25% Tariffs, 100% Wake-Up Call: Rethinking India’s trade sovereignty

India-US Trade Deal

The announcement of a 25% blanket tariff on Indian exports by the US, effective 1 August marks not merely a setback in bilateral trade relations; it serves as a litmus test for India’s economic diplomacy in an era of geopolitical realignments.

Paired with increasing political pressure and potential sanctions risks linked to India’s continued energy and defence engagement with Russia, the move is deeply symbolic: friendship with Washington now comes at the price of strategic alignment.

As an economist, I must resist the impulse to view this in narrow mercantile terms. This is a moment to ask big, forward-looking questions.

1. What is the long-term shape of India’s trade strategy?

2. Can India remain geopolitically non-aligned while being economically integrated with the West?

3. How can we future-proof Indian exports against external political shocks?

This study does not only analyse the damage. It charts a path forward, premised on resilience, diversification and negotiation.

Trump’s Tariff: Flashpoint or Inflection Point?

Let us recap what has happened: President Trump announced a 25% tariff on all Indian goods entering the US market, citing India’s purchase of Russian oil and weapons and failed trade negotiations.

Some voices in the US have associated these tariffs not only with trade conflicts and connections to Russia but also with India's involvement in BRICS, which is increasingly perceived in Washington as a counterbalance to Western influence. As BRICS enhances its role in global financial governance and discussions about reducing reliance on the dollar gain momentum, India's membership in the group is viewed as part of a larger challenge to US economic dominance.

Although India's participation in BRICS is motivated by strategic diversification rather than opposition to the West, it has introduced an additional layer of complexity to its relationship with Washington.

US imports from India in 2024-25 stood at $87 billion, meaning that nearly one in every five dollars earned by Indian exporters is now under threat.

Sectors such as textiles, pharmaceuticals, automotive components, IT hardware, and gems are bracing for demand contraction. Indian companies may see $8-10 billion in annual losses, and small and medium exports could be the hardest hit.

However, here is the catch: Trump’s tariffs are not a blip; they are a preview. In the new era of strategic trade, tariffs are used to discipline, coerce, and extract alignment. India must prepare not only to weather the storm but also to define its own weather system.

A Forward Strategy: Five Pillars for Economic Sovereignty

1. Strategic Trade Re-balancing

India must swiftly address its heavy reliance on the US market, which constitutes nearly 18% of the country's merchandise exports and 60% of its software service revenues. In the short term, a dedicated export contingency plan is essential for sectors that are most vulnerable to US demand. This plan should include expanded credit lines, increased RoDTEP rates, and time-bound interest subvention for the MSME sector. The medium-term objective must be to increase non-US exports to Africa, Latin America, Southeast Asia, and Central Asia by 10-15% over the next two years. This can be achieved through trade diplomacy, the establishment of new logistics corridors, such as the India-Middle East-Europe Economic Corridor, and incentivised market development. By 2028, the goal should be to reduce overdependence by expanding the share of South-South trade by at least 10-15% over the next three years, thus diluting US concentration.

2. Institutionalising a National Trade Security Architecture

India needs to establish an institutional framework for "trade intelligence and response" to proactively identify, model, and counter economic coercion. A Strategic Trade Risk Unit (STRU) should be created within the Ministry of Commerce, incorporating insights from MEA, Finance, and Industry. This unit should assess exposure across regions, simulate scenarios such as commodity embargoes or technology denial, and develop pre-approved response strategies. This approach will enable India to anticipate and mitigate disruptions, rather than merely reacting to them.

3. Turning Tariffs into Tariff Reforms

Ironically, while Trump’s critique of India’s high tariff barriers may be opportunistic, it underscores a persistent weakness. India’s average applied tariff stands at approximately 13%, ranking among the highest in the G20 countries. Although these tariffs protect domestic industries, they isolate India from global supply chains and weaken its bargaining power in trade negotiations.

A proposed reform could involve announcing a phased three-year tariff rationalisation plan, which would reduce duties on capital goods, green technology, and intermediate inputs while safeguarding vulnerable agricultural sectors. A new “Tariff for Trust” strategy could demonstrate India’s commitment to global integration without compromising its strategic sectors.

4. Digital Trade Diplomacy 2.0

While Trump's tariffs target goods, digital services are likely to be next. India's $110 billion software export industry heavily depends on its US clients. Contentious issues such as data localisation, cloud access, and digital taxes could be heightened by Washington in the coming months. India must lead the creation of a Digital Trade and Innovation Framework, a plurilateral, India-initiated agreement focused on data flows, AI governance, and digital sovereignty norms with the US, addressing secure cross-border data flows, AI governance, and digital public infrastructure norms. This also means negotiating exceptions for government data and health information while facilitating commercial data mobility. India has the potential to be a rule-setter in digital trade, rather than a reluctant participant.

5. Energy and Defence Autonomy

India's strategic autonomy is not for sale, but it must become more affordable to maintain it. Much of the US dissatisfaction arises from India's dependence on Russian crude oil and defense platforms. However, reducing reliance on Russia requires investment, not just rhetoric.

Policy roadmap:

a) Announce a National Strategic Diversification Plan for defence sourcing, targeting 50% non-Russian procurement by 2030. This will require not just new suppliers but the aggressive pursuit of joint R&D, IP waivers, and manufacturing partnerships, especially with France, Israel, and the Quad.

b) Accelerate the expansion of renewable energy and build oil buffer reserves from Middle Eastern and US suppliers to mitigate shocks from supply sanctions.

c) Use diplomatic capital to establish triangular partnerships, such as the US-India-UAE partnership for energy and India-France-Israel for defense R&D.

The goal is to achieve substitutability without subservience.

Diplomacy must match Data

India should not view this situation in terms of retaliation versus surrender. The true challenge lies in restoring predictability to an unpredictable global order.

A confident response involves the following steps:

# Initiate a bilateral emergency trade dialogue with the US through a special envoy, ideally someone outside the bureaucracy with cross-party credibility.

# Negotiate a short-term standstill agreement where the US halts tariff implementation for 90 days while India offers partial concessions and engages in structural dialogue.

# Involve like-minded partners such as Canada, Japan, and South Korea, who have faced similar coercion, to support India's call for rules-based dispute resolution at WTO plus forums.

India must project constructive agency, not passivity.

What's at Stake? India's Global Identity

India aspires to establish itself as a prominent voice in the Global South, a digital democracy, and a robust manufacturing hub. To fulfil this role, India must be perceived as not merely a counterweight but also a contributor to global economic governance. Achieving this will necessitate the formulation of cleaner and more efficient trade policies, including real-time industry consultation; agile economic diplomacy, wherein commerce and foreign policy are aligned; and the development of long-term industrial depth, rather than relying solely on short-term tariff protection.

This is not a crisis to endure but a pivotal moment to determine the nature of the economy and the type of global actor that India seeks to become.

Conclusion: The Shock India Needed

If India approaches this tariff situation with clarity, confidence, and creativity, it could serve as a pivotal moment, similar to the 1991 crisis that initiated economic liberalisation.

 In the immediate future, these challenges will be tangible. However, in the long term, the actions of the Trump administration may compel India to reconceptualise trade as a strategic endeavour rather than merely a commercial one. This should serve as a catalyst for change, not to withdraw from global engagement but to fundamentally transform the manner in which India interacts with the international community. This is not merely about tactical retaliation or concessions. It is about rethinking India’s institutional trade architecture with long-term investments in customs reform, FTAs, logistics and export resilience.