Trump’s trade tariffs shook the entire world as all the countries are facing the heat in trade terms. We are no longer working in isolation. As of now the US administration is focused only on trade in goods but not in services. We have a huge majority of Indian exports in services. Both our imports and exports have declined in goods/merchandise while the exports in services have considerably increased and imports have very marginally gained. Through the service sector we have strategically balanced our trade with the change in the rules of the game. It’s high time for India to concentrate on strengthening trade ecosystem by lowering regulatory costs, fortifying infrastructure and up skilling the youth population to thrive in the global economy.

Everything – good or bad, comes with a price. Attaching a price tag for every benefit conferred on the nation seems to be the USP of Trump’s administration. He could be right as a business man himself as he envisages more long term benefits to the people of US with his trade policies with a little trouble in the short run though. In reality, we are all dead in the long run. Running a business is a far different game from running a country and managing requirements of its population. Welfare economics or social measures are supposedly the key terms in country’s administration while such terms are hard to be found in the books of business administration.

Sweeping global tariffs by Donald Trump has been the every day’s headline in the newspapers. Tariffs, in simple terms are a kind of taxes on imports of goods and services by a country. They are imposed by the government as an extra cost when the foreign products enter the country. There are several reasons as to why the governments impose tariffs.

* They are the source of revenues for the governments

* Government would want to discourage consumption of imported goods and encourage domestic production

* Tariffs are also used as a negotiation tool in geo politics to apply pressure on foreign governments.

It is a known fact how Trump’s administration has imposed tariffs on Canada, Mexico and China to address illegal immigration and Fentanyl issue.

Impact of Tariffs on the imposing economies and the imposed

In the imposing economies, the foreign goods become relatively expensive but the positive side of it is that it may improve the demand for domestic products leading to a spur in the domestic production and consumption. However if the domestic industries rely on imported materials like spareparts or any other components it will push the cost of domestic production of goods. Imposing tariffs is not always a one way street. The tariff imposer usually ends up facing reciprocal tariffs which are evident in the current scenario. For example, US car producers import most of the electrical components from China. As a result of Tariffs the imports from China will be expensive, increasing the cost of production for US car producers.

Usually, the countries on whom tariffs are imposed may alter their export strategies to reduce losses which of course takes some more time and investment. Tariffs are calculated as a percentage of the value of the item. Trump’s trade tariffs shook the entire world as all the countries are facing the heat in trade terms. With the rapid rise in technology there increased the exchange of information. We are no longer working in isolation. With the international bodies like “WTO” that facilitated new trade initiatives and arbitrating trade issues, the countries dropped trade barriers long time ago. During colonisation India supplied goods and services to British Empire – did no good to us but impoverished the nation entirely. Thanks to globalisation as India emerged as one of the global super powers and we now account for almost 3.5% of global services exports.

How the US tariffs may impact India:

RBI governor Mr. Sanjay Malhotra made a statement “Domestic growth inflation trajectory demands monetary policy to be growth supporting while being watchful on inflation”. In the wake of global uncertainties from US Tariffs, RBI has lowered GDP projection by a small margin. RBI during the last few months has been juggling with various tools to address the problems of liquidity and currency depreciation while trying to maintain the inflation rate. Undoubtedly, there is going to be a slowdown in the global trade due to the tariffs. While the changes in demand hit the economic growth in the short run resulting in low consumer spending, eventually it would increase the pressure on domestic market in the long run.

Can we look at the tariffs as a blessing in disguise?

Source: Ministry of commerce and Industry trade statistics

When we look at the structure of trade with the US, we find services component more prominent and this makes our stand different from countries like China and Vietnam. As of now the US administration is focused only on trade in goods but not in services. We have a huge majority of Indian exports in services.

The data shows that we are in a comfortable position owing to our imports and exports as compared to the previous year. Both our imports and exports have declined in goods/merchandise while the exports in services has considerably increased and imports have very marginally gained. Through the service sector we have strategically balanced our trade with the change in the rules of the game.

Can we hope to become resilient to these changes in the global trade? Certainly yes.

Source: Ministry of Commerce & Industry

Our exports to different destinations are expressively diversified accounting for only 18% to US according to the ministry of commerce and Industry. Yet we need to be agile to change our strategies and simply follow the rules of the game as and when the changes occur.

Firstly, we can focus on improving competitiveness in the manufacturing sector as we have a huge amount of internal or domestic demand, supplemented by congenial demographics. We are like a huge joint family with lot of young population and whatever is cooked gets consumed due to its internal demand for consumption.

Secondly, India has to review the imports and export balances with the other countries to create a more diversified basket of exports by including the markets like Africa and other parts of Asia.

Another way to tackle the issue is to follow Vietnam –US deal. Vietnam is currently charging 90% of tariffs on US imports. Reciprocal tariff of 46% is announced by US on Vietnam wef 9th April 2025 which is the highest among South East Asian countries. USA heavily depends upon Vietnam for manufacturing furniture, apparels and toys and this industry of US will be hit majorly after the reciprocal tariffs. US contributes to 30% of Vietnam’s GDP as a largest export market. Data says that Vietnam is in a trade surplus of $123bn while US imports $146 bn goods from Vietnam. After holding sincere negotiations Vietnam is now bringing down tariffs on all US imports to zero and urged US to do the same for mutual wellbeing.

Similarly, the highest tariffs imposed on China by US could open the gates of opportunities to many Indian Industries like electronics, leather and textiles. India should leverage the situation to strengthen its export infrastructure. Government may step in to help MSMEs through financial support to expedite the export needs.

Trade tariffs are necessary sometimes but they are not a viable option for long term survival nor replacement for competitiveness. It’s high time for India to concentrate on strengthening trade ecosystem by lowering regulatory costs, fortifying infrastructure and up skilling the youth population to thrive in the global economy. We need to adopt smart, agile and inclusive trade policies to bag success and growth. Then the new rules could be a real game changer for Indian economy.

(The writer is Associate Professor in Finance at Christ University)