In 1700, India produced 25% of the world’s textiles. Our muslins, particularly from Bengal, were so fine that a 50-yard piece could pass through a wedding ring. But everything changed in June 1721, when the British Parliament passed the Calico Act, imposing a staggering 75% tariff on Indian textiles.
The impact was swift and severe. By 1750, Bengal’s textile exports to Britain had plummeted from 150,000 pieces annually to just 30,000. By 1813, India’s share of the global textile market had crashed from 25% to less than 3%.
That was the impact of tariffs way back in time.
Let me tell you another interesting anecdote.
Way back in 1930, two Republican congressmen, Willis Hawley and Reed Smoot, convinced President Herbert Hoover to sign what they believed would be their legacy – the Smoot-Hawley Tariff Act. Their intention? To protect American farmers by raising tariffs on over 20,000 imported goods to record-high levels.
What followed was perhaps history’s most expensive lesson in economic interconnectedness. As US tariffs rose to nearly 45%, America’s trading partners retaliated swiftly. Canada, then America’s largest trading partner, imposed new tariffs on 16 products that accounted for 30% of US exports. Global trade plunged by 65% between 1929 and 1934.
Fast forward to 1987. Japan had emerged as America’s fierce economic rival, dominating the consumer electronics market. President Reagan, pressured by American manufacturers, imposed a 100% tariff on Japanese electronics. Japan’s response? They shifted production to Southeast Asia, established assembly plants in America, and ultimately strengthened their global supply chains. The tariffs, instead of weakening Japan’s dominance, helped Japanese companies become more resilient and globally integrated.
Now in 2025, as Donald Trump announces fresh tariffs – 25% each on Canada and Mexico, and 10% on China – these historical lessons cast a long shadow.
Did you know? Together, China, Mexico and Canada accounted for more than 40% of imports into the US last year.
While China has hit back by announcing similar charges on some US products, it’s a wait-and-watch game as the Trump administration has paused the announced tariffs on Canada and Mexico for 30 days after both countries agreed to boost border security.
All this political drama and power struggle raises an important question, are we about to witness another expensive lesson in global trade dynamics?
Before I get to that, let’s go back to the basics.
What are tariffs?
A tariff is a levy or duty that a government imposes on imported goods. When a product crosses a country’s border, the government charges this fee before the product can enter the domestic market.
So, a tariff is essentially a type of tax on imported goods when they are brought into the country from abroad.
Here, it’s important to note that tariffs and sanctions are not the same. Tariffs make trade more expensive by imposition of tax, but the trade continues. However, sanctions are complete government-ordered roadblocks that make it illegal to trade with specific countries, companies, or people, usually used as diplomatic punishment for political actions.
How do tariffs work?
What is the impact of tariffs?
When a government imposes a tariff, it creates a ripple effect through the economy.
1. Raises government revenue
Tariffs can be used to raise revenues for governments. This kind of tariff is called a revenue tariff and is not designed to restrict imports.
Historically, before income taxes became common, tariffs were a crucial source of government revenue. The United States, for example, funded nearly 50% of its federal budget through tariff collection in the 1890s.
In recent times (2018 and 2019), the Trump administration imposed tariffs on many items to rebalance the trade deficit. In the fiscal year 2018, customs duties received were USD 41.6 billion. In fiscal year 2019, duties received were USD 71.9 billion.
While tariffs contribute to government finances, their primary role should not overshadow broader economic priorities.
2. Protects domestic industries from foreign players
Governments use tariffs to protect domestic jobs and industries. For example, in April 2018, President Donald Trump imposed a 25% ad valorem tariff (tax on imported goods that is calculated as a percentage of the value of the item) on steel articles from all countries except Canada and Mexico. In March 2022, President Joe Biden replaced the tariff on steel products from the United Kingdom with a tariff-rate quota (a system that limits the quantity of a product that can be imported while also applying different tariff rates to imports) of 500,000 metric tons and reached quota deals with several other countries. This reopened the trade of specific items with the U.K. while taking measures to protect domestic US steel manufacturing and production jobs.
But, this move can backfire too.
India’s attempt to protect its domestic motorcycle industry through high tariffs didn’t entirely work as planned. In the late 2000s, India imposed a 100% tariff on Harley-Davidson motorcycles. Under pressure from the Trump administration, which called this duty “unacceptable,” India reduced it to 50% in 2018.
