automobiles, machinery, and pharmaceuticals. 
• The 20% tariff, while significant, is the lowest among these major players, but still increases costs compared to pre-2025 levels.

India: 

• Emerging as a manufacturing contender, India specializes in textiles, pharmaceuticals, electronics, and auto components. 
• The 26% tariff, while not negligible, positions India favorably compared to China and Taiwan, and even Vietnam, which faces a 46% tariff.

Why India Might Attract U.S. Importers?

Cost Advantage Due to Lower Tariffs:

India’s 26% tariff is substantially lower than China’s 54% and Taiwan’s 32%. For U.S. importers, this translates to lower landed costs for Indian goods compared to these competitors.

For example, an electronic component costing $100 pre-tariff would incur an additional $54 from China, and $32 from Taiwan, but only $26 from India (excluding the universal 10% baseline for simplicity).

Compared to the EU’s 20%, India’s 26% is slightly higher, but the gap is narrow, and India’s lower labor and production costs could offset this difference.

Diversification Away from China:

The high tariffs on China align with a broader U.S. push to decouple from Chinese supply chains. India, with its growing manufacturing base and English-speaking workforce, is a natural alternative. Sectors like electronics (where Apple has shifted some iPhone production to India) and textiles could see increased U.S. interest.

Competitive Edge Over Other Asian Manufacturers:

Taiwan’s 32% and Vietnam’s 46% tariffs outpace India’s 26%. Vietnam, despite its rapid manufacturing growth, has become less attractive under this tariff regime. India could capture market share in labour-intensive sectors like apparel and electronics assembly, where Vietnam and Taiwan have been strong.

Existing Trade and Investment Trends:

India has been proactively courting U.S. businesses, with initiatives like tariff cuts on goods like Harley-Davidson motorcycles (noted in early 2025) signalling openness to trade. Its pharmaceutical sector, already a major U.S. supplier, benefits from tariff exemptions in some cases, further boosting appeal.

Scalability and Market Potential:

India’s large, skilled labour pool and government incentives (e.g., "Make in India") support manufacturing growth. While it lacks China’s scale, it offers a viable alternative for U.S. firms seeking to hedge against tariff risks elsewhere.

Challenges for India

Infrastructure and Scale: India’s manufacturing infrastructure lags behind China and the EU, potentially limiting its ability to absorb large-scale shifts quickly.

Higher Tariff Than EU: The 26% rate exceeds the EU’s 20%, which could keep some importers tied to European suppliers, especially for high-value goods where quality trumps cost.

Global Retaliation

Because of the recent tariff updates by the U.S. Government, there will be the possibility of raising issues in global markets. Markets can see a significant movement and can increase the country's volatility index due to the U.S. being the biggest economy in the world. All countries actively participate in trade relations, import and export, with the U.S. 

Conclusion

While the automobile and electronic sectors within the India’s 18% of U.S. export share will face increased costs due to reciprocal tariffs, the overall impact on India’s export trade is likely to be modest. The affected portions (less than 3% of total exports combined) are to be considered as small, exemptions protect key sectors, and India’s competitive positioning and diversification strategies should cushion the blow. Thus, India’s export trade is not likely to be significantly affected, though vigilance in trade negotiations remains critical.

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