Reciprocal Tariff: Definition, History and Benefits

Why in News? 

Recently, US President Donald Trump declared “Liberation Day” and imposed reciprocal tariffs on imports from various countries. This move aims to reduce trade imbalances and protect the trade interests of the United States.

What Are Reciprocal Tariffs?

• Definition: A reciprocal tariff is a type of border tax (tariff) that a country imposes when its trading partner imposes high tariffs on its exports. Its purpose is to establish equality and maintain balance in trade. This policy is based on the principle of “tit for tat.”
• It is a bilateral, reaction-based policy. It also becomes a medium of trade negotiation, where pressure is put on the other country to reduce tariffs.
• Objective: The goal is not just revenue collection but to create strategic pressure and ensure fair and balanced trade. Today, it has also become a political tool for maintaining power balance in global trade.
• Difference: Other types of tariffs, like general custom duties and anti-dumping tariffs, are mainly used to protect domestic industries, collect revenue, or prevent unfair trade practices. In contrast, reciprocal tariffs are based on bilateral relations and are direct responses to the trade policies of other countries.

History of Reciprocal Tariffs in Global Trade Agreements

• From Industrial Protection to Strategic Trade – In the 19th century, when nations wanted to protect their emerging industries from foreign competition, tariffs became an effective tool. The concept of reciprocal tariffs was born in this period – where countries imposed similar tariffs to offer benefits or cause harm. The aim was not only economic but also to exert political pressure.
• Cobden-Chevalier Treaty (1860) – This historic agreement between Britain and France showed for the first time that mutual tariff cuts could lead to stronger economies for both countries. This treaty marked the beginning of a “win-win” approach in global trade policy.
• 20th Century Protectionism – When the Smoot-Hawley Tariff Act of 1930 was enacted in the U.S., the world saw how excessive tariffs could disrupt global trade and cause economic depression. In response, other countries also imposed retaliatory tariffs, leading to a massive fall in global trade.
• Post-World War II Balance – After the war, the global community realized that indiscriminate tariffs lead to conflicts. This led to the formation of GATT (General Agreement on Tariffs and Trade) in 1947, which institutionalized the policy of tariff reduction based on mutual consent and equality.
• 21st Century Nationalism and Trade Wars – In recent years, especially under the Trump administration, the U.S. increased tariffs against several countries including China, citing “unfair trade policies.” In response, those countries imposed retaliatory tariffs. These developments show that reciprocal tariffs are still used as tools of political and economic power.

Implementation Mechanism of Reciprocal Tariffs

1. Strategy for Implementation:

   • The goal of reciprocal tariffs is to reduce bilateral trade deficits to zero.
   • The process begins with assessing which country has the highest trade deficit and the policy or tax reasons behind it.
   • Based on this, a reciprocal tariff rate is decided, which is then applied to imports from that country. This rate can vary from 0% to 99%.
   • Such tariffs are imposed when the trade deficit is clearly caused by that country’s tax policy, regulatory barriers, currency manipulation, or tax exemptions.

2. Calculation Process:

   • The calculation of reciprocal tariffs is not based only on simple import-export numbers, but also includes elasticity coefficients, passthrough effects, and the total value of bilateral trade.
   • Countries like the U.S. calculate these rates using official trade data, such as from the U.S. Census Bureau.
   • Using trade data from a specific year, tariff elasticity (ε) and passthrough (φ) are calculated as the base.

3. Example:

   • Suppose the U.S. wants to impose a tariff on country ‘i’; it first estimates the drop in imports.
   • This calculation includes parameters like ε (tariff elasticity of import demand), φ (rate of change in import prices due to tariff), m_i (imports from country i), and x_i (exports to country i). 
   • Combining these figures helps determine a tariff that can bring the trade deficit to zero – this is known as the actual retaliatory rate.

Benefits of Reciprocal Tariffs

• A tool for balancing trade relations – These tariffs prove to be very effective in situations where a country’s exports are weakened in the global market due to excessive tariffs imposed by another country. This helps create an environment of mutual respect and balance in global trade relations.
• An effective instrument for strategic negotiations – When trade disputes or unfair policies lead to a deadlock in negotiations, these tariffs become a pressure-based diplomatic tool. They not only provide an opportunity to reopen existing agreements but also encourage countries to respect each other’s trade positions and make tariff rates fair.
• A protective shield for domestic industries – Imposing retaliatory tariffs on imported goods increases their prices, allowing local producers to become more competitive. This provides stability to domestic factories, small traders, and production chains, strengthening the country’s industrial self-reliance.
• Promotion of economic nationalism – When a government adopts an active tariff policy to protect its industries, it is not just an economic decision but also symbolizes a national approach. This instills a sense among citizens that their government is protecting their livelihood, production capacity, and economic independence. This sentiment plays an effective role in boosting production, encouraging innovation, and reducing foreign dependence.