Further, in the 2025 Union Budget, India lowered the customs duty on fully built imported motorcycles over 1,600cc—Harley-Davidson’s speciality—from 50% to 30%. This case highlights how protectionist measures can be influenced by external pressures and may not always be sustained in the long run.
3. Influences international trade relationships
Tariffs often serve as powerful instruments in the complex chess game of international relations. When nations implement these trade barriers, they’re not just adjusting import costs – they’re sending diplomatic signals that can either strain or strengthen bilateral relationships.
During the US-China trade negotiations in 2019, China’s threat to restrict rare earth elements exports—controlling 80% of global supply—led to a 27% spike in rare earth prices and prompted the US to soften its stance on technology transfer requirements.
The US has always been at the centre of tariff wars. Before we get into detail, here’s a look at the top trading partners of the US at present.
As we currently witness tariffs being used to assert dominance and declare supremacy, multiple countries are impacted by the uncertainty around the US trade policy.
4. Retaliatory measures
Tariff wars often spiral into retaliatory measures, disrupting industries on both sides. In 2018, the US imposed tariffs on Chinese imports, aiming to curb its trade deficit and protect domestic industries. China responded with tariffs on US goods, triggering a tit-for-tat escalation.
There are enough examples across the globe of how tariff wars have led to trade wars and impacted economies instead of benefiting them.
The ripple effects of tariffs
- Burden on end-consumers
When tariffs are introduced, they can create financial burdens for citizens. For instance, in 2018 when the USA imposed tariffs on foreign washing machines it resulted in a 12% hike in prices. This increased the consumer cost by over USD 1.5 billion annually, dwarfing the estimated USD 82 million the US raised in tariff revenue.
The recent tariffs by the Trump administration on Canada, Mexico, and China are expected to cost the typical US household over $1,200 a year.
Similarly, India’s 25% tariff on imported solar panels in 2018 aimed to boost local production but led to an average 15% increase in the cost of a 5 kW residential solar installation. For many households, this translated into an extra INR 20,000 per system, slowing the adoption of renewable energy solutions.
2. Impact on the job market
Governments often impose tariffs to protect domestic industries, assuming that higher import duties will shield local businesses from foreign competition and create jobs, however, this may be counterintuitive. An IMF study indicates tariff increases are associated with significant declines in output growth and higher tariffs lead to more unemployment and higher inequality.
Take the United States’ tariff hikes in 2018-19 for example, the government aimed to boost American manufacturing by imposing steep tariffs on imported steel, aluminium, and various Chinese goods. However, this exposed the US manufacturing industries to these tariff increases and the US witnessed a decline in employment. The rising input costs and retaliatory tariffs led to greater job losses than protectionist benefits.
3. Supply chain disruptions
Sudden changes in tariffs are infamous for disrupting the global supply chains, especially for industries that rely on cross-border production. In 2018, Ford estimated a loss of USD 1 billion due to these tariffs, while GM faced significant earnings hits. Intel delayed chip factory construction due to rising equipment costs, while Dell increased computer prices by 13% in response to higher component tariffs.
4. Economic slowdown
While tariffs are often framed as tools to protect domestic industries, they can trigger broader economic slowdowns, particularly for trade-dependent nations like India. In December 2024, President Donald Trump accused India of imposing high tariffs and threatened reciprocal taxes on Indian exports. Analysts warned that an all-out tariff war could shrink India’s GDP by 0.3% in the following fiscal year, highlighting the fiscal repercussions or how protectionist policies can backfire.
And, this applies not just to nations on whom the tariff is imposed. It can also impact countries imposing the tariff.
During the first administration of President Trump as part of his economic policy, which was known as “America First”, the Trump administration slapped tariffs on imported aluminium. After that, a 25% tariff on all imported steel was imposed, in addition to the 10% tariff on aluminium in many countries.
In a survey of economists conducted by Reuters, the Trump administration’s tariffs were very poorly received. Almost 80% of the 60 economists surveyed believed that the tariffs on steel and aluminium imports would harm the U.S. economy.
Let me share an interesting anecdote here.
