UPSC Issue at a Glance | From Trump’s reciprocal tariffs announcement to 90-day pause: Everything in between

What is the issue?

Amid global pushback, US President Donald Trump announced a 90-day pause on tariffs, however, China has been excluded from the pause, and instead, the tariff rate has been increased to 125%. The Asian markets bounced back on Thursday (April 10) after President Trump announced the pause on tariff.

Earlier, on Monday (April 7) the Indian stock markets experienced a sharp fall in the wake of the trade war that is unfolding globally. The benchmark indices — Nifty 50 and Sensex — each lost more than 2.5 per cent of their value. This was the most they have fallen since the dip in the wake of the results of the general election in June last year. But what caused this decline?

At a fundamental level, the reason was pretty straightforward: the massive upending of global trade thanks to the unilateral announcement of punitive tariffs on the rest of the world by US President Donald Trump, which now has been paused for 90 days. Therefore, it becomes crucial to understand this issue from a broader perspective. 

( Relevance: UPSC Syllabus General Studies- II, III: Effect of policies and politics of developed and developing countries on India’s interests, Indian Economy, Effects of liberalisation on the economy)

Setting the Context: Trump’s Announcement of Reciprocal Tariffs

US President Donald Trump celebrated April 2 as America’s “Liberation Day” by announcing “reciprocal tariffs” against all major trading partners. Two sets of tariffs were announced. One, a base tariff of 10% against all countries, which represents a sharp increase from the pre-Trump 2.0 tariff rate of around 2.5%.

Then there are country-specific tariffs, as shown in the table below. These tariffs were determined by estimating how much each of these countries charges on US goods and then halving that amount to calculate the “USA discounted reciprocal tariffs”.

The table lists the main countries against which the US announced reciprocal tariffs, in descending order of tariffs imposed. ( As on April 2)

As shown in the table given above, India has been hit with a country-specific tariff rate of 26%. Donald Trump also shared a report of the US Trade Department that gave details of why each country was being tariffed. The report was critical of the Government of India’s increasingly protectionist stance since 2014. However, US President Donald Trump Wednesday (April 9) paused reciprocal tariffs on 75 countries, including India, while imposing a steep 125 per cent tariff on China in response to its retaliatory measures.

Here arises several pressing questions, the key ones being — what are the reasons behind Trump’s announcement of reciprocal tariffs? As Anil Sasi of The Indian Express explains, “the objectives of these tariffs, as stated by Washington over a period of less than a month, too have been shifting: ranging from national security concerns (fentanyl and immigrant inflows), to the changed narrative of a need to balance trade deficits and putting a stop to America being shortchanged. Another reason being offered by the Trump administration is that the exercise will bring in the money for the proposed tax cut expected later this year.”

The implications of higher tariffs and the trade war initiated by Trump’s actions on the world economy and the Indian economy are only beginning to unfold. The recent decline in Indian stock markets and the change in monetary policy can be attributed to the uncertainty surrounding these tariffs.

Since the impact of US policies is felt around the world, it is important to understand how countries are responding to Trump’s retaliatory tariffs.

“There are three differing templates emerging of how countries are responding to US President Donald Trump’s retaliatory tariffs. On one end is the Chinese playbook of “resolute opposition” and tit-for-tat retaliation”, explains Anil Sasi.

1. China’s resolute opposition: Beijing will impose 125 per cent tariffs on US goods from Saturday (April 12), up from the 84 per cent previously announced, news agency Reuters quoted the Chinese finance ministry said on Friday. This comes after the Trump administration decided to pause tariffs for 90 days on many countries, but hit China with a 145 percent tariff amid the ongoing trade wars.

2. Japan opts for negotiated settlement: Japan seems to be on the other end of the spectrum, getting ready to dispatch a team to negotiate with Washington — one of the early movers in this game. US President Trump said Monday that he had spoken with Japanese Prime Minister Shigeru Ishiba and confirmed that Japan is dispatching a team to negotiate on trade with US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer, Reuters reported.

3. EU considering both options: The response from the European Union slots somewhere in between the reactions from Japan and China. The trade ministers of the 27-nation bloc had gathered in Luxembourg to discuss their response to Washington’s new trade regime. Given that the trans-Atlantic trade relationship is the biggest in the world, worth about 1.5 trillion Euros, there is considerable worry across European capitals. EU officials, however, came out to say that they would rather negotiate than fight the US on tariffs, but in parallel, they are preparing a potential list for retaliation and other measures for retaliation.

India’s stance

Meanwhile, reiterating it’s stance of ‘studying’ silence over trade tariffs, India’s Ministry of External Affairs (MEA) said it is “studying the implications” of US President Donald Trump’s reciprocal tariffs on Indian goods, as both nations work toward finalising a bilateral trade agreement. MEA spokesperson Randhir Jaiswal stated that discussions between the Indian and US trade teams are ongoing.

Commerce Minister Piyush Goyal Wednesday (April 9) urged exporters not to panic and reassured them that India is working towards the “right mix and right balance” in its proposed trade agreement with the US.  Goyal also highlighted the opportunities associated with the tariffs.

“However, as far as India is concerned, there is potential for increased manufacturing and job creation, as India could attract major players in the global supply chain. The country has established itself as a trusted and reliable partner and a predictable, business-friendly destination,” he said.

Ravi Dutta Mishra of The Indian Express writes, “India’s strategy of initiating talks for a bilateral trade agreement (BTA) with the US, along with its restraint in not retaliating against US tariffs, appears to have paid off, as US President Donald Trump Wednesday paused reciprocal tariffs on 75 countries, including India, while imposing a steep 125 per cent tariff on China in response to its retaliatory measures.

