Analysis | Dissimilar exports, quick FTAs may shield India from Trump’s reciprocal tariffs

Reciprocal Recipe

While Trump has announced the plan for reciprocal tariff, it is not immediately clear if US wants to impose these levies sector-wise or product-wise.

For instance, the White House mentions India in its factsheet on fair and reciprocal tariffs, saying, “…the US average applied Most Favoured Nation (MFN) tariff on agricultural goods is 5 percent. But India’s average applied MFN tariff is 39 percent. India also charges a 100% tariff on U.S. motorcycles, while we only charge a 2.4% tariff on Indian motorcycles.”

Think tank Global Trade Research Initiative (GTRI) points out so far, US is referring to sectors or products, as it suits the country.

“The US must choose a criterion: product or sector for transparent decision making, else all the US efforts on MFN tariff cuts will end up benefitting China as it is the largest global supplier of industrial goods,” said GTRI.

However, if one goes by levies on Indian goods exported specifically to the US, for 75 percent of these products, in value terms, the average tariff is already less than 5 percent.

Emkay Global’s Madhavi Arora points out that US' trade deficit with India for 2024 was $49 billion, substantially lower than the likes of China. Emkay added that Trump administration is likely to target countries that have extremely heavy deficits with America.

What may shield India from a possible fallout of Trump’s latest trade salvo is the difference in the export profiles of the two countries, spurring hopes that reciprocal tariffs may not have a significant impact on India.

GTRI explains this with an example. “If the US charges 50 percent reciprocal tariffs on Indian pistachios because India charges the same, India is happy as it does not export pistachios to the US.”

While India’s largest exports to the US includes engineering goods, electronic products, drugs and pharmaceuticals, along with gems and jewellery, America’s outbound shipments into India are starkly different, mostly comprising crude oil, petroleum products, coal and cut and polished diamonds.

An industry representative, on the condition of anonymity told Moneycontrol, “..the profile isn’t complimentary between the exporting products of India and US, only when it is complimentary can you justify reciprocal tariffs. Even if such tariffs are put, it will be on items that are narrow in terms of trade volumes. However, it is too early to make a guess on the impact, given that the US is yet to reveal the details of its move.”

Emkay Global’s Madhavi Arora said that on a relative basis, India has among the highest tariffs on US imports, which means that it may get disproportionately hurt if reciprocal tariffs are imposed.

This is true across most broad product categories - especially for intermediate goods - which could hurt India’s strategy of incentivizing domestic manufacturing or assembly, she added.

“If Trump goes by the letter of his statement, then wherever US goods are suffering, he may reciprocate. Thereby, he may shield the impact on India, given the different export profiles of the two nations. However, If US goes for sectoral tariffs then it may be a different scenario,” GTRI’s Founder Ajay Srivastava added.

Doubling Down on Deals

Another route that could protect Indian exports from a world that is increasingly shifting towards a higher tariff regime is bilateral trade deals with and beyond US.

Modi ended his 36-hour visit to the US in the early hours of February 14, aiming to more than double total bilateral trade with America to $500 billion by 2030. Both the leaders also announced plans to negotiate the first tranche of a mutually beneficial, multi-sector Bilateral Trade Agreement (BTA) by fall of 2025.

Both countries promised to increase market access, reduce tariff and non-tariff barriers, and deepen supply chain integration, with India committing to buy more petroleum products and liquified natural gas from the US.

The idea of a mini trade deal with US isn’t new. Negotiations for a Free Trade Agreement (FTA) was initiated during Trump’s first presidency. However, it was reportedly shelved by Joe Biden administration.

One industry official told Moneycontrol that a bilateral trade deal with US may also protect India from reciprocity of tariffs.

India does stand to benefit from speeding up bilateral FTAs with other nations as well. A senior Indian government official earlier this month said that the nation may bank on quick FTAs, which provide lower duties between partner countries to limit the fallout of Trump’s aggressive tariff policies.

India is negotiating a slew of trade deals with countries and blocs, including the United Kingdom, Oman and the European Union.

India’s trade and investment pact with the European Free Trade Association (EFTA), which includes Iceland, Liechtenstein, Norway and Switzerland, is also expected to be ratified by the end of the current calendar year.

FTAs are a key tool to counter trade disruptions as such agreements helps lower restrictions between the signatory countries, offering greater market access through removal or reduction of import taxes or duties.

India can especially use this time to speed-up the process of inking FTAs since Trump’s reciprocal tariffs won’t take immediate effect, likely an intentional move, to give nations time to potentially negotiate new trade terms with the US.

However, GTRI’s Srivastava warns this may not be the best time to broker an FTA or full trade agreement as the US does not respect such agreements. “An example is how the Trump administration has imposed tariffs on Mexico and Canada, and on steel and aluminium in violation of the trade agreements between these nations.

Competitive Exports

The best way to limit the fallout of Trump’s tariffs is to increase the competitiveness of Indian exports, both in cost and quality.

Srivastava explains that trade is an outgrowth of good product, and tariffs wont’s matter if India improves the cost and quality of the products it sells to the world. This would involve reducing input costs to make Indian finished goods more cost-effective, as well as increasing investments in research and development to enhance quality.

The Centre is already taking steps to correct inversions in custom duties imposed on inputs or raw materials in a bid to boost local manufacturing of finished products and make exports competitive.

Rationalising import duties on components or parts that are not manufactured in India helps make end-products more competitive, and consequently boost exports, a playbook China has successfully adopted for years.

In fact, in the Budget 2025-26, significant changes were rolled out in India’s indirect tariff structure, with some of them specifically benefiting American exports like fish hydrolysate, synthetic flavouring essences, ground installation for satellites, including spares and consumables and on motorcycles based on engine capacity.