President Trump, a “tariff enthusiast,” often cites William McKinley, the 25th US President, as his inspiration. McKinley was famously known as the “tariff man,” introducing some of the steepest tariff hikes in American history.
But here’s the twist—by his second term, McKinley had a change of heart. He abandoned his hardline stance and started advocating for freer trade. It’s almost poetic— history has a way of proving that even the most die-hard tariff supporters eventually realise that walls don’t build economic success.
How tariffs impact India
Tariffs have different impacts based on whether we are imposing them on imported goods or if our exported goods are being subject to tariffs. Accordingly, the impact on the concerned industry and thus the economy varies. Whilst the current focus is on the potential impact of US tariffs on Indian industries and the economy, India has historically maintained relatively high tariff rates compared to other major economies, with an average Most Favored Nation (MFN) applied tariff rate of 18.3% in 2020. This places India among the world’s most protected major economies – significantly higher than China’s 7.5% and the U.S.’s 3.4% average tariffs.
Impact of recent US tariffs
The US is India’s largest trading partner, with bilateral trade surpassing USD 120 billion in FY24. India’s imports from the US include petroleum crude, pearls, precious stones, electrical machinery, aircraft parts, and military equipment. Exports to the US primarily consist of petroleum products, pharmaceuticals, telecom instruments, and electronic components.
While India was excluded from the recent US tariffs on Canada, Mexico, and China, the broader trend of US protectionism poses potential challenges. Here are a few implications of tariffs:
- Impact on exports: While no direct tariffs have been announced yet by the new Trump administration, in the past India has been impacted by tariffs on exports. On March 23, 2018, India was part of the first round of countries hit by Trump’s national security tariffs. Trump imposed tariffs of 25% on USD 761 million of steel and of 10% on USD 382 million of aluminum imported from India. Combined, these tariffs covered roughly 2.3% of India’s exports to the United States in 2017. India’s exports of steel products fell 46% in the 12 months since the tariffs were imposed.
- Increased costs: India imports 87% of its crude oil in U.S. Dollars. India imported USD 134 billion worth of oil in FY 2024. With the Rupee weakening, oil import costs rise, leading to higher prices for petrol, diesel, plastics, and fertilizers.
- Rupee volatility: Increased global trade uncertainty can lead to volatility in the Indian Rupee, making imports more expensive and potentially affecting India’s trade balance. We witnessed the Indian Rupee hit an all-time low of 87.29 per dollar on Monday. Further, Trump’s recent threat to impose 100% tariffs on BRICS nations, including India, should they undermine the US dollar, adds a layer of uncertainty.
- Opportunities: Tariffs can protect developing domestic industries, particularly in sectors like electronics and automotive components. For instance, India’s electronics manufacturing sector grew from USD 29 billion in 2014 to USD 75 billion in 2020, partially attributed to protective tariffs ranging from 15-20% on imported electronics.
When it comes to US-India trade, manufacturing sectors like textiles, jewellery, and automotive components have shown particular sensitivity to tariff adjustments. The trade diversion effects, especially in the context of US-China trade tensions, have created opportunities for Indian manufacturers.
India’s response to global tariff trends, including its trade policies and negotiations, will play a crucial role in shaping its economic future. As we aim to become a USD 5 trillion economy, the balance between protection and competitiveness remains a crucial policy challenge.
In summary
Tariffs matter beyond mere headlines; they have profound implications for economies, businesses and citizens. As nations continue to engage in tariff battles and sanctions against one another, understanding these dynamics becomes essential for investors and consumers alike.
The ripple effects of tariff decisions extend far beyond bilateral relationships, influencing global trade patterns and diplomatic alliances. As nations navigate these complex waters, they must carefully weigh the immediate economic benefits against potential long-term damage to international partnerships and diplomatic goodwill.
While most focus on the negative impact of tariffs, they can also serve as catalysts for meaningful dialogue. When nations face economic pressure from trade barriers, they’re often compelled to return to the negotiating table with renewed commitment to finding mutual solutions. This dynamic highlights an important paradox: while tariffs can initially damage international relationships, they sometimes create the necessary tension that drives countries toward more sustainable long-term agreements.
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Disclaimer: The information contained herein is for informational purposes and should not be interpreted as soliciting, advertising, or providing any advice.