Tariffs as Weapons of Destruction

Ashok Nag

Tariffs are taxes on international trade, typically levied on imports. Export tariffs are relatively uncommon and are imposed for specific reasons, such as regulating domestic prices, protecting local industries, or generating revenue. In the age of colonialism, colonial powers employed tariffs as a tool to weaken competing industries in their colonies. A prime example of this is the destruction of India’s textile industry when it became a colony of the British Raj. In the early 17th century, India was once an industrial powerhouse and a global leader in manufactured textiles (as noted in Anarchy by Dalrymple). The imposition of exorbitant tariffs on Indian products–an 85% tax on importing Indian hand-woven calico (chintz) and 44% on importing Indian muslin–eventually led to the collapse of India’s textile industry. As a result, by the end of colonial rule, India’s share of the global textile market had plummeted from 25% at the start of British rule to just 2% by its end.

After 75 years of independence, India is again facing a similar challenge of protecting its significant share of the global pharmaceutical market. A trade surplus of $19 billion and providing livelihood to 2.7 million Indians, positions this industry as one of the most pivotal industries for the country’s economic growth.

Export of this industry increased from $15.07 billion in 2013-14 to $27.85 billion in FY 2023-24. India’s share in the global pharmaceutical market currently stands at 3.5% in terms of value, while it is the 3rd largest by volume..The top five destinations for these exports are the USA, Belgium, South Africa, the UK, and Brazil. The US alone accounts for 31% of total exports.

This growth story of the Indian pharmaceutical industry, commendable as it is, cannot obscure the fact that India’s primary exported products are drug formulations and biologicals, which include generic drugs. These products account for over 75% of the country’s exports. Indian generic drugs are significantly cheaper, by some estimates, 33%–than similar drugs produced in the US and other advanced countries. According to a report by Bain & Co., India is the leading supplier of generic drugs to the US, contributing 40% of its total supply. Many of these producers are small companies, with the industry comprising 3,000 pharmaceutical companies and 10,000 manufacturing facilities. Operating on very thin profit margins, a 10% increase in tariffs could render many of these firms unviable, as they may not be able to pass on the additional costs entirely to US buyers.”

Although the Trump-era tariff on the Indian drug industry is expected to significantly impact the survival of small to medium-sized generic drug producers, its repercussions will be even greater for a large segment of the American population. According to a BBC report, generic drugs account for 9 out of 10 prescriptions in the USA. The report also cites a study by the consulting firm IQVIA, which found that in 2022, US consumers saved $219 billion by using generic drugs exported by the Indian pharmaceutical industry. Many of these generic drugs produced by Indian firms are 50% less expensive compared to those manufactured by non-Indian companies. Replacing these imported generic drugs with locally produced alternatives, even if feasible, will require substantial time and investment. In essence, this tariff represents a two-way challenge.

This tariff, though potentially damaging in the short term, also has a positive aspect. It will compel Indian companies to move up the value chain. Currently, the Indian pharmaceutical industry is largely positioned in the lower tier of the value chain. The allocation of profits towards cutting-edge research and development by leading Indian pharmaceutical companies is minimal compared to their US counterparts. The following table presents the latest data.

Finally, the imposition of a tariff is clearly a political decision. Keynes once remarked, ‘Is there anything that a tariff could do which an earthquake could not do better?’ However, he was ambivalent about the desirability of tariffs when the interests of his own country were at stake. Economist Eichengreen has written, “Keynes repeatedly reversed his public position on the advisability of protection... It is by no means clear whether his legacy has promoted or hindered efforts to reduce trade barriers.”

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Vol 57, No. 41, Apr 6 - 12, 2025