Tariffs at Fifty: An Econometric Evaluation of US-India Frictions

Abstract

This study investigates the economic consequences of the United States’ imposition of a 50% tariff on Indian goods, employing rigorous econometric methodologies to provide empirical evidence of its trade and macroeconomic effects. Using a combination of the gravity model of trade, difference in-differences (DiD) estimation, and vector auto regression (VAR), the research identifies substantial adverse impacts on India’s export performance. The gravity model results reveal that, controlling for GDP and geographic factors, the tariff significantly reduced Indian exports to the United States by nearly one-third. The DiD estimation further highlights a clear divergence between India and a group of comparable exporters not subject to the tariff, underscoring the discriminatory effect of the measure. VAR analysis captures the dynamic repercussions of the tariff shock, including declining export revenues, contraction in industrial output, and heightened currency volatility. Robustness of results was validated through a series of diagnostic tests, including checks for normality, Heteroscedasticity, serial correlation, and specification tests. Policy implications emphasize the need for India to diversify export markets, strengthen domestic support measures, and engage in proactive trade diplomacy. More broadly, the findings caution against protectionist trade policies, underscoring their destabilizing effects on global supply chains and international economic relations.