India’s Trade Strategy Amid US Tariff Pressures: Cooperation or Retaliation?
Introduction: Understanding Trump’s Reciprocal Tariff Policy
The US trade deficit reached $918.4 billion in 2024, with India contributing $45.7 billion to this imbalance. Trump’s reciprocal tariff policy aims to ensure that countries imposing high tariffs on US goods face equivalent duties on their exports to the US. The key logic is fairness: if India levies high tariffs on American products, the US will do the same to Indian goods.
India has been criticised as a “Tariff King” because its average import tariffs are 5.2 times higher than those of the US. The difference is even more significant in agriculture, where India’s tariffs (39%) are nearly 7.8 times higher than the US’s 5%. This protectionist approach has helped Indian industries grow but has also drawn the US’s ire, making India a target for Trump’s tariff reforms.
Instead of retaliating, India should see this policy as an opportunity to rethink its trade strategy and align itself with global trade norms. By reducing excessive tariffs in non-sensitive areas and cooperating in energy and defence, India can prevent a trade war and strengthen its relationship with the US.
Why India Cannot Afford a Trade War
The US is India’s largest trading partner, with bilateral trade at nearly $200 billion in 2023. Under the ambitious “Mission 500”, both nations aim to raise this to $500 billion by 2030. However, if India retaliates with its own tariffs, it could risk losing access to the vast American market for IT services, textiles, and pharmaceuticals—sectors that heavily rely on US demand.
A trade war would also affect India’s economy in several ways:
- Exports to the US would decline, impacting millions of Indian jobs, especially in labour-intensive industries like textiles and leather.
- American companies might shift their supply chains away from India, preferring friendlier markets.
- India’s already struggling manufacturing sector would face higher costs if the US raises tariffs on Indian-made goods like steel and machinery.
Given these risks, a cooperative strategy—where India strategically lowers some tariffs in exchange for US concessions—would be a smarter approach.
Energy and Defence: Key to Balancing Trade
One of the simplest ways for India to reduce its trade surplus with the US is by increasing its imports of American energy and defence equipment. This would not only strengthen diplomatic ties but also help balance trade without making politically difficult tariff cuts. Given that the US is a global leader in energy production and advanced defence technology, India has much to gain from expanding its trade in these areas while addressing American concerns over trade imbalances.
Increasing Energy Imports: India imported crude oil worth $139.2 billion in FY 2023-24, but only 4% of this came from the US. By increasing its imports of American shale oil and liquefied natural gas (LNG), India can diversify its energy sources, making it less dependent on countries like Russia and the Middle East. This would enhance energy security while also reducing the trade surplus, easing tensions with the US. Additionally, access to American energy technology would help modernise India’s infrastructure, making energy production more efficient and sustainable in the long run.
Expanding Defence Procurement: India is already South Asia’s largest buyer of US defence equipment, but it has room to deepen cooperation. Purchasing high-tech fighter jets like the F-35 and missile defence systems would not only enhance India’s military strength but also counter regional threats like China. Additionally, these deals could be used as bargaining tools to secure better trade terms with the US. Strengthening defence ties would not only bolster India’s security but also reinforce its strategic partnership with the US, ensuring long-term economic and political benefits.
Rationalising Tariffs: Where Can India Make Concessions?
India must lower excessively high tariffs while still protecting key industries. Some tariffs, particularly on luxury goods, agriculture, and electronics, can be reduced without harming domestic businesses. These adjustments would strengthen India’s trade relationship with the US, making negotiations smoother. By targeting non-essential goods for reductions and using trade-offs in sensitive sectors, India can balance economic growth with fair trade practices while maintaining support for local industries.
Luxury Goods — A Simple Concession: India imposes 150% duties on whiskey, vodka, and rum, along with 125% on automobiles. These tariffs are extremely high and do not protect vital domestic industries. Unlike agricultural or industrial goods, reducing duties on luxury imports will not hurt Indian businesses, as these products mainly cater to high-income consumers. Bringing these tariffs down to 50% would demonstrate goodwill towards the US while allowing more affordable access for Indian consumers. Such a move could also encourage similar reductions on Indian exports to the US, creating a fairer trade environment.
Agriculture — A Delicate Negotiation: Agriculture is politically sensitive in India, but some tariff reductions could be beneficial. Currently, India imposes 45% tariffs on soybeans and 5% on cotton, which could be lowered in exchange for better market access for Indian fruits like mangoes and pomegranates in the US. A Tariff Rate Quota (TRQ) system could also help—India could allow limited US agricultural imports at lower duties, ensuring that American farmers benefit while Indian farmers remain protected. Such a strategy would satisfy US demands without causing major disruption to India’s farming sector.
Electronics and Machinery — Supporting “Make in India”: India imposes high tariffs on American electronic goods and machinery, increasing costs for Indian manufacturers. Lowering these tariffs would allow cheaper access to advanced US technology, boosting India’s industrial sector. Encouraging American investment in Indian manufacturing would also create more jobs and strengthen the “Make in India” initiative. If US firms see India as a cost-effective manufacturing hub, they may shift production from China, benefiting both trade and employment in India.
Leveraging the US-China Trade War: The US-China trade war presents an opportunity for India to expand exports in labour-intensive industries like textiles, footwear, leather, and toys. As the US reduces its dependence on Chinese suppliers, India must act quickly. However, to fully benefit, India must enhance manufacturing efficiency, remove barriers like strict US sanitary standards, and offer incentives to US companies setting up factories in India. If managed well, this shift could help replace China in key export sectors, boosting economic growth and job creation in India.
The Role of Diplomacy in Negotiations
Commerce Minister Piyush Goyal’s visit to the US will be crucial in deciding how India navigates these trade challenges. Key negotiation strategies should include:
- Securing tariff cuts on Indian exports (e.g., mangoes, textiles) in exchange for reducing high Indian tariffs on select US goods.
- Strengthening energy and defence trade, as these are areas where India can make concessions without harming domestic industries.
- Pushing for relaxed non-tariff barriers, especially for agricultural goods and labour-intensive exports.
India must focus on a long-term trade agreement rather than short-term concessions, ensuring a stable and predictable economic relationship with the US.
Conclusion
India must respond strategically to Trump’s reciprocal tariff policy rather than retaliate. The best approach is to reduce excessive tariffs on non-sensitive sectors like luxury goods and automobiles, ensuring goodwill without harming domestic industries. Additionally, boosting imports of US energy and defence equipment would help balance trade, strengthen diplomatic ties, and modernise India’s infrastructure. Leveraging the US-China trade war presents another key opportunity, allowing India to expand exports in labour-intensive sectors like textiles, footwear, and electronics, increasing global competitiveness and job creation.
Beyond economic measures, smart diplomacy is crucial to securing a long-term, balanced trade deal with the US. By negotiating tariff adjustments wisely and offering targeted concessions, India can avoid trade tensions while protecting key domestic industries. Instead of viewing US tariffs as a threat, India should embrace this challenge as a chance to modernise its trade policies. A cooperative strategy will safeguard India’s economy, strengthen its global position, and help achieve the ambitious Mission 500 goal of expanding bilateral trade to $500 billion by 2030.