India and the US are currently negotiating a bilateral trade agreement aimed at more than doubling trade – from the current $191 billion to $500 billion by 2023. The first phase of the deal is expected to be concluded by autumn this year.”

Express View “Trump’ tariffs and market fall — India needs to be better prepared”

“The Indian stock markets experienced a sharp fall in the wake of the trade war that is unfolding globally….There are two ways in which Indian policymakers can view this fall. One, as just a temporary blip and a good opportunity to buy more of the market especially since Indian markets are falling less than the rest. Soon, tariffs will be withdrawn and all will be fine. Two, as a tectonic shift in global trade where the US has lost its credibility as a trade partner and opened the door to protectionist industrial policies that belong to a bygone era. In a world without fair trade rules, India will have to be better prepared to make its way, and thrive.”

How USA’s economic policies — from the Federal Reserve to President Trump’s trade actions — impact the Indian market?

As the world’s biggest economy, the United States has a significant influence on global financial systems. Whether it’s a shift in its monetary policy or a tweak in fiscal spending, every move made in Washington resonates across global markets — and India is no exception. American economic policy directly or indirectly affects India’s economic policymaking and market behaviour. Therefore, it becomes important to understand some of the components of the US economy and their effects on Indian economy. 

📌 Federal Reserve’s Monetary Policy

The United States Federal Reserve (henceforth just ‘the Fed’) is responsible for the country’s monetary policy, and its decisions have an impact that goes far beyond the country’s geographical borders. Among the most affected are emerging economies like India. This is not just due to the US being the world’s biggest economy but also because the US dollar is the world’s most trusted and traded currency. Several countries hold US dollars as assets.

The Federal Reserve’s monetary policy affects India in different ways. For instance, as India is a capital-scarce economy and is always looking to incentivise foreigners to invest in India, if Fed cuts rate, it can incentivise global investors to borrow in the US and invest in India — be it in stocks, debt, or in the form of foreign direct investment (FDI).

But on the other hand, when the Fed raises its policy rates, the difference between the interest rates of the two countries narrows, thus making countries such as India less attractive for the currency carry trade.

📌 Tariff Policy

As the US is India’s largest trading partner, with bilateral trade in 2023 crossing $117 billion. India is also vulnerable to changes in American trade policy, as the US market is India’s largest export market for both goods and services. Most importantly, the US is the only country with which India has a trade surplus, making it a crucial source of US dollar earnings. In this context, the tariff policy of the US also affects the Indian economy on multiple fronts. 

Thus, we also see that in the wake of fears that higher tariff rates may lead to inflation, an increase in trade tensions and a lower growth in the world economy the Reserve Bank of India’s (RBI) six-member Monetary Policy Committee’s (MPC) in its policy review on April 9 (Wednesday) took the decision to cut the repo rate – the key policy rate – by 25 basis points (bps) to 6 per cent. 

RBI Governor Sanjay Malhotra delivers the Monetary Policy statement. (RBI Youtube via PTI Photo)

“Global economic outlook is fast changing. FY26 has started on an anxious note, and some global trade frictions are coming true,” RBI Governor Sanjay Malhotra said. In his remarks, the RBI Governor conceded that tariffs were expected to impact merchandise exports. He also said that India’s GDP was seen growing at 6.5% in FY26. The inflation was forecast at 4%. However, the central bank’s rate-setting body can’t sit at ease after US President Donald Trump announced sweeping tariffs, which can fuel inflationary pressures going ahead. Economists have also warned of likely recessionary effects at play due to the tariffs, which can hike costs and tamp down demand.

In conclusion, the impact of the US’s economic policy can be seen on multiple fronts of the Indian economy, which makes it highly relevant to stay updated on the US’s economic decisions.

P.S: Dear Aspirants, 

Some issues are developing stories, and hence it is important to keep an eye on the everyday changes and continuities. This issue is one such example. Therefore, it is advised to keep track of this topic through our other initiatives, like Knowledge nugget and UPSC Key. However, our attempt to provide conceptual clarity through this article on the issue so far will be beneficial for you at all stages of the exam.

Post Read Questions

Prelims

(1) Indian Government Bond Yields are influenced by which of the following? (UPSC CSE 2021)

1. Actions of the United States Federal Reserve

2. Actions of the Reserve Bank of India

3. Inflation and short-term interest rates

Select the correct answer using the code given below.

(a) 1 and 2 only 

(b) 2 only 

(c) 3 only

(d) 1, 2 and 3

(2) Consider the following statements: (UPSC CSE 2022)

1. Tight monetary policy of the US Federal Reserve could lead to capital flight.

2. Capital flight may increase cost of firms with existing External Commercial Borrowings (ECBs)

3. Devaluation of domestic currency decreases the currency risk associated with ECBs

Which of the statements given above are correct?

(a) 1, 2 and 3

(b) 1 and 2 only

(c) 2 and 3 only 

(d) 1, 2 and 3

(3) Consider the following statements:

1. Tariffs are taxes or duties imposed by a government on imported goods and services.

2. Objective of tariffs is to make foreign products more expensive compared to domestically produced goods

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Mains

What are the key areas of reform if the WTO has to survive in the present context of ‘Trade War’, especially keeping in mind the interest of India? (UPSC CSE 2018)

Read More:

Black Monday bloodbath: As markets crash, what could be the endgame for Trump’s reciprocal tariffs

ExplainSpeaking: Trump’s reciprocal tariffs — impact on India, rest of the world

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