Reciprocal tariffs are a means for the US to boost its revenues where it is levying a lower duty compared to the levies of the exporting country when it imports. In the case of India, the 27% reciprocal tariffs represent the average higher rate of tariff that India charges US exports, so these reciprocal tariffs do not give any undue advantage to India. At the same time, the US also earns more in the form of revenues from the trade. That is what reciprocal tariffs are about. 

In the last few days, there has been an extensive global debate on the outcome of such reciprocal tariffs. For starters, it is likely to trigger a tariff war among the countries and in the process make the goods more expensive for consumers. The second big risk is that such a move could lead to a sustained compression in demand. It is estimated that global GDP growth could take a hit of 30 bps to 50 bps as a result of such reciprocal tariffs. Thirdly, there is the big risk of inflation rearing its head again. Economies have spent a lot of time resolving inflation and do not want to deal with it all over again. That is an open-ended risk now! 

One positive outcome of this entire tariff story is the salutary impact on trade and on FPI flows. Here is why. Firstly, while the US has imposed tariffs on India, the rate of tariffs on many nations are much higher. For instance, the effective tariff imposed by the US on Chinese imports is closer to 54%, so in comparison, India looks to be on a safer wicker. Also, this can give India a comparative edge in certain products, when it comes to catering to the US markets. The other side is FPI flows. The tariff fiasco has led to the dollar plummeting sharply and a consequent strengthening of the INR. That is likely to spur more FPI inflows, as these FPIs would generally prefer to catch the rupee close to the bottom. 

At this stage, it is important that India plays its trade cards smartly. While the tariffs will cause a dent on exports, it can have concomitant benefits too. In a tough hour, the best answer would be to not overreact to the situation and look at counter-tariffs. That is what China and Canada are doing; and that is exactly what India must avoid. While the US is India’s largest trading partner, it is the only trade partner to generate a big trade surplus for India. If India has to play a calculated game, it must use this opportunity to expand the surplus with the US in the long run. After all, a crisis cannot be allowed to go waste!