Trump tariff impact: Brace for exchange-rate wars too

Three things need to be kept in mind when analysing the impact of the new tariff order imposed by the US.

- MADAN SABNAVIS

The first is whether higher tariffs will lead to more domestic production in the US. If the price factor kept local production down, then this will help. But the consequence will be higher inflation for sure.

Second, the relative tariffs now imposed across countries matter. Hence, India has to look at competition from countries which attract lower tariff rates in the new regime. The third is whether the relatively smaller countries can scale up to substitute for others. This begs the question as to whether countries have the ability to scale up substantially to substitute other exporters.

What has the US done?

There are new tariff rates announced for 180 countries with the base level being 10 percent. The tariffs have been fixed at broadly 50 per cent of the rate countries are charging US imports. Therefore, there is a concession reciprocal tariffs structure announced. China has a higher rate of 54 per cent because the 34 per cent half-tariff will be on 20 per cent imposed earlier. The US has calculated the effective tariff rates on US goods in these 180 countries based on both nominal rates as well as indirect protection provided through different measures.

Should India be worried?