US President Donald Trump marked on April 2, 2025, America’s ‘Liberation Day’ by unveiling a series of ‘reciprocal tariffs’ targeting all major trading partners. This move was part of his broader economic strategy to address trade imbalances and protect American industries. The new import taxes have caused significant disruptions in global markets. Trump argues that the tariffs are essential for correcting trade imbalances and safeguarding American jobs and manufacturing. These were to come into effect from April 9, 2025. He claims that the move will revive American manufacturing, eliminate trade deficits (which hit US$1.2 trillion in 2024), and generate jobs.
However, Trump announced a 90-day pause on tariffs. Though, China was excluded from the pause, and, the tariff rate increased to 145 per cent, Trump had to drop the tariff rate to 30 per cent, whereas China lowered to 10 per cent from 125 per cent after a truce between the US and China.
Tariff
The word ‘tariff’ has Arabic origins, originally meaning ‘information’ or ‘explanation’. It was first recorded in a Sicilian document, in 1338, and later in a Venetian merchant guide in 1345. The earliest use of the word ‘tariff’ in English appeared in William Garrad’s 1591 military manual, The Arte of Warre, where ‘tariffas’ referred to numerical tables for organising soldiers. Over time, the meaning of term evolved, and today, a tariff refers to an official schedule of customs duties applied to imports and exports in global trade.
The US currently runs a trade deficit of approximately US$ 1.2 trillion, meaning it imports goods worth US$ 1.2 trillion more than its exports. A trade deficit occurs when the value of a country’s imports exceeds the value of its exports. In this case, the substantial gap highlights the imbalance in the US trade relationship with the rest of the world.
Reciprocal or Retaliatory Tariffs
When a country mirrors the tariff imposed by a trading partner it is called a reciprocal tariff. Normally, both the terms, ‘reciprocal’ and ‘retaliatory’ can be used synonymously. For instance, in 2018, after the US raised duties on select steel and aluminium imports, India formally retaliated by increasing tariffs on 29 US products to recover equivalent revenue.
Trump’s Tariff Model
Donald Trump announced a significant tariff policy shift: a base tariff of 10 per cent on all imports marking a significant rise from the pre-Trump average tariff rate of approximately 2.5 per cent. As of now, there is a 10 per cent base tariff effective from April 5, 2025.
The companies that import foreign goods into the US would be responsible for paying this tax to the US government, though the cost may indirectly impact consumers as well. In addition to the base tariff, Trump introduced ‘reciprocal tariffs’ targeting specific nations. These additional tariffs vary in rate based on a widely criticised government formula that primarily focused on trade deficits.
The Trump administration is expected to impose specific reciprocal tariffs on roughly 60 of the ‘worst offenders’. The key trading partners of the US are subject to customised tariff rates (in percentage) including: EU (20), Vietnam (46), Thailand (36), Japan (24), Cambodia (49), South Africa (30), Taiwan (32), among others. These tariff rates were determined by assessing how much each country charges on US goods, then halving that amount to establish the ‘USA discounted reciprocal tariffs’. In contrast, US allies like Canada and Mexico were exempted—though they were already facing a separate 25 per cent tariff under the United States-Mexico-Canada Agreement (USMCA). Therefore, the 10 per cent baseline tariff rate would not be applied to imports from these two countries.
Do You Know?
In 1930, President Herbert Hoover enacted the Smooth-Hawley Tariff Act, which imposed an average import duty of 20 per cent. The move prompted retaliatory measures from Canada and several European nations, contributing to the Great Depression. The resultant collapse in exports and global trade, therefore, compelled President Franklin D. Roosevelt to repeal the Act in 1934.
Nearly a century later, President Trump’s strategy follows the same trajectory—albeit in a far more interconnected world. In 1930, imports formed just 4.2 percent of the US GDP; whereas in 2025, they are expected to account for 14 per cent. Consequently, the potential economic repercussions of such measures are more profound.
Trump’s Tariff Impact on Countries
Cambodia and Bangladesh (37 per cent), with low per capita incomes and small shares of the US trade deficit, face some of the highest tariffs. In contrast, China and the EU, which have much higher per capita incomes and account for larger portions of the US trade deficit (25 and 20 per cent, respectively), face tariffs of 30 per cent and 20 per cent, respectively. The US has also imposed significant tariffs on countries with which it has a trade surplus, such as the UK, Brazil, Singapore, and Colombia. India, with a 26 per cent tariff, was specifically targeted due to its increasingly protectionist policies since 2014, according to a US Trade Department report.
Foreign Goods Exempted from Tariff
Although the new global round of tariffs covers most foreign goods entering the US, several exceptions have been made. These include items such as copper, pharmaceuticals, semiconductors, lumber, bullion, energy, and certain other materials not readily available in the US. Additionally, foods categorised under a US code clause—often interpreted as covering ‘informational materials’, communications and donations—are further exempted. Notably, steel, aluminium, vehicles, and vehicle parts are excluded from the baseline tariffs, as they are already subject to separate 25 per cent sector-specific tariffs.
Tariffs’ Effect on Prices
Tariffs have increased costs for both US firms that import goods and those that rely on foreign parts. The impact on consumers varies by industry and product. Some companies, like Target and Best Buy, plan to pass higher costs onto customers, while others, like Walmart, have pressured suppliers to lower prices. Luxury goods sellers may absorb costs due to their high profit margins, while firms with large market shares might also choose to absorb costs to maintain their dominance. Companies that absorb tariffs without raising prices may have less capital for growth, potentially affecting jobs. Despite these effects, Trump has downplayed any significant impact on prices, expressing indifference to price increases— particularly in the auto industry—as it could encourage consumers to buy American-made cars.
