Tariff threats and trade talk

As he joined Prime Minister Narendra Modi to address journalists at the East Room of the White House on February 13, President Donald Trump did his usual ranting about India’s high tariffs on US exports and vowed to impose reciprocal tariffs. But he also noted that Modi’s government in New Delhi, “as a signal of good faith”, recently moved to slash tariffs on several products to help boost US exports to India. The leaders also announced that the two nations would restart negotiations for a trade agreement with the target of concluding at least the first part of it by fall 2025.

So, the policymakers in New Delhi, as well as the trading community, were expecting that the US president might take a softer stance on India. “We were expecting that since India and the US decided to negotiate a bilateral trade agreement, we might be given a long rope,” said Federation of Indian Export Organisation (FIEO) Director General Ajay Sahai. The expectations were belied, though. Trump announced on March 4 that the US would impose reciprocal tariffs on India, along with other nations, on April 2. The announcement was made when Commerce Minister Piyush Goyal was in Washington, D.C., to set the stage for starting negotiations for the trade deal. Sahai said that Trump's announcement about reciprocal tariffs on India’s exports to the US could be a kind of posturing to expedite the trade negotiations and extract a more favourable deal.

Pankaj Chadha, chairman of the Engineering Export Promotion Council (EEPC), said that any undue concession promised to the US, especially in sectors like auto and food products, could trigger similar demands from other trading partners of India. “We are also negotiating trade agreements with the UK and the EU. If we give concessions to the US, they will also ask for the same,” said Chadha.

India already offers favourable deals to the US when compared with other countries. The weighted average tariff in India on US goods is 7.7%, which is lower than the overall average of around 11%. Earlier this year, India lowered tariffs on several US products, including bourbon whiskey, motorcycles, Information and Communication Technology and metal goods.

There is, however, a substantial – around five percentage point – gap in the average tariffs charged by the US and India. The weighted average tariff imposed by the US on Indian goods is 2.8%. This means that average tariffs imposed by India are 4.9% higher when compared with the US.

It is still not clear how the US will implement reciprocal tariffs. It could be zero-for-zero, or matching tariffs product-wise or the country weighted average.

Mithileshwar Thakur, secretary general of Apparel Export Promotion Council (AEPC), said that India should offer a zero-for-zero deal to the US on apparel products. In 2024, the value of India’s apparel exports to the US stood at $5.2 billion, while imports were negligible. Around 35% of India’s total apparel exports go to the US.

Thakur expressed hope that the bilateral trade agreement would not only mitigate the potential risk of tariffs but also create possibilities for enhancing apparel exports to the US.

But can a trade deal with the US shield India from tariff wars like the one unleashed by Trump? The experiences of Canada and Mexico, which have a tripartite trade agreement with the US, are not reassuring. Trump targeted both neighbours of the US with tariffs.

The Confederation of Indian Industries (CII) stated that the trade deal should ensure easier market access and regulatory harmonization so that Indian products and services could find a greater foothold in the US market and vice versa.