Trump’s promised ‘liberation day’ tariffs — What could happen on April 2?

The run-up to April 2

Just a day ahead, there are three key reports from the United States Trade Representative (USTR), Department of Commerce and the Treasury Department, which will lay out a lot of advance warnings on what’s to come on April 2. Given that the US has trade agreements with some 20 different countries, the initial onslaught is likely to be focused on these trading partners. Primarily because the US has some 200 trading partners and 12,500-odd tariff categories, so reciprocal tariffs in the true sense could spawn millions of new tariffs, which would be an administrative nightmare for Washington, DC. There is the other option of a blanket tariff rate on “everything, everywhere, all at once”. That too has its problems. What needs to be looked out for is whether Trump’s recourse to tariff hikes, by using the President’s emergency powers, is only resorted to as a stopgap measure even as they could potentially come off after the tariffs are followed by investigations.

Difficulties in walking-the-talk

It would be simplistic to assume that the tariff regime will be settled on April 2. Analysts such as Mike Wilson, the chief US equity strategist and chief investment officer for Morgan Stanley, are of the view that the “reciprocal tariff announcement is likely a stepping stone for further negotiations, as opposed to a clearing event”. That could well be the case.

Trump had said over the weekend that Washington is open to negotiations on reciprocal tariffs, but that “those pacts” would have to be discussed after the reciprocal tariffs go live on April 2. And, unlike his first term, the American president seems unconstrained by the impact his policies have on the American financial markets. Trump also appeared to shrug off the inflationary effect of his proposed measures, stating openly that he is not bothered about higher car prices on account of the tariffs. And unlike his previous term in office, where he was kept under check by some of his staffers, this current set of officers are simply cheering him along. US Treasury Secretary Scott Bessent, a venerated hedge-fund titan, has stated on record that the economy could benefit from a “detox”. US Commerce Secretary Howard Lutnik, another respected business leader, has been a big cheerleader of the tariff hikes.

How US trading partners are likely to react to Trump’s proposed tariffs

What needs to be seen is also how America’s trade partners react to what unfolds on April 2. While the temptation to retaliate would be strong, as many countries have done against the earlier tariff hikes, some of this could be self-defeating and there could be a clear cost to all this. Tariffs are a tax on domestic consumers and any hike is likely to bring in economic pain. It could trigger further escalation from Washington too.

Some countries might, instead, choose to get concessions by pruning their own tariffs, while also presenting an opportunity for countries to bring down the barriers that exist among themselves.

How will upcoming US tariffs impact India

According to the USTR, India’s average Most-Favored-Nation (MFN) applied tariff rate was 17 per cent in 2023, which “was the highest of any major world economy, with an average applied tariff rate of 13.5 per cent for non-agricultural goods and 39 per cent for agricultural goods. It is only a question of time when Washington’s fire gets directed at New Delhi.

India might also not receive a concession on the sweeping US reciprocal tariffs, as Trump told reporters aboard Air Force One that “all countries” would face the new tariffs. This came even as the US and India concluded their four-day talks on Saturday to determine the contours of a trade agreement. The Indian and US negotiators have yet to agree on the terms of reference (ToR) outlining the scope of the proposed deal.

Damaging secondary tariffs

Then there is the issue of secondary tariffs, that could have a wider impact than Trump’s reciprocal tariffs. India could, for instance, end up attracting an additional 25-50 per cent US tariffs over the purchase of Russian oil. This comes after Trump indicated Sunday he was upset at the progress of peace talks with Russian President Vladimir Putin and warned of imposition of secondary tariffs on buyers of Russian oil if he felt Moscow was blocking his efforts to end the war in Ukraine. If oil from Russia were to be priced out from the market, it could lead to higher global oil prices, impacting importers such as India. While securing sufficient oil supplies over the medium term should not be an issue for India, higher oil prices and the loss of discounted Russian barrels, would be a clear setback for the country.

Earlier on March 25, Trump had threatened to impose 25 per cent “secondary tariffs” from April 2, in addition to any existing tariffs, on countries such as India and China that import Venezuelan oil. “Venezuela has been very hostile to the US and the freedoms we espouse. Therefore, any country that purchases oil and/or gas from Venezuela will be required to pay a tariff of 25 per cent to the US on any trade they conduct with our country. All documentation will be signed and registered, and the tariff will take effect on April 2,” Trump said in a social media post last week. According to a Financial Times report, Trump told reporters that the 25 per cent tariff on buyers of Venezuelan crude would be in addition to any existing levies. As per the executive order issued by the US administration, once applied, the tariffs would remain in place for one year “after the last date on which the country imported Venezuelan oil,” unless the US commerce secretary approved their earlier removal, the FT report said.