3 Apr 2025

Assessing the impact of US reciprocal tariffs

US tariffs: Rationale

US President has long advocated an America First policy, which involves boosting domestic
production and reducing the dependence on imports. During the first few weeks of his second
Presidency, Donald Trump focused his attention on Canada and Mexico, two of USA’s key
trading partners, announcing sector specific tariffs. At the same time, President Trump also
spoke about high tariffs imposed by other countries including India and China, vowing to
correct the tariff imbalance through reciprocal tariffs. The said announcements were expected
to be made on 3 Apr 2025, a day President Trump announced as a “Liberation Day” in the
history of the US. True to his words, US President announced sweeping tariffs on several of its
trading partners yesterday, ending weeks of uncertainty. As per the Executive Order, the new
set of tariffs are aimed at correcting USA’s growing trade deficit, which is weighing on
domestic manufacturing capability. New tariffs have been announced for 180 countries.

To put this in perspective, US trade deficit rose by 40% in the last 5 years to reach US$ 1.2 tn
in 2024. A large part of this deficit is concentrated in the industrial goods sector, which
accounted for over 95% of total US trade deficit in 2024. US major imports from other
countries are majorly machinery (16%), electronics (15%), automobiles (12%), which together
account for over 40% of its total imports. Apart from this, pharma products and precious
stones are also important import items for the US. (Table 1)

Table 1: US major imports

Imports in
2024, US$ % share in
Product Name bn 2024
Machinery and mechanical appliances 531.2 15.82
Electrical machinery and equipment and parts thereof 485.9 14.47
Vehicles 391.5 11.66
Mineral fuels, mineral oils and products of their distillation 251.1 7.48
Pharmaceutical products 212.7 6.34
Commodities not specified according to kind 128.0 3.81
Optical, photographic, cinematographic, medical or surgical
124.8 3.72
instruments and apparatus
Precious stones 87.2 2.60
Plastics and articles thereof 78.2 2.33
Furniture; bedding, mattresses, mattress supports, 72.6 2.16
Total 3,356.8
Source: WITS, World Bank, Bank of Baroda Research

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US tariffs: What has been announced?

To correct the alleged disparity on tariff and non-tariff measures, President Trump signed an
Executive Order imposing a base 10% ad valorem duty on all US imports. Apart from this,
additional tariffs were announced on several countries based on the principle of reciprocity,
while also accounting for the perceived impact of non-tariff measures as well as currency
distortions by partner countries. The formula used was that the tariff would be 50% of the
imputed rate other countries charged on US exports. The tariff was calculated based on
nominal rates as well as indirect barriers including currency distortions.

The new and old tariff rates for some of USA’S major import partners are presented in Table
below. It can be seen that amongst major partners, South-East Asian countries such as,
Vietnam, Thailand, Taiwan and Indonesia have been penalized the most, with tariff rates
ranging between 32%-46%. Tariff rate on China has been increased to 34% (on top of existing
20%), while for India, the new tariff rate has been set at 26%. Amongst advanced economies,
tariff rates on Switzerland, Japan, Korea and Eurozone has been the highest ranging between
31% to 20%. On the other hand, UK’s imports have been taxed at a rate of 10%.

Table 2: Major import partners for the US

Tariffs charged to
% share the US (incl.
Adjusted
Imports by the US in US currency
Rank Country reciprocal
in 2024, US$ bn imports manipulation
tariff, %
in 2024 and trade
barriers), %
1 Mexico 510.0 15.2 NA NA
2 China 462.6 13.8 67 34
3 Canada 421.2 12.5 NA NA
4 Germany 163.4 4.9 39 20
5 Japan 152.1 4.5 46 24
6 Vietnam 142.5 4.2 90 46
7 Korea 135.5 4.0 50 25
8 Taiwan 118.7 3.5 64 32
9 Ireland 103.8 3.1 39 20
10 India 91.2 2.7 52 26
11 Italy 78.4 2.3 39 20
12 United Kingdom 68.8 2.1 10 10
13 Thailand 66.0 2.0 72 36
14 Switzerland 64.0 1.9 61 31
15 France 61.1 1.8 39 20
16 Malaysia 53.8 1.6 47 24
17 Brazil 44.2 1.3 10 10
18 Singapore 43.6 1.3 10 10
19 Netherlands 35.0 1.0 39 20
20 Indonesia 29.5 0.9 64 32
Total 3,356.80 100.0
Source: WITS, World Bank, White House Press Release, Bank of Baroda Research

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Threat to India

In 2024, US imports from India stood at US$ 91.2bn. US majorly imports electrical machinery,
pharmaceuticals, precious stones and machinery, from India which together accounted for
close to 40% of USA’S total imports from India. Textiles is also another important export item
for India.

Table 3: India’s competitors in US market (Imports in US$ bn)

Germany

Vietnam

Total US
imports
Taiwan
Ireland
Product name

Korea
Japan
China
India
Electrical machinery and equipment and 14.4 127.1 12.0 2.8 19.2 20.7 32.5 42.6 485.9
parts thereof
Pharmaceutical products* 12.7 7.8 17.2 50.3 7.4 4.0 0.4 0.1 212.7
Precious stones 11.9 1.8 1.5 0.1 0.3 1.0 0.2 0.2 87.2
Machinery and mechanical appliances 7.1 85.1 34.3 1.2 36.1 26.5 57.9 29.2 531.2
Organic chemicals 3.6 8.9 2.8 25.7 1.5 2.5 0.7 0.0 71.1
Textiles (including RMG) 8.0 27.8 0.1 0.0 0.1 0.3 0.2 15.8 101.8
Iron or steel articles 2.8 13.2 2.7 0.0 1.8 3.4 3.5 1.4 52.7
Vehicles 2.8 18.0 34.9 0.0 51.3 45.4 3.2 1.1 391.5
Source: WITS, World Bank, Bank of Baroda Research │Note:* Reports suggest that pharma products have been exempted
from higher tariffs as these are not domestically produced in the US

In the chart we have colored in green countries where tariffs are higher than 26% while the
red represents tariffs which are lower than India’s.

