Should India reduce tariffs given the U.S. moves?

What is the consensus opinion among economists on the impact of tariffs on economic growth?

Laveesh Bhandari: I think there is a near-consensus among economists that generally lower tariffs are good and, as much as possible, you should keep tariffs low. It’s not just from a consumer perspective, but also from an efficiency perspective. It is important to get our tariffs down, down to wherever we can. And of course, there are many other issues here, the most important being that you also need to look at the non-tariff barriers that exist both within and outside.

Ajay Shah: I agree. I want to add two more points. The first is that the extent of the economic distortions and the damage to efficiency caused by tariffs is related to the heterogeneity of tariffs. So, if you must have tariffs, please have only one or have very few rates. Second, China is a systemically important country. It is a country where the government has a very high control of the economy and there is a whole array of mechanisms through which Chinese overproduction is messing with the world. This calls for certain measures. But generally, in almost all situations, we are better off with lower tariffs with a uniform rate.

Shouldn’t governments’ tariff policy focus on helping consumers rather than producers?

Ajay Shah: When there is a 20% customs duty on a car, the price of the car goes up from ₹5 lakh to ₹6 lakh and the consumers end up paying ₹1 lakh extra for a car. Indian manufacturers also get a higher profit margin because they are able to sell the car at ₹6 lakh instead of ₹5 lakh. But this issue is fundamentally about efficiency. That is, if a firm is not competitive and cannot produce a car at ₹5 lakh, it should probably go out of business. You should only be producing in India if you’re globally competitive. If not, somebody else somewhere in the world should be producing and we should import. So, it’s a deeper story about resource allocation: we in India should do the things that we are good at and we should be buying the rest from the world. So, this is the efficiency idea. It is the opposite of Atmanirbhar Bharat.

Are Mr. Trump’s reciprocal tariffs simply a bargaining tool, or a way of encouraging domestic American manufacturing?

Laveesh Bhandari: Mr. Trump is not entirely incorrect. Almost every country has different kinds of protection that they provide to their own industry and at the cost of U.S. firms. The problem, however, is when he starts to negotiate different rules to be applied for different countries, such as different rates to be applied to different countries. That’s where I think there will be a great harm one way or another to U.S. industry. At the same time, I don’t see how else he could have gotten other countries to get their own tariffs down. This had to be perhaps the only tool he had to negotiate others’ tariff rates down. I think he is going to mellow down after a year or two when the early gains have kicked in.

Do you think reciprocal tariffs are a good way to get other countries to lower tariffs? The traditional approach has been to negotiate lower tariffs through bodies such as the World Trade Organization.

Laveesh Bhandari: Yes, but the WTO has effectively become dysfunctional. So, using such a mechanism to get countries to reduce their tariffs and non-tariff barriers would have been a very long shot. So, I think Mr. Trump had to use something more than that. I agree that maybe he’s doing this in an extreme manner, but I don’t see any other mechanism which could have gotten countries to reduce tariffs.

Ajay Shah: I think China holds the blame for spoiling the global trade system. China was the systemically large player in world trade, and it practised domestic subsidies and distortions at an unprecedented scale. That has created problems for everybody. I agree that the WTO is broken and doesn’t work as the WTO gives a veto to every single country. So, basically almost any idea can be blocked. India is famous for having been a spoiler by interfering with every imaginable thing. Now, in that context, what do you do? I’m not convinced that the Trump approach is that effective. First of all, he’s talking about all countries. He’s not talking only about China. He wants to go after so-called unfair trade practices by every country. He is pointing to Indian tariffs, which are essentially the highest in the world. But then what are you going to do about it? The end game is not clear. Mr. Trump is not saying that once India solves everything, that is, if it solves the problem of high tariffs and non-tariff barriers and opens up the economy to free trade, zero tariffs will be imposed on Indian goods coming into America. These are all messy questions and the U.S. is about 20-25% of world GDP. So, action by the U.S. is throwing a spanner in the works of the global economy, and it will harm economic activity and the efficient organisation of production all over the world.

What about non-tariff trade barriers? How significant are they, and what is their effect on global trade and India?

Laveesh Bhandari: I think non-tariff trade barriers are far more endemic than what even studies are showing. I think they exist in different ways or in almost every sector, and almost every country has some set of non-tariff barriers. India also imposes such barriers on its imports from almost every trade partner. If you talk to people in the industry, they will complain about various kinds of non-tariff trade barriers that they have to face. India may have a different set of benchmark quality specifications required as opposed to those in some other countries. So, sometimes that also gets in the way, and it’s sometimes very difficult to be able to disentangle whether something is an explicit non-tariff trade barrier or not. But having said that, non-tariff trade barriers are a very big issue, and from what I understand of the U.S. approach, they are saying that they will judge and decide for themselves how significant the barriers are.

Ajay Shah: I agree that non-tariff barriers are very important and very messy. It’s very hard to interpret and judge the materiality of a non-tariff barrier. The Europeans have extremely high sanitary standards on the export of grapes from India to Europe. Now it is a level playing field in that the grapes made in France need to comply with the same quality controls as the grapes made in Nashik. It is possible to fiddle with these rules and make them a trade barrier. So, this is a difficult field and also a very important one.

How should India handle Mr. Trump’s tariff moves? Should India declare unilateral free trade with all countries?

Laveesh Bhandari: We should reduce tariffs across the board. However, it should not be instantaneous. It’s nicer to give some time for firms and stagger tariff reductions and make it clear to the industry that these reductions are permanent and not dependent on how the U.S. responds.

Ajay Shah: I would like to take us all back to former Finance Minister Yashwant Sinha’s period, which, in my opinion, witnessed one of the greatest, successful trade liberalisations in India. What was done was years ahead of time. Everybody was told that the peak tariff rate would go down by 5% every year and then businesses started putting this into their planning and it triggered a great investment boom. So, one should not do things suddenly, but you should announce them earlier. And the government needs to achieve credibility, in the sense that whatever announcements are made should actually go through. With a very comprehensive Indo-U.S. free trade agreement, it is possible to remove all the trade barriers between India and the U.S., and that would be exciting. Without any trade barriers, a frozen chicken from Texas would compete with chicken made in Maharashtra. We should also go for complete trade liberalisation with the EU, the U.K., Japan, and so on. That would be something truly transformative for the Indian economy. Mr. Trump is not entirely incorrect. Almost every country has different kinds of protection that they provide to their own industry and at the cost of U.S. firms. The problem, however, is when he starts to negotiate different rules to be applied for different countries.

Listen to the conversation in The Hindu Parley podcast

Published – April 04, 2025 02:00 am IST