The US government’s announcement imposing high, country-specific reciprocal tariffs represents one of the most important changes in the global economic environment, resulting in a meltdown in financial markets.
It is a clear signal that the world is moving away from multilateral free trade regime built on the principle of most favoured nation (MFN) and declining tariffs, to a regime of country-specific tariffs aimed at “creating a level playing field.
Global trade patterns are likely to undergo a change with the high levels of tariffs on the table and the wide variation in country-wise tariffs. The profound nature of the changes will have far-reaching impact on supply chains, industrial policies and economic strategies of countries across the globe.
Reciprocal tariffs are only part of the wider US economic strategy of correcting trade imbalances, shoring up manufacturing in the country, increasing tax revenues and reducing fiscal deficit and debt to GDP ratio. The US administration has said that it will follow the stick of high tariffs with the carrot of a more attractive investment regime through lower tax rates, ensuring energy security and simplification to drive manufacturing within the US and providing access to its vast consumer market.
The tariff announcement of 2 April is only an opening gambit. The proposed tariffs are by no means final. Products such as pharmaceuticals currently exempted could be subject to reciprocal tariffs in the future. The US government has said that it may take further action depending on underlying conditions being resolved or mitigated. Other countries may react with counter-tariffs and impose anti-dumping duties. All this creates global uncertainty. In such an environment, businesses will find it challenging to take quick decisions relating to investments and supply chains in the face of uncertainty in the future regime.
On a very short-term basis, there is no doubt that the world economy and the global merchandise trade will slow down. There is a risk of demand contraction and fall in consumer confidence thereby impacting spending.
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Slowdown or changes in demand can result in overcapacity in countries with large trade balances. Currency values (also discussed in the executive order) and commodity prices will undergo a change.
The Indian government has been proactive, engaging in extensive discussions with the US government on a trade agreement before the 2 April announcement. A closer integration of Indian and US economies through low reciprocal tariffs would benefit India as the strengths of the two economies are complementary in nature.
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Navigating tariff turbulence
India should aim to conclude these discussions on an equitable and timely basis to both mitigate the impact of these tariffs and bring policy certainty at the earliest.
Simultaneously, India would benefit by creating a more diversified export market and basket to stay resilient and shockproof. While early conclusions of FTA discussions with the EU and the UK have become even more important, adding markets like West Asia and Africa presents an opportunity.
It is also time for India to undertake a more systemic review of its major imports and trade imbalances that exist with various countries, including those with which India has existing FTAs. Given the possibility of overcapacity in countries with surplus trade balance, Indian authorities also need to be vigilant against dumping. Overcapacity can also result in export of goods at the variable cost of production.
Lastly, this is an opportunity for India to make regulatory changes to unleash investments in manufacturing and other industries of strategic defence and economic importance. Focus should be on improving the competitiveness by simplifying regulations, reducing import duties on critical raw materials for India’s high-growth industries and reducing the social burdens (e.g., high electricity tariffs to cross subsidise other consumers) on our manufacturing sector.
Large domestic consumption is India’s ultimate source of economic strength. Staying vigilant, building partnerships with other countries, focusing on creating greater value add within India by closely looking at our imports and identifying products where we can have manufacturing advantage, while creating a more competitive business environment is what is needed. All of the above can potentially help us control the controllable variables and navigate this period of uncertainty.
Rajiv Memani is chairman and CEO of EY India. Views are personal
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