India needs more than a trade deal to tackle Trump’s reciprocal tariffs

While many saw the proposed India-US trade deal as a sure-shot way to insulate New Delhi from reciprocal tariffs, US President Donald Trump’s recent actions on Canada and Mexico have dashed hopes that a bilateral trade agreement (BTA) could be the solution.

Trump proceeded with the decision to impose 25 percent tariffs on Canada and Mexico on March 3, despite both countries having trade deals with the US.

Ajay Srivastava, Founder, Global Trade Research Initiative (GTRI), says, “Trump’s decision to impose 25 percent tariffs on Mexico and Canada despite finalising the USMCA in 2019 reflects his scepticism toward free trade agreements. The US may also push India to open government procurement to American firms, reduce agricultural subsidies, weaken patent protections by allowing evergreening, and remove restrictions on data flows—demands India has resisted for decades and is still not prepared to accept.”

India and the US, during Prime Minister Narendra Modi’s visit to America on February 13, unveiled a plan termed "Mission 500” – aiming to more than double total bilateral trade to $500 billion by 2030 and announced plans to negotiate the first tranche of a mutually beneficial, multi-sector BTA by fall of 2025.

Srivastava adds that FTA (Free Trade Agreement) negotiations are time-consuming, and by the time an agreement is reached, Trump may have already imposed reciprocal tariffs, making it ineffective. On account of these reasons, the option to broker a trade deal with the US may not be advisable.

Madhavi Arora, Chief Economist, Emkay Global, tells Moneycontrol that even if there is a trade deal between India and the US there is no guarantee that it will safeguard New Delhi from higher tariffs.

“India needs to appeal to the counterparty, you have to negotiate to protect key sectors such as farm goods, auto ancillaries, and low-end manufacturing products. However, it makes logical sense for any economy to do a trade deal irrespective, since that will help kick-start the conversation on insulating India from higher duties as well as providing opportunities to the US as well,” Arora says.

India on the radar

When Trump unveiled his reciprocal plan last month, India was mentioned as one of the trading partners that do not offer the US a reciprocal treatment.

“The US’s 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 percent tariff on US motorcycles, while we only charge a 2.4 percent tariff on Indian motorcycles,” according to a statement from the White House on February 13.

Even before being elected as President, Trump has been terming India as a “tariff abuser” and as recently as during his address to the Joint Session of the US Congress on March 4, he called out the South Asian nation for imposing duties as high as 100 percent.

“India charges us 100 percent tariffs; the system is not fair to the US, it never was. On April 2, reciprocal tariffs kick in. Whatever they tax us, we will tax them. If they use non-monetary tariffs to keep us out of their market, then we will use non-monetary barriers to keep them out of our market,” he said during the address.

Reciprocal recipe

This reciprocal plan first unveiled by Trump mid-February, within days of taking charge as President, seeks to “correct longstanding imbalances in international trade and ensure fairness across the board”.

In theory, reciprocal tariffs refer to the US levying import duties against trading partners that match the existing levies foreign countries impose on American goods.

While Trump’s officials are currently working out the nuts and bolts of the plan to respond against trading partners that do not give the US reciprocal treatment, the authorities are yet to elaborate on the mechanisms of this decision.

However, several statements from the US President over a month-and-a-half have singled out certain countries that could be the target of Trump’s tariffs, including India.

The biggest question still is, how would the US implement the reciprocal plan?

So far, Trump has been referring to sectors or products, as it suits the country. In India’s case, he has repeatedly raised the issue of auto tariffs.

Think tank GTRI points out, “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.”

A look at the trade profiles in goods between India and the US reveals that the former already levies lower tariffs on American goods.

Emkay Global’s Arora points out that 82 percent of India's FY24 imports from the US had tariffs of 0-10 percent, while around 15 percent of imports had tariffs of 10-20 percent and only about 3 percent of imports had tariffs higher than 20 percent.

“However, on a relative basis, India has among the highest tariffs on US imports, which means that it will be disproportionately hurt if reciprocal tariffs are imposed. This is true across most broad product categories, especially for intermediate goods, which could hurt the government’s current strategy of incentivising domestic manufacturing or assembly,” Arora adds.

Indian chemicals, transportation (automobiles), textiles and footwear sectors are expected to be among the worst hit by reciprocal tariffs.

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 include engineering goods, electronic products, drugs and pharmaceuticals, along with gems and jewellery, America’s shipments to India mostly comprise crude oil, petroleum products, coal and cut and polished diamonds.

Complementary export profiles remain key to effectively implementing reciprocal tariffs.

India taking steps

New Delhi has already started working on insulating the country from Trump’s reciprocal plan, including the proposed trade deal.

Commerce Minister Piyush Goyal has embarked on a US visit starting March 3, wherein he is expected to negotiate more favourable trade terms for India.

While New Delhi is toying with the idea of reducing tariffs on certain sectors such as automobiles and chemicals, Indian authorities are also looking to boost exports of textiles and farm products to the US, notably through the proposed trade deal between the two nations.

India ranks tenth among the top nations that export to the US, at $91 billion in 2024, with Mexico, China and Canada occupying the top three positions.

The US is India's top export destination and its fourth-largest source of imports.