On an aggregate basis, since tariff rates imposed on AEs such as Germany, Ireland, Japan and
Korea are lower than India, our export competitiveness is likely to be impacted. (However, the
tariffs on them are still 20% and above).This is especially true for products such as electrical
machinery, in which India is at a comparable level to Korea and Japan in terms of value of
imports to the US. On the other hand, India is much better placed than EMs such as China,
Taiwan and Vietnam which have been hit with a much higher tariff rate than India.

In fact, a higher tariff rate for China (34+20%), which remains the top supplier of almost all
the items to the US, can be an opportunity for Indian exports, especially so for automobiles
and chemicals. India also stands to gain market share in textile exports to the US, as tariff rates
on Vietnam, a major supplier to the US have been increased substantially to 46%.

What does it mean for the global world order and the US economy?

The tariffs announced by the US have been much higher than market estimates. The finer
details do include some exemptions on some key items such as pharmaceuticals,
semiconductors and energy. Even so, these tariffs are likely to have wide ranging impact
including rejig in global supply chains and tariff structure. While countries are expected to
attempt to mitigate the impact of higher tariffs through negotiations as well as retaliatory
tariffs, global inflation and growth is likely to be affected. Higher tariffs can stifle export

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margins and lead to lower production and growth. On the other hand, global inflation is also
likely to inch up as countries announce retaliatory tariffs.

In the US, growth indicators are pointing towards a slowdown in the economy, with hushed
mentions of a recession. Given the limited domestic production capacity, higher tariffs are
likely to push up the cost of imports, thereby increasing inflation. This also poses a dilemma
for the Fed amidst diverging growth and inflation dynamics. While two rate cuts are expected
this year, with inflation risks increasing this possibility might not see fruition. This should mean
that the dollar is likely to see high volatility, which in turn will weigh on other currencies as
well.

Any slowdown in global trade due to these tariffs can cause a slowdown in export oriented
countries including China which does not augur well for the world economy. There are talks
of stagflation too in USA with higher prices and lower growth. However, it may be too
premature to conclude thus.

Impact on India

India remains a domestic oriented economy with consumption accounting for ~60% of total
GDP. On the other hand, merchandise exports accounted for only 12% of GDP in FY24.

- Assuming a 10% decline in value of India’s exports to the US, the total impact on India’s
GDP growth is likely to be around 0.2%. However, exemptions on pharma products and
also the possibility of a trade agreement can limit this impact. Further, there is also an
opportunity for India’s exporters to gain market share from other South-East Asian
countries, in which case these tariffs could be marginally positive for India.
- Prima facie, the sectors which are likely to be impacted most are electronics, precious
stones and machinery besides readymade garments.
- Further, since these sectors have a high concentration of MSMEs, the sector may face
increased challenges, requiring possible government support. The government may be
expected to come out with special schemes to buffer this impact.
- Profitability of companies in these sectors would need to be monitored as they can get
affected due to export turnover coming down or prices being reduced to maintain
competitive edge. This is something which banks would also need to monitor given
their exposures to these sectors.
- The impact on inflation will largely flow from the currency channel. Based on how the
US dollar behaves, we can expect volatility in the exchange rate. Our analysis had
earlier showed that the impact of currency depreciation is muted and is felt largely on
WPI inflation. In fact, our analysis showed that a 10% depreciation in INR can lead to a
~0.12-0.16% increase in WPI in the short run, and 0.38%-0.49% in the long-run.

Overall, the direct impact of higher US tariffs on India looks fluid as of now. It all depends on
whether exports come down and to what extent. As higher tariffs have been imposed on all
countries, the disadvantage for India could be muted to an extent. If US domestic production

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increases and imports in general come down, then it will mean a negative impact. On the issue
of other countries with lower tariffs substituting Indian exports, the scope is limited though
present.

The indirect impact through the currency route and possibly the Fed route is something which
is a concern as the year can be typified as being a repetition of 2024 where volatility was
pervasive.

To conclude, given the good diplomatic relations between the two countries, the progress on
finalizing a mutually beneficial trade deal by end 2025 is expected to be quick, which will
further limit the impact. However, India is unlikely to remain unharmed from the bouts of
volatility in global financial markets, which will have an impact on domestic markets as well.

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Annexure

Table A.1: US major import from India

Share in Total
US Imports from
Product name imports from
India in 2024
India
Electrical machinery and equipment and parts 14.4 15.8
Pharmaceutical products 12.7 14.0
Precious stones 11.9 13.0
Machinery and mechanical appliances 7.1 7.8
Organic chemicals 3.6 4.0
Mineral fuels, mineral oils and products of their
distillation 3.2 3.5
Textiles, made up articles; sets; worn clothing and
worn textile articles; rags 3.1 3.4
Iron or steel articles 2.8 3.1
Vehicles 2.8 3.1
Apparel and clothing accessories; not knitted or
crocheted 2.5 2.8
Apparel and clothing accessories; knitted or
crocheted 2.4 2.6
Fish and crustaceans, molluscs and other aquatic
invertebrates 2.0 2.2
Commodities not specified according to kind 1.4 1.6
Furniture; bedding, mattresses, mattress supports 1.4 1.5
Plastics and articles thereof 1.4 1.5
Total 91.2
Source: WITS, World Bank, Bank of Baroda Research