Shifting trade winds: US tariffs and India's strategic response

The US imposed additional tariffs on imports from all countries including India effective from 5 April 2025, at a baseline tariff rate of 10%.

By Vimal Pruthi and Shiv Ashish

“Tariffs are the most beautiful words to me.” These were President Donald Trump’s words on January 20, 2025, the very day he took office, setting the tone for his presidency. From the outset, it was clear that trade policy would be central to his administration's goals that is putting America first, securing better trade deals, protecting US manufacturing, and reducing trade deficits. While his administration was primarily focused on tariffs as a tool to achieve these objectives, but President Trump made it clear that tariffs alone weren’t enough. He also made sure to tackle non-tariff barriers that many countries used to restrict the entry of US goods.

On April 2, he introduced "combined tariffs" as a response to non-tariff barriers that were restricting US companies' global competitiveness. This approach accounts for both direct tariffs and the hidden costs in the nature of non-tariff barriers imposed by other nations, aiming to create a fairer trade environment and strengthen US exports in international markets.

In line with his campaign promises, President Trump first imposed duties on key trading partners like China, Canada, and Mexico. Next, he imposed duties on specific goods such as steel, aluminium, and automobiles. On April 2, 2025, referred to as the ‘Liberation Day,’ the US has introduced reciprocal tariffs targeting nearly all trading partners, marking a significant shift in trade policy to prioritize domestic industries and rebalance global trade.

Reciprocal Tariffs Impact Analysis

The US imposed additional tariffs on imports from all countries including India effective from 5 April 2025, at a baseline tariff rate of 10%. This rate will be increased to the rate mentioned in the Annexure I of the Executive Order dated 02 April 2025, for the respective countries which will come into effect from April 9, 2025. For India the applicable rate is 27%. When we examine this move in the context of global trade dynamics, India faces a considerable increase in its export costs to the US. Yet, when compared to countries like China and Vietnam, India’s position remains relatively advantageous. Imports from China will be subjected to a significantly higher tariff of 34%, while Vietnam will face an even steeper 46% duty. This gives India a competitive edge of 7 percentage points over China and 19 percentage points over Vietnam in terms of tariffs alone.

Additionally, it’s important to note that while India’s tariffs are rising, the US has excluded Canada and Mexico from these reciprocal tariffs due to the US-Mexico-Canada Agreement (USMCA). These reciprocal tariffs will not apply to imports from Canada and Mexico, but goods that do not qualify under the USMCA agreement remain subject to the existing 25% tariffs. Therefore, on products covered under USMCA, Mexico and Canada are in an advantageous position as compared to India.

Sector Wise Analysis

The recent tariff revisions imposed by the US on Indian exports have had a varied impact across key sectors. The pharmaceutical sector remains unaffected due to exemptions, while the auto and telecom sectors face significant cost pressures with tariffs rising to 25% and 27%, respectively. The textile and gems & jewellery sectors are grappling with increased tariffs, though India still retains some competitiveness over China. The agriculture sector is among the most impacted, with tariffs surging by 27%, threatening export viability. To mitigate these challenges, India must push for a Bilateral Trade Agreement (BTA) with the US to secure concessional tariff rates and maintain its trade competitiveness.

Conclusion

The evolving global trade landscape presents both challenges and opportunities for India. While the recent US tariff hikes pose difficulties, India is proactively taking steps to support its domestic industries and sustain export growth. Key measures include negotiating new Free Trade Agreements (FTAs) with the EU and the UK, which will open new markets and reduce dependency on any single trade partner. Additionally, higher tariffs on India’s counterparts like China, Vietnam and Bangladesh provide a unique opportunity for India to strengthen its presence in the US market, particularly in sectors like Telecommunications and Textiles.

At the same time, businesses must engage with the government to address new risks, such as the potential redirecting of Chinese goods into India due to shifting global trade dynamics. With the international trade environment rapidly evolving, India must adopt a strategic and forward-looking approach to safeguard its industries while capitalizing on emerging opportunities. By taking decisive action now, India can not only navigate these challenges but also position itself as a stronger global trade leader in the years ahead.

(Vimal Pruthi is Tax Partner, EY India. Shiv Ashish, Tax Professional, EY India, also contributed to the article.)

The views expressed in this article are personal and based on the current understanding of the law and available information. Readers are advised to seek professional guidance or clarifications from relevant authorities for specific situations.

The views in the article do not represent the stand of this publication.