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Investing.com-- ANZ analysts said the impact of higher U.S. trade tariffs on India, as threatened by President Donald Trump, was likely to be minimal in the near-term, but could have a deeper effect in the medium-to-long term.
ANZ sees a 0.1% to 0.2% impact on India’s GDP in the near-term from any reciprocal tariffs- which it deemed “not excessive.”
But the indirect impact of the tariffs- through a rise in unemployment and weaker domestic production capacity will be challenging for the country, both on the economic and political front.
Trump had repeatedly criticized India for charging high duties on the import of U.S. goods, and threatened to impose reciprocal tariffs against the country. India responded to the threat by offering to lower import duties on several key sectors.
It was not immediately clear just what Trump’s tariffs will entail. ANZ estimated that a blanket tariff based on weighted average tariff difference could see India face a 6.5% higher tariff, while product-specific tariffs could result in a 12% increase.
Higher U.S. tariffs will impact India’s exports and GDP growth, given that the country’s dependence on U.S. demand has increased in recent years.
But the immediate impact of tariffs will be manageable, ANZ analysts said. The U.S.’ ability to impose tariffs on India may also be limited by high dependence on some Indian imports.
Indirect tariff impact to be more challenging, ANZ says
But ANZ noted that the indirect impact of the tariffs will be far more challenging, given that high import tariffs in emerging markets seek to shield local producers from foreign competition.
While the lowering of such tariffs can boost some sectors, particularly those with a strong global presence, other sectors could face increased headwinds due to a lack of insulation against global competition.
“Even seemingly small export losses due to lower tariff differential can have noteworthy economic and political impact. For instance, reduced tariff differentials can worsen unemployment in India’s low - tech sectors that employ a disproportionately larger share of workforce,” ANZ analysts wrote in a note.
Sectors such as agriculture, textiles, toys, and leather- which already have a diminishing global trade advantage- stand to be impacted by lower Indian tariffs.
ANZ said the Indian government will have to balance economic trade-offs with international relations. The Modi government will have to protect the interests of its low-tech, high-employment sectors, given that they also account for a large voting base.
ANZ recommended that India should consider lowering tariffs across the board, although such an option stands to further widen India’s already large goods trade deficit.