GS2 – International Relations
Context
U.S. President Donald Trump has proposed imposing a 25% tariff on Indian goods starting August 1, 2025, citing India’s protectionist trade policies and strategic closeness to Russia.
Root Causes of Trade Friction
- Trade Deficit Issues: Trump criticized India’s trade practices as “obnoxious,” pointing to the persistent U.S.–India trade imbalance.
- Russia Angle: India’s continued oil imports and defence partnerships with Russia post-Ukraine war have emerged as key U.S. concerns.
- Breakdown in Trade Talks: Earlier efforts toward a trade agreement had shown promise, but the proposed tariffs reflect strategic signalling rather than commercial logic.
Economic and Strategic Implications
Global Trade Norms Under Strain
- WTO Undermined: Unilateral tariffs violate the multilateral spirit of WTO agreements.
- Geoeconomics Over Rules: Demonstrates the increasing role of strategic interests over rule-based systems, weakening post-WWII trade frameworks.
India’s Trade Policy Dilemma
- Strategic Autonomy: India must carefully balance its defence and energy independence with growing U.S. pressure.
- Push for Reforms: The tariff threat may catalyse India to diversify exports and boost domestic manufacturing.
State of Bilateral Relations
- Continued Strategic Convergence: Despite tensions, India and the U.S. continue cooperating on platforms like QUAD, IPEF, and G20.
- Trust Deficit Risk: Unilateral U.S. actions may delay a comprehensive trade deal and weaken bilateral confidence.
India remained the largest trade partner of the U.S. for the fourth consecutive year (2024–25), with trade worth $131.84 billion.
Impact on Indian Exports
- Sensitive Sectors: Likely to be hit are textiles, pharma, auto parts, engineering goods, and IT services.
- Comparative Disadvantage: The proposed 25–26% tariff rate is higher than for Indonesia (19%) and Vietnam (20–40%), though lower than China and Bangladesh.
- Supply Chain Risk: Many Indian sectors rely on Chinese imports, making them vulnerable to trans-shipment clauses.
- Additional Strains: Further stress from proposed BRICS oil tariffs and extra duties on steel and aluminium.
- MSME Vulnerability: Smaller exporters may face job losses and shrinking global competitiveness.
Way Forward
- Trade Diplomacy
- Revive Trade Policy Forum talks.
- Explore interim agreements in areas like pharmaceuticals, agriculture, and digital trade.
- Export Diversification
- Accelerate FTAs with EU, ASEAN, Africa, and Latin America.
- Promote rupee-based trade and regional supply chain resilience.
- Boost Domestic Competitiveness
- Expand PLI schemes, upgrade logistics.
- Support MSMEs with credit, insurance, and digital export tools.