Trump has decided to go on a tariff war with multiple countries, including India. And this is something you need to know. This war is far more lethal and far more silent than actual bullets and snipers. A war that is extremely risky for India, as America is India’s biggest trade partner, while India doesn’t even rank in America’s top 10.
But the interesting thing is that this move is not only hated by Indians but also Americans.
What Is Reciprocal Tariff and Why Is It Happening?
Now why? What is this reciprocal tariff all about? Why is Trump using them? And more importantly, what will be the impact of this on India’s economy and business?
We have consumed hundreds of pages of reports and articles along with interviews to make this the only video you need to watch on this topic.
Now before we begin — welcome to the channel. I’m Abishek. We are now part of Zerodha’s media network. At Grotex, we are a community of 4,000 members from India’s top technology companies. You can check more from the link in the description.
How Do Tariffs Work? Understanding the Trump Tax
Now coming back to the video — let’s understand how these taxes even work and what this Trump tax problem is.
See, anything that gets imported in any country gets taxed. For example, if India makes a Samsung smartphone at a factory cost of $300, before it gets exported to the US, there’ll be multiple additional costs of transport and import duties that will pile up. Then there are additional margins for wholesalers and retailers on top of all of this. This all adds up to the final price that the customer pays.
And if you increase one small part of this chain, which is the import tariff, you basically make the product expensive for US customers.
Now this means products at Walmart and other stores will become expensive. This also means fewer sales and chances of getting replaced by cheaper products from other countries who are also exporting to the US.
The Tax Differential and Unfair Trade Argument
Not all countries charge the same taxes for importing from each other — even for the same products. And here’s a list of a number of sectors like textile, jewelry, electronics, where this tax differential exists.
This is exactly what Trump calls unfair trade. And his solution is simple: reciprocal tariffs.
His logic? If the US is being charged higher tariffs on export, then other countries should face the same consequence when they are selling to the US.
Why Would Trump Want This?
Well, the answer is very simple. The US has a massive trade deficit of a trillion dollars and it’s been there for the longest time. In fact, this is the largest trade deficit for any country in the world.
A trade deficit means that a country is importing more than it is exporting. A trade surplus is basically the complete opposite of this. For example, countries like China, Germany, and Japan are in a trade surplus. While on the other hand, countries like the US, UK, and India are in a trade deficit.
Trump thinks that this tariff will boost manufacturing within the US and protect jobs in the long run — and it will grow the economy. Sure, he has already slapped these higher taxes on the countries that import the maximum.
But everyone — including Americans — are calling it foolish.
The Real Cost of Tariffs for Americans and Indians
Why? Well, because everyone knows that the initial pressure will come on American consumers. In fact, US inflation will rise from 2.9% to 4%, which is almost 2x of the current inflation levels.
Now, we need to understand this because the India-US relation is a delicate one. We need the US, and I’ll tell you why.
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The Real Trade Numbers Between US and India
Now let’s go ahead and carry on with our episode.
US has been India’s largest trade partner. But here’s the kicker: When we look at US’s top trading partners, we don’t even show up.
We exported goods worth $75 billion in 2023 — almost twice what we imported from the US. This number makes the US’s share at 18% of our total exports.
Now if you look at the tariffs, you would see that we charge 15% tariff on US exports to India — this is weighted average. And when we export Indian goods to the US, they charge us 3% effective tariff.
You see the problem?
The Role of GSP (Generalized System of Preferences)
And I know you must be thinking, why is this rate different in the first place?
Well, this is exactly where a three-letter word called GSP comes in — Generalized System of Preferences.
And while it might sound complicated and technical — trust me, it’s not.
Think of it like a preferential treatment given by the US to a few countries. The idea was simple: give and take. US wanted to help smaller economies grow — like that of India — by making their exports cheaper in the US. And in return, US would access Indian markets with fairer trade conditions.
But in 2019, when Trump came to power for the first time, he scrapped India’s GSP status.
He pointed out three main issues:
- Higher tariff on US goods (as discussed earlier)
- Tighter e-commerce rules in India that affected US’s darling companies — Amazon and Walmart’s Flipkart
- Price caps on medical devices made by US companies that are selling to India
All of these put together made Trump pull the plug.
Should India Worry?
Now you must be wondering: should we as Indians really worry about this?
See, while these tariffs are expected to cost us ₹58,000 crores, if you zoom out from the GDP point of view, you would see that India won’t take as big a hit — because Indian exports to the US are only 2% of our GDP.
By the way, for context — we have roughly 13% of our GDP dependent on goods exports.
So while exports are important, high US tariffs won’t be a solid, devastating blow to our economy.
That said — don’t forget that US remains India’s biggest trading partner — which means the risk may be small, but it’s real.
What Does It Mean Going Forward?
You will start seeing Indian products in the US becoming more expensive, with price hikes between 6 to 10%. This will make us less competitive.
The biggest hit will be on the top 15 sectors where export value to the US is more than a billion dollars.
The second major risk is to Indian industry — because as part of the compromise, India is expected to slash import taxes on US companies. Now this will make American products cheaper in India. It will force our domestic businesses to compete more aggressively.
For context — the tax on motorcycles and American whiskeys have already made Harley-Davidson and brands like Jim Beam cheaper in India.
The Silver Lining
Is this all bad? Not really.
The silver lining is that India knows how to negotiate smartly and might use other ways to arrive at better deals.
How? Well, this could be happening with better defense deals — like the F-35 jet contracts to India — along with bigger oil and gas deals. In fact, our oil imports from the US have already doubled.
So it’ll be interesting to see how the final trade agreements shape up.
Conclusion
One thing is clear though — both countries need each other.
Let’s not forget that higher tariffs and rising prices will slow down US consumption in the short, medium, and long term. And India is not alone — these tariffs are also hitting our neighbors: Bangladesh, Vietnam, and China.
This means, despite the price hike, India still has a chance to stay competitive.
FAQs
Q1. What is the Trump tariff war all about?
It’s about reciprocal tariffs imposed by the US to counter what it considers unfair trade practices by countries like India.
Q2. How much will India lose due to these tariffs?
The estimated impact is around ₹58,000 crores.
Q3. What is GSP and why was it scrapped?
The Generalized System of Preferences (GSP) offered preferential tariff treatment to countries like India. It was scrapped by Trump in 2019 due to issues like high tariffs, tight e-commerce rules, and price caps.
Q4. Will Indian exports be severely affected?
While exports to the US form just 2% of India’s GDP, certain sectors could take a significant hit due to reduced competitiveness.
Q5. Is there a silver lining for India?
Yes. India could use this situation to negotiate better trade and defense deals while continuing to diversify its export destinations.
