Trump, Tariffs and the Future of India-US Trade
Image Source: Wikimedia Commons
Durgesh K. Rai
Donald Trump began his second term as the 47th president of the US on January 20, 2025, and trade was one of the prominent subjects in the Presidential Memorandum released on the same day. As part of the “America First Trade Policy,” the new president directed the Secretary of Commerce to investigate the causes of the US’s large and persistent annual trade deficits and recommend appropriate measures. In all likelihood, some of Mr. Trump’s election campaign rhetoric on tariffs and trade will be converted into action.
In addition to China and his country’s immediate neighbours, Canada and Mexico, President Trump has accused other BRICS countries, such as India, of contributing to the US’s trade deficit problem and called them tariff abusers. More specifically, Trump stated that his administration would adopt a reciprocal approach on tariffs with the leading trade partners of the US, especially with whom it has a significant trade deficit. Some media reports also suggest that the Trump 2.0 administration could raise tariffs at least by 60 percent on imports from China and 10 or 20 percent on goods from other countries, including India. In a recent interview with a newspaper, the former ambassador to India (2017-2021), Kenneth Juster, also suggested that India should expect some tariff actions on its exports from the Trump 2.0 administration.
Given the prominence of the US as a leading trade partner, its proposed tariff actions are likely to cause a significant adverse impact on India’s exports to the world’s largest economy. Therefore, it’s imperative to understand the US’s importance in India’s external trade profile, examine the sectors that are likely to encounter market access challenges due to anticipated tariff hikes, and contemplate possible solutions.
The US is India’s largest trading partner both in goods and services. It is also among the few leading economies of the world with which India enjoys a favourable trade relation. The US is the only country from the list of India’s top ten trading partners with whom the country has been able to maintain a surplus trade balance for the last decade or so. As Table 1 clearly demonstrates, the importance of the US in India’s external trade has experienced significant growth over the last ten years. While Indian merchandise exports to the US have increased from US$ 42.4 billion in 2014-15 to US$ 77.5 billion in 2023-24, India’s merchandise imports from the US rose from US$ 21.8 billion to US$ 42.2 billion during the same period.
It’s worth noting that India’s trade with the US has grown faster than its trade with the rest of the world. As a result, the share of the US in India’s merchandise exports has increased from 13.7 percent in 2014-15 to 17.7 percent in 2023-24. The US’s share of India’s merchandise imports has also increased from 4.9 percent to 6.2 percent during the same period. Moreover, the US’s bilateral trade deficit with India has also grown significantly over the years. As Table 1 shows, India’s bilateral trade surplus with the US has increased from US$ 20.6 billion in 2014-15 to US$ 35.3 billion in 2023-24. Nevertheless, it is pertinent to underscore that India-US bilateral trade shrunk in 2023-24 compared to 2022-23. However, the decrease in India’s imports from the US was more pronounced compared to a marginal decline in its exports to the US. This has led to a significant surge in India’s trade surplus with the US from US$ 27.6 billion in 2022-23 to US$ 35.3 billion in 2023-24, becoming an important issue for Mr. Trump’s presidential election campaign.
Source: Ministry of Commerce and Industry, Government of India
According to Trump, the main reason for the trade deficit with India is that while India imposes high tariffs on goods from the US, the import duties levied by the US on Indian goods are lower, causing more imports and fewer exports from the US. Therefore, his remedy to the deficit problem is to increase the rate of tariffs on imports entering the US market. If we go by Trump’s statements like “I have always said, if they tax us, we tax them the same amount,” his new administration could follow a reciprocal approach with regard to the imposition of tariffs on imports coming to the US market. Although it would be a violation of the World Trade Organisation (WTO) rules to impose country-specific tariffs, the Trump 2.0 administration might try this option given the fact that WTO’s dispute settlement mechanism (DSM) has been dysfunctional since 2019. As mentioned previously, the second possible approach that could be adopted by the Trump 2.0 government to tackle the deficit problem is raising the tariff rates on the most favoured nation (MFN) basis by 10 or 20 percent on imports coming from all the countries.
If the Trump 2.0 administration decides to go with the reciprocal approach, it will levy the same tariffs as those imposed by its major trading partners like India. It is highly likely, however, that the reciprocal tariffs would not be put on all goods coming to the US market but only on the products from select sectors in which the US has some export interest and India’s import duties are higher than that of the US. Keeping this criterion in mind, the key sectors that could be subjected to a tariff hike include information and technology products, cotton, agriculture products, medical devices, safety and security products and automobile products. For instance, as per the US’s International Trade Administration (ITA), fresh fruits like apples and medical devices like Electrocardiographs are of great export interest for the US, but India levies import duty of 15 percent and 7.5 percent, respectively, while the US has zero duty on them. Therefore, the Indian apple and electrocardiograph would face 15 percent and 7.5 percent of import duties, respectively, in the US market. Similarly, on motorcycles with engine capacity of more than 800cc, India imposes a 100 percent import duty while the US has only a 2.4 percent customs tariff. Hence, the export of Indian motorcycles with engine capacity of more than 800cc would attract an extra tariff of 97.6 percent in the US market.
Instead of adopting the reciprocal tariff approach, if the Trump 2.0 government goes on to follow the second approach and imposes a duty of 10 or 20 percent on an MFN basis, the set of sectors that are going to be most affected in India would be those where India’s dependence on the US market is very high. Some of the key sectors in which India’s dependence on the US market is substantial (more than 25 percent of total exports of that sector in 2023-24) include fisheries (31 percent), dairy (28 percent), pharmaceutical products (37 percent), carpets and other floor coverings (58 percent), apparel and clothing (32 percent), articles of stones and cement etc (42 percent), glass and glassware (29 percent), precious stones and jewellery (30 percent), iron and steel products (28 percent), electrical and electronic goods (32 percent), furniture including beddings and mattresses (46 percent). However, this is not to say that the new US administration would raise the tariff rates on products belonging to all the above-mentioned sectors but just to highlight their vulnerabilities in case of a hike in import duties as the US constitutes a substantial proportion of Indian exports.
Whether the Trump 2.0 administration follows the reciprocal or the MFN tariff approach, India’s exports will be substantially affected and cannot be ignored, as the US is a very important market for products from many of India’s key export sectors. However, the proposed tariff hikes will also have an adverse impact on the US’s exports and economy. As the tariff actions by the US would also prompt India to retaliate with new tariffs on US goods. Therefore, neither side will benefit from the trade friction. However, it is not unwise to assume that Mr. Trump is pragmatic and not dogmatic. This means that his administration would be very much open to sitting at the table to find a solution that would make both countries better off. India should leverage its strategic clout and market potential and use this as an opportunity to negotiate a trade deal (mini) that would not only take care of the US’s concerns and protect India’s export interests but also become a robust framework for a much deeper integration between the world’s first and fifth largest economies in the long run.
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Dr. Durgesh K. Rai is an Associate Professor at the School of Entrepreneurship, Rishihood University, Sonipat, Haryana. Views expressed are personal.
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