From US tariffs to a trade deal: What are India’s strategic options?

This announcement came amid some perplexity among Indian policymakers and trade experts, who were busy trying to decipher exactly what US President Donald Trump meant by the “reciprocal tariffs" he had promised to levy. Most experts felt that since India had high tariffs compared to the US, product-specific tariffs in areas of American export interest, along with some kind of tariff equivalent of non-tariff measures imposed by India, may constitute ‘reciprocal tariffs.’

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If that were so, the USTR’s National Trade Estimate Report on Foreign Trade Barriers (NTE 2025), would have helped identify US pain points, some of which could be addressed through a BTA.

The 2 April tariff announcements by Trump confused everyone because ‘reciprocal tariffs’ appeared to cover US trade imbalances with other countries rather than their tariff and non-tariff measures.

Free trade agreement (FTA) partners of the US, like Vietnam and Japan, faced a high ‘reciprocal tariff’ on account of their positive trade balance with the US. Vietnam faced a reciprocal tariff of 46%, despite its comprehensive agreement with the US, and Japan with a limited trade deal faced 24%.

None of America’s FTA partners has been spared. So, trade agreements, irrespective of their scope and coverage, do not guarantee trade certainty with the US.

Compared to many other Asian countries, India did much better, faced with a reciprocal tariff rate of 26%, without any trade agreement. Therefore, will a trade deal with the US really help?

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The reason that the US targeted its FTA partners with high reciprocal tariffs is its trade imbalance with them. The USTR has come up with a unique formula to calculate reciprocal tariffs, which is tilted towards trade deficits rather than barriers to American exports.

In this situation, even if a developing country like India or Vietnam goes for zero-for-zero import duties for American goods in their FTAs, it may not be able to address its trade gap with the US. How much domestic demand can be generated in a developing country for American products like apples, corn, motorcycles, automobiles, flowers, coffee, raisins, walnuts and alcoholic beverages?

On the contrary, if we get zero duty, we can export a lot more products to the US. So, as in the case of Vietnam, our trade surplus with the US could enlarge after a BTA. Would that make India a target for higher reciprocal tariffs in the future?

So far, things have been in our favour. This is primarily because our policymakers have taken the right decisions. With America’s growing hostility with China, US companies need a large market, which we offer. But we cannot be relaxed or happy with the 26% tariff announced on 2 April as new sector-specific tariffs may unfold on 9 April.

In any case, will a tariff that is lower than our Asian competitors give us a competitive edge in the US market? There are many scenarios and possibilities. Let us consider four.

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Scenario 1: If our price competitiveness vis-à-vis competing countries increases on account of lower tariffs, then we can export more to the US, but that could worsen the latter’s negative trade balance with us. So, while we may have a short-term gain, in the future, an enlarged trade deficit with the US may engender the risk of higher tariffs imposed on our exports, while our competitors may face lower tariffs as their exports might decline, leading to better balanced trade with the US.

Scenario 2: If both India and the US reduce tariffs to zero, the latter’s negative trade balance may remain, or even grow. But if we reduce tariffs for products that are considered sensitive by New Delhi, like dairy items or cotton, there may be a domestic backlash. In such cases, different lobby groups are likely to behave differently. For example, if our import duties on cotton from the US are zero, farmers may be unhappy, but our textile industry may be happy.

Scenario 3: Companies may start changing their sourcing hubs and making use of trans-shipment hubs. For example, they may export goods through the UAE or Singapore, which face lower tariffs, rather than directly to the US market. So, there could be changes in the way products are routed.

Scenario 4: Some of our competing countries may bring down tariffs to zero for US exports, as Vietnam is reportedly considering, while others, like China and Canada, may impose reciprocal tariffs. Some countries may quietly and smartly subsidize their exports and others may play with exchange rates to absorb the high tariff impact.

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All these scenarios may work together and there could be more scenarios that we have not thought about. Therefore, we should not be in a rush to sign a BTA, but wait and watch as the situation unfolds.

This is the right time for India to implement domestic reforms, including lower tariffs, to attract investment and improve industry competitiveness, especially of our micro, small and medium enterprises (MSMEs). Tariff reductions should be done to support ‘Make in India’ in general and not to support any specific industry. We should closely monitor what competing countries are doing and how supply chains are changing, even as we diversify and de-risk our own supply chains and continue to smartly engage with the US to ensure some stability and predictability in our bilateral trade in an uncertain situation.

The author is a professor, Indian Council for Research on International Economic Relations (ICRIER).