India-U.S. Bilateral Trade Talks Amid Reciprocal Tariff Concerns

Why in News?

The Indian government recently reacted to US President Donald Trump’s reciprocal tariffs on Indian goods. It said that it is hoping for bilateral trade agreement (BTA) discussions with the U.S., rather than reciprocal tariffs.

Relevance:
GS-02 (Economy)

What is a reciprocal tariff?

Reciprocal tariffs are trade policies where two or more countries impose similar or matching tariff rates on each other’s goods. These tariffs are often used as a response to another country’s tariff policies to ensure fair trade.
Key Points About Reciprocal Tariffs:
- Tit-for-Tat Tariffs: If one country raises tariffs, the other imposes similar tariffs in return.
- Trade Negotiations: Used in trade deals to push for equal tariff rates between countries.
- Retaliation in Trade Wars: Countries may impose reciprocal tariffs as a countermeasure against protectionist policies.
- Example: If Country A imposes a 10% tariff on steel imports from Country B, Country B may also impose a 10% tariff on similar imports from Country A.

Impact on India

Trade Deficit Adjustment: India may increase imports from the U.S., especially in sectors like defense, oil, and gas, lowering its current trade surplus of $38 billion.
Higher Export Costs: Increased U.S. tariffs could make Indian exports like textiles, pharmaceuticals, and auto parts more expensive, reducing their competitiveness.
Weaker Rupee: Higher imports would raise demand for U.S. dollars, potentially weakening the rupee and increasing the cost of imports.
Challenge to Self-Reliance: The Atmanirbhar Bharat initiative might face setbacks if India is pressured to buy more American products.
Foreign Investment Shift: To bypass high tariffs, U.S. companies might set up production units in India, leading to increased Foreign Direct Investment (FDI).

Prelims Question:

Consider the following impacts of increased U.S. tariffs on Indian goods:

Indian exports may become less competitive in global markets.
The Indian rupee may strengthen due to higher imports from the U.S.
Foreign Direct Investment (FDI) in India may increase as U.S. firms look for local production.

Which of the above statements are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(d) 1, 2, and 3

Answer: (c) 1 and 3 only

(Statement 2 is incorrect because higher imports from the U.S. would weaken the rupee, not strengthen it.)