After second inauguration of Trump administration in the United States of America, President Trump has come up with many new and radical ideas for implementation. He presumably wants to make America great by tightening immigration laws, ousting illegal immigrants, imposing reciprocal tariffs, cut wasteful expenditures, taking over Greenland and Panama Canal, etc. However, he also wants to establish peace by ending Russia-Ukraine war and Hamas-Israel conflict.  Further, he also aims to access strategic resources in Ukraine and Russia and develop an ambitious real estate project into Gaza strip. Amongst all the aforementioned wish list of President Trump, the statement on imposition of reciprocal tariff has sent a major global economic shock wave, plummeting stock market across globe.

As of 2024, the United States had significant trade deficits with several countries which indicate that the U.S. imported more goods and services from these countries than it exported to them during the specified period. Some of the  countries/region with which the U.S. had the largest negative trade balances are China, European Union, Mexico, Vietnam, Japan and, Canada. However, trade deficit of the U.S. with China is close to US $ 300 billion as of 2024 which is highest among all trading partners. As of 2024, the United States had a trade deficit of $45.7 billion with India.

Even though the advantage to each country participating in global trade is never proportionate, but on the whole, international trade is always considered good for global economy. Hence putting restrictions on global trade through tariff and quota will definitely alter global demand and supply unfavorably for all the countries and may potentially lead to contraction of global GDP.

The reciprocal tariff policy proposed by Donald Trump shall impose the same level of tariffs on imports from other countries as they impose on U.S. exports. If implemented globally, it would trigger retaliatory trade policies and impact major economies like China, India, and the U.S. itself in different ways.

Impact on China: Reciprocal tariffs would increase costs for Chinese manufacturers reducing its demand in the U.S. market. Since China’s economy export oriented economy, reduction in trade due to increased cost could reduce trade and slow China’s economic growth. Due to decreased demands, there would be job losses in labour intensive export industries such as electronics, machinery, and textiles, etc. This may also disrupt the supply chain of some of the Chinese industries.

However, China has second largest population after India. Therefore, in order to save its manufacturing industries, China may focus on increasing domestic consumption to offset export losses through various types of incentives. Moreover, China would try to strengthen trade with other nations to compensate for losses from reduced U.S. exports. China may also impose additional tariff and non-tariff barriers as a retaliation.

Impact on India: Trade and the trade deficit of the U.S. with India is very small compared to China and many other countries, and therefore, economic impact of reciprocal tariff would be very small. Due to higher tariffs on Indian exports, sectors like IT services, textiles, auto parts and pharmaceuticals would suffer.

However, India could potentially gain from U.S.-China tensions. If the U.S. reduces Chinese imports, India could replace China in sectors like electronics and manufacturing. Under these circumstances, India can also reduce trade deficit with China by imposing higher reciprocal tariffs on Chinese imports, boosting local industries. These conditions may boost domestic production as companies shift away from import dependence under India’s Make in India policy. Thus, India may face short-term trade disruptions due reciprocal tariff but could benefit in the long run if it replaces China as a supplier to the U.S. market.

Impact on the U.S.  Reciprocal tariff would make imported goods costlier for American consumers increasing inflation. Cost of American products with higher content of imported input material will also increase making it uncompetitive in global market. American export of agricultural, automobile and technology product may suffer due to imposition of tariff and non-tariff barriers by other countries as retaliatory measure.

However, local industries in the U.S. may grow in medium to long term leading to creation of more jobs addressing unemployment issue. The U.S. may use tariffs as leverage to negotiate better trade deals. Foreign investment could also reduce due to trade tensions.

However, it has to be seen whether Trump is really serious to implement reciprocal tariff or using the same to get some favourable trade concessions for the U.S.