Challenges and Criticisms Related to Reciprocal Tariffs

• Decline in global trade – When one country imposes these tariffs on imported goods, the other country inevitably responds with similar tariffs. This chain reaction severely harms exporters, as their products become costlier in foreign markets, reducing their competitiveness. As a result, trade statistics of both countries decline and global trade becomes unstable.
• Risk of trade wars – While these tariffs may be effective as a limited strategy, if used repeatedly and harshly, they can lead to trade wars between countries. This intensifies not only economic but also political and diplomatic tensions.
• Increase in consumer prices – As soon as a high tariff is imposed on an imported product, its retail price increases. This forces local consumers either to pay more or to give up that product. Consequently, market options become limited and consumer freedom is affected.
• Disruption in global supply – The modern global trade system relies on interdependent supply chains. These tariffs disrupt those links. Companies depend on multiple countries for raw materials to finished products. Due to tariffs, not only do production costs rise, but timely delivery is also disrupted, raising concerns about global trade stability.
• Long-term instability – Although this policy may provide relief to domestic industries in the short term, in the long run, it restricts the market, reduces consumer confidence, and increases production costs. This can hinder trade relations between two countries, which may eventually affect investments, technological cooperation, and strategic partnerships.

Key Points of Reciprocal Tariffs Announced by the US

• On 2nd April 2025, President Donald Trump declared “Liberation Day” and imposed retaliatory tariffs on all trade partners, bringing a major change to the global free trade system that had existed for the past 75 years.
• The US argues that these tariffs have been imposed in response to trade deficits, currency manipulation, and non-economic barriers such as tax and regulatory disparities.
• Under the International Emergency Economic Powers Act, 1977 (IEEPA), the US imposed a universal base tariff of 10% on all countries, effective from 5th April.
• Special rates were applied to countries accused of “creating trade barriers” – such as 54% on China, 26% on India, 20% on the European Union, 24% on Japan, and 32% on Taiwan. These rates were decided with some concessions compared to the tariffs and indirect barriers imposed by those countries on US goods.
• Some materials were exempted from tariffs, such as copper, pharmaceuticals, semiconductors, gold, timber, energy resources, and minerals not available in the US.
• A direct 25% tariff was imposed on foreign vehicles, leading companies like German Volkswagen to announce import fees on their cars and halt vehicles at ports.

Impact of US Reciprocal Tariffs on India

• Limited adverse impact – According to the Global Trade Research Initiative (GTRI), the US-imposed reciprocal tariffs will not have a deep immediate effect on India, as India’s export structure is quite different from that of the US. For example, if the US imposes a 50% tariff on pistachios, it won’t harm India because India doesn’t export pistachios.
• Pressure on specific sectors in India – India faces a relatively lower 26% tariff compared to other South Asian countries. This gives India some competitive advantage, but high-value sectors like electronics ($14 billion) and gems and jewelry ($9 billion) may be affected.
  • Exporters in labor-intensive sectors like textiles, fish, and automobiles will face a 26% tariff, increasing their costs and reducing competitiveness in the US market.
  • India’s $9 billion pharmaceutical exports to the US have been exempted from the new tariffs. Similarly, energy products are also excluded, providing some relief.
• Defense and energy purchases – India’s imports of US defense equipment, crude oil, and natural gas may rise, slightly reducing India’s trade surplus with the US. This will increase demand for the US dollar and may lead to depreciation of the Indian rupee, making imports costlier.
• Consumption-driven growth – In the 2025 budget, tax exemptions worth ₹1 lakh crore were announced to encourage consumption among the high-income group. But if US products become cheaper, this group may shift towards foreign products instead of domestic goods. This may harm the concept of ‘Atmanirbhar Bharat’ (self-reliant India) and put pressure on domestic manufacturing.
• Rebalancing in fiscal policy – India may have to reduce tariffs on certain US imports (like gems and jewelry, auto parts) to send a message of balance and maintain stable bilateral trade relations.

Explore our Books: https://apnipathshala.com/product-category/books/

Explore Our test Series: https://tests.apnipathshala.com/