Ifs and Tariffs

U.S. President Donald Trump has shaken the established international trading system by announcing worldwide ‘reciprocal tariffs.’ The recent tariff-related measures have aggravated uncertainty, affecting the economic outlook across regions. Slowdowns in trade and a crash in stock markets are observed, and experts also predict that a global recession might be triggered because of tariff imposition. The impact of high tariffs will be an increase in cost for businesses that are dependent on global value chains, restricting their ability to compete in global markets.

A flat 26% tariff was imposed on all exports of India to the U.S., while reciprocal tariffs range between 10%-49% for other countries. Tariffs will be imposed on imports of goods from India, which account for 56.1% of India’s total exports. However, services have not yet been subject to tariffs. As per World Bank data, exports of goods accounted for around a fifth of India’s economy in 2023. As per India’s Ministry of Commerce and Industry, the share of exports to the U.S. during 2023-24 stands around 18%.

India has a trade surplus of around $46 billion, with the U.S. with around $14 billion worth of electronic products and around $9 billion worth of gems and jewelry being the top two sectors affected by U.S. tariffs. However, pharmaceutical and energy products are exempted under the latest round of tariffs. Previously, tariffs on India’s automobiles were 1.05%, while average tariffs for gems and jewellery, chemicals and pharmaceuticals, and electronics products were 2.12%, 1.06%, and 0.41%, respectively.

It is estimated that reciprocal tariffs would hit around 87% of India’s exports to the United States. Tariffs will primarily affect sectors including metals, chemicals, and jewellery, while pharmaceuticals, automobiles, and food products will also be affected. Similarly, the average tariff in India on U.S. farm products is 37.7% compared to 5.3% on US agricultural products.

Considering that the U.S. is the major export destination, India is likely to experience a decrease in its exports. Besides, India holds a trade surplus with the U.S., which is expected to be affected by tariff imposition. The situation will exert pressure on foreign exchange reserves and slow down the country’s economic progress.

As per the U.S., India imposed non-tariff barriers in the form of complex testing and certification requirements in sectors including chemicals, telecom products, and medical devices. These barriers make it challenging and costly for U.S. businesses to sell their products in India. It is estimated that without these barriers, the U.S. can increase its exports to India by $5.3 billion annually. According to World Trade Organization data, the U.S.’s trade-weighted average tariffs have been around 2.2% compared to India’s 12%.

India has decided not to retaliate against Trump’s 26% tariff on imports imposed on the country. Relevant representatives of both countries have discussed tariffs on India and made progress towards a ‘fair and balanced trade relationship.’ The final impact on India’s trade will depend on how long the announced tariff structure will remain valid. Besides, how other countries retaliate or negotiate tariffs with the U.S. will also influence the outcome.

India has agreed on the importance of the early conclusion of the Bilateral Trade Agreement. However, even with a trade deal in place, India will likely face a slowdown in economic growth due to lower demand for its exports, potentially because of a downfall in global growth. The Indian government intends to have a trade deal with the United States as soon as possible to pause the hefty reciprocal tariffs imposed by President Donald Trump. The 90-day pause on reciprocal tariffs is a relief to domestic exporters. In February 2025, India and the U.S. announced plans to complete the initial phase of a trade agreement by autumn 2025 to achieve bilateral trade of $500 billion by 2030.

India has a bright chance to shape a new trade vision by decreasing protectionist barriers in South Asia and strengthening relations with Southeast Asia and the Middle East. Reduced tariffs will help India attract trade and economic activity while generating employment opportunities. Besides, higher tariffs on India’s competitors, such as China and Bangladesh, have provided an opportunity to export textiles and garments to the U.S. India can be a preferred origin for new manufacturing setups and component assembly lines as international brands seek diversification in their supply chains to avoid high-tariff countries. The tariffs can serve as an opportunity for India to initiate trade deals with its partner countries. Besides, tariffs may also help domestic businesses purchase raw materials from countries affected by this situation.