Reciprocal Tariffs by the US: Impacts and strategies for India

Background:

The global trade has been disruptive to say the least ever since the new United States of America administration took charge on 20 January 2025. The President’s ‘America First Trade Policy’ aims to reinvigorate investment and manufacturing in the US by adopting ‘Tariffs’ as a centrepiece tool to achieve the policy objectives.

Even during his first term (2018-2021), President Trump had applied import tariffs on Steel and Aluminium under Section 232 of the Trade Expansion Act, 1962 citing national security concerns. He also imposed tariffs on imports from China under Section 301 of the Trade Act of 1974 on the grounds of unreasonable Chinese Intellectual Property Rights (IPR) related practices. However, the frequency and extent of application of tariffs as a US policy instrument has increased multi-fold in Trump’s second term.

The President’s second term has seen tariffs of 20% imposed on imports of all goods from China and Hong Kong; an increase of tariffs of up to 25% on Aluminium along with withdrawal of all previous exemptions with an expansive definition of derivatives of Steel and Aluminium covered within the scope of tariffs; a 25% tariffs on Automobiles (covering passenger cars and light trucks) and certain Automobile parts with some exemptions granted to imports from Canada and Mexico. 

The latest to the addition is the much-awaited reciprocal tariffs under the Executive Order 14257 of 2 April 2025 (‘EO’). The EO aims to address the United States’s escalating goods trade deficit (~$1.2 trillion in 2024) with its trading partners. The EO targets countries which have high trade deficits with the US on the presumption that non-reciprocal trade practices by those trading partners are a primary driver of the trade deficit which necessities immediate action.

The reciprocal tariffs are claimed to mirror the trade barriers imposed by trading partner nations on US exports of goods. The EO's tariffs measures are far-reaching, affecting nearly all US trading partners, with significant implications for global trade dynamics.

Legal basis:

The US president has used his powers under the International Emergency Economic Powers Act, 1977 (‘IEEPA’) to declare a ‘national emergency’, a prerequisite for taking action under the IEEPA. The EO treats trade deficit of US with its trading parties as a national emergency and a national security risk to the US which is hollowing out the US manufacturing, making it over-reliant on foreign goods and undermining its military readiness and industrial capacity.

Tariff structure:

Effective from 5 April 2025, the EO introduces a base 10% tariff on all imports into the US from all countries. Effective from 9 April 2025, this 10% tariffs are set to increase to country-specific reciprocal tariffs ranging from 11% to 50% on 57 countries given in Annex-1 at the rates indicated against each country. The rates applicable to India along with some of the key Asian countries are given in the table below:

[1] To reduce the risk of transshipment and evasion, the tariffs imposed by the present EO on China shall also apply to products of Hong Kong and the Macau Special Administrative Region.

* includes products of Hong Kong and the Macau Special Administrative Region. Products of China and HK already suffer additional IEPPA tariffs of 20% imposed under previous EOs taking cumulative 54% tariff rate for China apart from Sec 301 tariffs and normal MFN custom duties.   

**Annex-1 as originally issued specified 27%, but was corrected later to 26%

Transitional provisions:

The duties do not apply to goods which are loaded onto a vessel at the port of loading and in transit on the final mode of transit before 12:01 am EST on 5 April 2025, and 9 April 2025, respectively.

Exempted goods:

1. Articles covered by 50 U.S.C. 1702(b): Covers postal communications; certain donations like food, clothing, and medicine; certain information or informational materials like publications, films, posters; and certain personal use items like baggage.

2. Goods already covered by Section 232 Tariffs: Steel and Aluminium articles and their derivatives, Automobiles and specified automotive parts and articles that may become subject to future actions under Section 232 of the Trade Expansion Act of 1962.

3. Other products listed in Annex II: These include goods such as certain inorganic and organic chemicals, copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, and energy and energy products.

4. Articles from sanctioned countries: like Russia, Belarus, Cuba and North Korea articles. Goods from these countries already have high tariffs.

5. USMCA compliant goods: The goods imported from Canada and Mexico into the US which are complaint with the rules of origin under the United States-Mexico-Canada Agreement (USMCA).

6. Non-USMCA compliant goods: The goods imported from Canada and Mexico into the US which are not complaint with the rules of origin under the USMCA continue to be subject to tariffs under the previous EOs (25% tariffs except energy or energy resources and potash imported from Canada/Mexico which have 10% tariffs).

Duty only on non-US content:

The duty applies only to the non-U.S. content of a subject article, provided at least 20 percent of the value of the subject article is US originating. The table below illustrates by taking India’s 26% duty rate as an example:

As can be seen, with the increase of US content, the effective tariff rate appliable to imports of goods into the US reduces. The ‘US content’ is the value of an article attributable to the components produced entirely, or substantially transformed in, the US.  

Duty drawback:

Unlike previous EOs where drawback of additional duties is not allowed (for instance, the IEEPA tariffs of 20% on products of China and HK), the present EO does not explicitly provide for disallowance of duty drawbacks of reciprocal tariffs which suggests that drawbacks of reciprocal duties paid under the EO are available. This may reduce the burden on US importers who import for manufacture and re-export purposes.

Calculation of reciprocal Tariff:

The country-specific reciprocal tariffs have been calculated based on the value of trade deficit which the US has with the respective country, divided by the value of imports from that country into the US. The calculation also factors in the price elasticity of import demand and the elasticity of import prices with respect to tariffs. Finally, the calculated rate has been divided by 2 to calculate the ‘discounted rate’ for a country. The calculation methodology is designed in a manner such that a country with higher trade deficit with the US suffers a higher rate of reciprocal tariff, the underlying assumption being persistent trade deficits are due to a combination of tariff and non-tariff barriers by the trading partner country that prevent trade from balancing.

Challenges and opportunities for Indian business:

India is currently in the process of negotiating a Bilateral Trade Agreement (BIT) with the US. With reciprocal tariffs in place, the US may claim to have an upper hand in the ongoing negotiations, however, the Indian Government needs to be dynamic and adept in negotiating a deal with the US which is beneficial to both sides. It provides an opportunity to the Indian industry to engage with the Indian Government on desired concessions and possible elimination/reduction of reciprocal tariffs. In addition, the Indian business, particularly Indian exporters, should take the following steps to navigate the challenges and maximise the opportunities presented by the changing global trade order.

* Identify Tariff arbitrages: Analyse tariff impact on specific sectors/commodities/tariff lines to identify the tariff arbitrage opportunities for growth vis-à-vis other competing nations. It can be seen that many competing Asian countries have higher reciprocal tariffs as compared to India.

* Re-calibrating the supply chains: Tariff mapping of supply chains for inputs considering existing concessions available under India’s Free Trade Agreements (‘FTAs’) with partner nations/blocks along with cost benefit analysis of sourcing inputs from the US.

* Appropriate pricing strategies: Recalibrating the pricing strategies to maximise opportunities and minimise the risk of unfair pricing leading to dumping investigations. The businesses can also take advantage of ‘first sale’ principle applied by the US for determining the customs value for assessment in reducing the duty impact of new US tariffs.

* Classification and origin checks: With tariffs rates and exemptions contingent on proper tariff classification and meeting the country-specific origin criteria particularly for products produced at various stages in multiple jurisdictions, the businesses must relook at the customs compliance to take maximum benefit and avoid subsequent penalties and fines.

India’s response to the changing global order in trade must be multifaceted, balancing diplomatic negotiations with economic diversification and targeted industrial support. By adopting a proactive and adaptive approach, India can not only mitigate the immediate impact of the tariffs but also emerge more resilient in the face of trade challenges.

[The author is a Partner in International Trade and WTO practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]