Rising Cost due to Higher Labour and Infrastructure
Since Trump took office, some companies have planned to increase US manufacturing, though many of these plans were already in progress before his election. While tariffs could boost domestic production, job gains in manufacturing might be offset by losses in other sectors. Bringing production to the US could raise costs due to higher labour and infrastructure expenses, potentially leading to higher consumer prices. Automation in manufacturing limits job creation, and tariffs on imports could increase the cost of building factories. Additionally, some products, like shoes and T-shirts, may remain too expensive to produce in the US due to a lack of labour and supply chains.
Tariffs’ Effect on Stock Market
Trump’s tariff announcement led to volatility in global stock markets. Stock prices dropped as investors anticipated that the new tariffs would increase costs and reduce profits for businesses. This decline in the stock market affected many people, even those who had not directly invested in shares, due to the ripple effect on pensions, jobs, and interest rates.
On April 9, however, the US stock market experienced a sharp rally following Trump’s announcement of a 90-day tariff pause for all countries, except China. The rally reversed earlier losses driven by President Trump’s escalating trade war. The Dow Jones surged by 2,962.97 points (7.87 per cent) to 40,608.56, the Nasdaq Composite rose 1,867.06 points (12.16 per cent) to 17,124.97; and the S&P 500 gained 474.93 points (9.53 per cent) to 5,456.20.
Asian markets, too, rebounded following Trump’s announcement of a tariff pause. Japan’s Nikkei 225 index surged by eight per cent, South Korea’s Kospi index rose by five per cent, and Australia’s ASX 200 gained five per cent in the early hours of trading.
US Reciprocal Tariffs not World Trade Organization (WTO)-Compliant
As per WTO norms, member countries must adhere to their bound duty rates outlined in official tariff schedules. Trade experts argue that the newly imposed reciprocal tariffs by the US may breach these commitments, raising concerns about their alignment with global trade rules.
India’s Position on Reciprocal Tariff
India stated that it chose to engage early and constructively with the Trump administration on trade issues, leading to a mutual agreement to work towards a bilateral trade deal by the fall. It is the only country so far, in Trump’s second term, to have reached such an understanding in principle.
India emphasised that its strategy is goal-oriented, aiming to address the current trade situation through a bilateral trade agreement with the US—an objective it has held for a long time. External Affairs Minister, S. Jaishankar, noted that while the newly imposed tariffs may have created the immediate context for serious negotiations, India had been seeking such a deal since Trump’s first term.
Between April and November 2024–25, Indo-US bilateral trade in goods stood at US$ 82.52 billion, with India enjoying a US$ 23.26 billion surplus. At present, Indian exporters, particularly in the steel and aluminium sectors, face new hurdles due to 25 per cent tariff effective from March 12, though some sectors like pharmaceuticals and IT services remain relatively shielded.
On the other hand, India has surprisingly offered to remove 100 per cent tariffs on US goods, as per a Times of India news on May 19, 2025.
Other Countries Stand on Trump’s Tariff
European Union chief Ursula von der Leyen warned that ‘the consequences would be dire for millions of people around the globe’.
Canada has announced a 25 per cent tariffs on some US vehicles, with a start date to be confirmed.
Italy’s Giorgia Meloni—a Trump ally—stated the reciprocal tariffs were ‘wrong’ but that she would work towards a deal with the US to “prevent a trade war”.
In the Republic of Ireland, Micheal Martin said there was ‘no justification’ for ‘deeply regrettable’ tariffs which benefitted ‘no-one’.
Australia’s Anthony Albanese said ‘this is not the act of a friend’.
South Korea’s acting president Han Duck-Soo said ‘the global trade war has become a reality’.
Japan stated its 24 per cent levy was ‘extremely regrettable’ and could violate the WTO and US-Japan agreements.
Consequences for the US and Global Economy
Even without any retaliation, the newly imposed tariffs are expected to disrupt global trade and slow down economic growth worldwide. In the coming days, stock markets are likely to decline as investors adjust to reduced corporate profit expectations and weaker overall economic prospects. However, if other countries retaliate, the outlook worsens further, with credit rating agencies likely to increase the estimated risk of a recession in the US.
If economic growth slows while inflation rises, the US could enter a period of ‘stagflation’—a damaging combination of stagnant growth and persistently high inflation. This scenario could have serious political consequences for the Trump administration, as rising living costs were a key factor in the Democrats’ defeat in the November elections, and a similar surge in prices could erode public support once again.
The WTO revised its global trade forecast on April 16, anticipating a 0.2 per cent contraction in global merchandise trade volume in 2025, a significant revision from its earlier projection of 2.7 growth.
The global economy is likely to slowdown and experience higher prices, depending on each country’s reliance on the US economy and its ability to secure new trading partners and supply chains. The future impact on the rest of the world largely hinges on how Europe responds. While the US accounts for 13 per cent of the global trade, Europe represents almost 38 per cent, and if Europe strengthens its trade relationships with Asia (which accounts for 35 per cent of the global trade), global dependence on the US could decrease in the medium to long term. However, in the short term, the ongoing trade wars are expected to cause significant economic hardship worldwide.
Way Out for US Citizens
The only way US citizens could avoid inflation caused by tariffs is if the dollar strengthens against other currencies by the same percentage as the tariffs. For instance, if the dollar appreciates by 26 per cent against the Indian rupee—moving from Rs 85 to Rs 108 per dollar—US consumers would continue paying the same prices for Indian imports, avoiding the impact of the tariff. However, this shift would hurt Indian consumers, as a weaker rupee would reduce their purchasing power and increase the cost of essentials like crude oil, leading to higher domestic inflation. If the rupee stays at 85, US consumers would face a 26 per cent price hike on Indian imports, and similar increases on goods from other countries, triggering a significant wave of inflation in the US.
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