Higher tariffs in both the US and India could lead to reduced real wages and incomes.....

 In economic policymaking, domestic real wages/income typically take precedence over foreign real wages/incomes. Policymakers are primarily focused on the economic well-being of their own country's citizens and businesses, including factors like job creation, purchasing power, and overall economic stability. While global economic conditions and foreign incomes can influence domestic policies, the primary goal is to optimize domestic conditions.

Here's why:

Domestic Focus:

Policymakers are responsible for managing their own country's economy, including its labor market, inflation, and overall economic growth.

Political Considerations:

Domestic economic issues directly impact voters and political stability, making them a primary concern for policymakers.

Policy Tools:

Policymakers have tools like monetary policy, fiscal policy, and regulatory measures that can directly influence domestic wages and incomes.

International Trade and Investment:

While foreign wages and incomes are important in the context of international trade and investment, the focus remains on optimizing domestic competitiveness and ensuring fair labor practices at home.

Higher tariffs on US metals by India would likely lead to a decrease in exports to the US, potentially increasing domestic supply and potentially reducing prices for the domestic economy. Here's how:

Impact on Exports:

Reduced Exports:

A tariff is a tax on imported goods, making them more expensive. This would reduce the competitiveness of Indian steel and aluminum exports to the US, as US buyers would find other suppliers (or might decide not to buy at all).

Increased Costs for Indian Exporters:

The increased tariff would raise the cost of exporting to the US, potentially leading to lower profitability for Indian companies.

Impact on Domestic Supply and Prices:

Increased Domestic Supply:

As exports to the US decline, some of the steel and aluminum that would have been exported might be redirected to the domestic market. This could increase the supply of metals in India, potentially leading to lower prices, according to a report from ClearTax.

Potential for Lower Prices:

With more steel and aluminum available domestically, businesses and consumers might experience lower prices for these materials.

Important Considerations:

Other Markets:

Indian steel and aluminum producers might seek to diversify their markets and find alternative outlets for their exports, such as Europe or the Middle East, according to India Briefing.

Domestic Demand:

The impact on domestic prices and supply would depend on the strength of domestic demand for steel and aluminum. If domestic demand remains strong, even with higher imports, the price might not drop as much as expected.

Reciprocal Measures:

The US could also retaliate with tariffs on Indian goods, potentially harming other sectors of the Indian economy.

How Tariffs Reduce Real Wages and Incomes:

Increased Costs for Businesses:

Tariffs raise the cost of imported goods, including raw materials and components, which can increase production costs for businesses, particularly those heavily reliant on global supply chains.

Higher Consumer Prices:

Increased costs for businesses are often passed on to consumers in the form of higher prices for goods and services. This reduces consumer purchasing power and negatively impacts real incomes.

Reduced Demand and Employment:

Higher prices and reduced consumer demand can lead to a decline in sales and profitability for businesses. This can result in job losses, reduced wages, and lower overall income.

Trade Wars and Retaliation:

Tariffs can trigger retaliatory measures from other countries, further disrupting trade and potentially leading to trade wars. This can create uncertainty and instability in the global economy, harming businesses and consumers alike.

Why Tariffs are Sub-Optimal:

Reduced Economic Growth:

Tariffs can impede economic growth by limiting trade, disrupting supply chains, and increasing costs for businesses.

Negative Impact on Global Welfare:

Tariffs can reduce overall global welfare by hindering international trade and resource allocation.

Increased Inequality:

Tariffs can disproportionately affect lower-income consumers who spend a larger portion of their income on basic necessities, leading to increased income inequality.

Distorted Resource Allocation:

Tariffs can lead to misallocation of resources by protecting less competitive industries and discouraging innovation.

Reduced Access to Advanced Technologies:

Tariffs can limit access to advanced technologies and expertise from other countries, slowing down technological progress and innovation.

Examples of Impact in India:

Automotive and Electronics Sectors:

The U.S. reciprocal tariffs announced in April 2025 could particularly impact India's auto and electronics sectors, which rely on imports of components and raw materials.

Potential for Dumping:

Other countries may retaliate by dumping goods in India, which could further disrupt the market and harm Indian manufacturers.

Overall GDP Impact:

Experts estimate that the U.S. tariffs could erode India's GDP by up to 50 basis points, as a result of reduced exports and slower economic growth.

Higher tariffs in both the US and India could lead to reduced real wages and incomes due to increased costs for businesses and consumers, ultimately harming overall economic welfare. While tariffs might protect domestic industries, their negative impacts on global trade and supply chains outweigh the benefits. The higher prices and potential trade wars could lead to slower economic growth and lower living standards.