What is Retaliatory Tariffs issue between India-US ?
Source : Economics Times
GS III : Indian Economy

Why in News ?

US Trade Representative announced on June 2 the plan for the 25 per cent increase in the tariffs on 26 items from India. Now it decided to hold the hikes till December.

Key Facts

• Background
  • India impose Digital Services Tax (DST) on tech giants.

    

    • A two per cent tax starting in April last year on earnings in the country by foreign technology and e-commerce companies like Amazon, Facebook and Google.
  • This was opposed by the administration of former President Donald Trump, and Biden has picked up the baton.
  • India’s DST is unreasonable or discriminatory and burdens or restricts US commerce.
  • Estimates indicate that the value of the DST payable by US-based company groups to India will be up to approximately $55 million per year.
• Other nations imposing DST.
  • United Kingdom, Austria, Italy, Spain and Turkey
• US threatened to increase duties include bamboo, window shutters, cigarette papers, pearl, copper foil and bedroom furniture.
  • This retaliatory tax aims for the international negotiations on taxation.
• India retaliated with higher tariffs on 28 US products that included walnuts and almonds.

What is Retaliation Tarrifs and Trade Wars ?

• What is tarrifs ?
  • It is a tax.
  • It adds to the cost borne by consumers of imported goods a country can enact.
  • This taxes owed on imports are paid by domestic consumers and not imposed directly on the foreign country’s exports.
  • It is mostly to make foreign products relatively more expensive for consumers than a domestic products.
• Why tariffs are imposed ?
  • To protect domestic industries
  • For Protecting Consumers
  • In order to boost domestic employment
  • Protecting competitive domestic infant industries
  • Reduce drain of economy and national security
  • Retaliations
• What is Retaliatory Tariffs ?
  • Countries set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. 
  • For instance consider India put a tariff against a product from United States in the view to protect/reducing economic drain for beyond an expected time.
    • US at the same time imposes a higher tariffs to the import of other products from India as a retaliatory measure or for negotiations.
  • Also this type of Tariffs can be imposed when trading partner goes against the government’s foreign policy objectives of importing country. 
• What is the impact of Retaliatory Tariffs ?
  • Domestic industries benefit from a reduction in competition as import prices are artificially inflated.
  • For consumers and businesses this higher import prices means higher prices for goods.
  • It support the domestic Industries but negatively affected Consumer.

World Trade Organisation and Tariffs

• With the introduction of international organizations designed to improve free trade tariffs has declined.
• Countries have shifted to non-tariff barriers such as quotas and export restraints.
  • An import quota is a restriction placed on the amount of a particular good that can be imported.
  • Voluntary Export Restraints : Created by the exporting country rather than the importing one.
    • For Instances India placed export restrains on a product exporting from US in line with a request from US then US place restraints on exportation of other product to India.
• Apart from WTO Multilateral Agreements between governments increase the likelihood of tariff reduction.

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