'Not in India’s best interest to negotiate trade deal with US amid Trump’s tariff threats'

AJAY SRIVASTAVA

United States President Donald Trump’s recent announcement about imposing reciprocal tariffs on India from April 2 didn’t come as a surprise. He has already imposed tariffs on Mexico, Canada, and China and threatened to do the same with the European Union and other trade partners of the US.

However, as India and the US have agreed to negotiate a comprehensive multi-sectoral trade agreement during Prime Minister Narendra Modi’s visit to the White House on February 13, Trump’s latest announcement raises an important question: Can any meaningful negotiation progress under the imminent threat of reciprocal tariffs?

Negotiating a comprehensive Free Trade Agreement (FTA) with the US under such circumstances is not in India’s best interest. Washington’s demands would likely extend beyond tariff cuts to include opening government procurement for US companies, reducing agricultural subsidies, weakening patent protections, and allowing unrestricted data flows – concessions India has resisted for decades.

Trump has a track record of renegotiating or outrightly disregarding trade agreements. This was evident when he dismantled the North American Free Trade Agreement in 2018-19, replacing it with the US-Mexico-Canada Agreement (USMCA). Yet, despite negotiating and finalizing the USMCA, he is now imposing tariffs that violate its terms. Given these factors, India should avoid committing to a comprehensive FTA with the U.S. and instead explore alternative trade strategies.

The Zero-for-Zero Tariff Strategy

One viable approach for India is a Zero-for-Zero tariff deal. Under this framework, India could propose eliminating tariffs on most industrial products from the US, provided the Trump Administration reciprocates by removing duties on Indian goods. India could identify tariff lines where it already permits duty-free imports under the existing FTAs, ensuring minimal disruption to domestic industries. Importantly, agriculture should be excluded from this arrangement to safeguard India’s farmers and rural economy.

India should present this proposal before April, pre-empting any punitive US tariff decisions. If other countries raise objections, India can later notify the deal to the World Trade Organization (WTO) as a goods-only trade agreement. This approach would allow India to retain control over its trade policy while avoiding the broader risks of a full-fledged FTA with a volatile US administration.

Impact of reciprocal tariffs on India

The US argues that while it keeps tariffs low on foreign goods, other countries impose higher tariffs, leading to a trade deficit of over $1 trillion and harming its industries and workers. To address this, President Trump introduced the Reciprocal Tariff Plan on February 13, allowing the US to raise tariffs on countries with which it has a trade deficit.

For India, Trump’s proposed reciprocal tariffs could have varied sectoral impacts. While India's weighted average tariff on US goods is 7.7%, compared to 2.8% on Indian exports to the US, certain sectors would be more vulnerable. Here are the sectoral tariff gaps: Automobiles (23.1%), diamonds and jewellery (13.3%), and chemicals and pharmaceuticals (8.6%) face a significantly higher tariff gap, Electronics (7.2%) and textiles (1.4%).

More concerning is that Trump’s approach might not be limited to tariff differentials alone. He may factor in non-tariff barriers and local taxes like GST, further increasing retaliatory tariffs.

For a few sectors, new tariffs may not mean much. For example, even without new tariffs, India’s passenger car exports to the US have already seen a decline. In FY 2024, these exports were worth $12.9 million and could fall below $8 million in FY 2025. A 100% tariff would dampen this already limited trade, but the impact would be negligible considering the low values involved. India may not agree to substantial tariff cuts on automobiles.

The US is India’s largest trade partner, with bilateral trade in goods and services exceeding $190 billion in 2024. Indian businesses are concerned about the impact of Trump’s tariffs. But Trump’s tariff threats reinforce the need for India to adopt a cautious and strategic approach in its trade negotiations with the US.

Any deal must protect India’s core interests, including tariff flexibility, government procurement autonomy, and agricultural subsidies. As global trade tensions rise, India must remain proactive in safeguarding its economic interests against shifting US policies.

(The writer is the founder of the Global Trade Research Initiative.)