Reciprocal Tariffs Impact on ICT Goods and Services, Are You Prepared for Inflationary Effect?

Introduction

• Tariffs are introduced to protect domestic goods and services growth and reduce the trade deficit by making foreign goods and services expensive, increasing the competitiveness of U.S. manufacturers. The U.S. tariff is calculated by estimating the tariff levels required to reduce its trade deficit (last observed at -6.1%) with each country to zero. The calculation uses trade data and the sensitivity of imports to price changes. The implementation of reciprocal tariffs with a baseline rate of 10% tariff paves a critical risk pathway not only for the U.S. but also for IT service countries.
• Additionally, the consequence of the U.S. de facto abrogation of the Information Technology Agreement (ITA) poses challenges for the U.S. companies’ competitive positioning and operational efficiency. For instance, according to the economic data by the Information Technology Innovation Foundation (ITIF) U.S. ICT sector contributed 5.5% to global GDP in 2020. However, if the U.S. distances itself from its cooperative ITA framework would create risk for U.S. companies losing a crucial foothold in the worldwide market.

• Globally, ICT software development and management services are largely driven by the U.S. technology and digital services ecosystem. Since digital services firms make up a large portion of the U.S. stock indices, termed as “Magnificent Seven,” their downturn can drag the broader market down. U.S. digital services are largely threatened by repercussions such as low margins, higher service prices, and unemployment, in tech firms and related industries. At the same time, proactive approaches such as the Digital Markets Act and Digital Services could act to constrain U.S. platform operations in the EU. 
• One of the major markets for U.S. digital services is the EU, accounting for roughly USD 87 billion and running a surplus. Crucially, these exports are a quarter of the U.S. total digital exports, which include social media and advertising, cloud computing, and various online subscriptions, and the EU is the single largest export destination for U.S. digital services.
• Further, India’s service sector, which exports USD 36.33 billion to the U.S. is negotiating hard to lower ICT tariffs. India, through its Bilateral Trade Agreement (BTA), integrated an approach to strengthen market access for the ICT companies, reducing tariff and non-tariff barriers.

How Tariffs Impact the Economy

Globally, technology and digital services firms are largely affected by the U.S. America First trade policy and the Fair and Reciprocal Plan. The European Union, Japan, and India are potential targets that would bear the brunt of the Trump Tariffs. These tariffs would also threaten the trade balance of ICT services in the global market. They would eliminate the surplus trade of digital services with the EU, which accounts for almost a quarter of the U.S. digital economy. According to a report by the U.S. Chamber of Commerce, the digital economy accounts for 10% of U.S. GDP and supports over 3 million jobs in America. Further, U.S. businesses are largely prone to tariffs as they provide services to the prominent, developed, and developing economies of the world. Thus, tariff imposition could stagnate a company's investment plans, owing to the stagflation and margin shrinking in the IT and Communication services.

Impact on Global Business

• Risk of Shifts in Investment and Market Capitalization Burn

Even though there is a strong countervailing force, such as demand for Artificial Intelligence (AI) and peripheral technologies such as machine learning and IoT, the ICT industry tariffs would face a negative impact in terms of market capitalization loss and change in investment plans. For example, when tariffs were first announced in early 2025, the NASDAQ composite index plunged over 5% in a single day. Prominent players’ shares, such as Apple’s, dropped 9% while Meta and Amazon sold over 7%. This sharp sell-off wiped out hundreds of billions of dollars of market capitalization. Furthermore, a global multinational digital services firm would face repercussions of reciprocal tariffs as it would erode investor confidence in the market, which would trigger valuation correction and increased volatility in the market.

• Sector-Specific Impacts

Tariffs on ICT goods and services drive up technology prices as the technology supply chain is disturbed by technology spending and tailspin, causing direct inflationary effects on the prices of ICT services. Further, innovation in the technology industry is fueled by the low-cost driven high-tech sectors. The implementation of tariffs and America First policy drives preference for domestic tech firms, creating employment opportunities and reducing dependency on a global volatile supply chain. For a short period, companies having limited pricing power should adapt to these higher prices through strategic supplier negotiations and pricing adjustments. These policies might prove less effective and less aligned with their advanced technological requirements. Further, in the long term, customer demand may diminish, resulting in a revenue reduction owing to many factors such as diverting investments toward advanced GPU development and driving AI competitive advantage.

• For instance, in a recent quick poll by Canalys, an Omdia company, 40% of respondents believe that they will witness a short-term boost in the pricing of technology services. However, feedback from U.S. partners is more polarized, while 20% consider it a disaster move.

Strategies for Businesses

Businesses might face uncertainty and rising costs during their short-term tenure. Further, businesses should seek retaliatory tariffs that target U.S. companies. However, strategic collaboration, such as the EU, U.S. Trade and Technology Council, and agreements on data sharing could be jeopardized. The imposition of digital tariffs might encourage major countries to follow many other countries to take sides. Thus, extending digital collaboration and technology sharing between countries could promote business growth through Greenfield investment and measures to lower tariffs on ICT products and services.

• For instance, in the recent discussion held on 17 February 2025, the U.S. hailed India’s recent measure to lower tariffs on American products and services. Additionally, both countries agreed on the BTA, which will act as a catalyst for Greenfield investment in high-value industries and drive opportunities for companies in both countries.

Key Takeaways

Tariffs are reshaping the global economy and trade flows, similarly boosting the digital economy through innovative collaboration strategies. The tariffs' repercussions would cause economic disorder, stagnation, uncertainty, and margin shrinks. However, ICT companies adapting to flexible cost strategies and investing in advanced AI technologies are important to tackle a constantly evolving scenario. Companies need to rethink their strategy and modernize their cost structure to develop a resilient business model. Besides, leveraging ease in norms and free trade agreements would promote the adoption of technology services in foreign lands, which would increase market access in the long term.