Mint Explainer: Will tariff reductions and a trade treaty with the US harm India?

As he did in his first term, Trump continues to pressure India to lower its high and protectionist import duties on several goods, including luxury goods. India has made some concessions recently by reducing the duties on Harley Davidson motorcycles and bourbon whiskeys.

Trump wants more, he wants trade between India and the US to be more balanced. In calendar 2024, India exported goods worth $87.4 billion to the US and imported goods worth $41.8 billion, leaving the US with a $45.7 billion trade deficit. Trump wants that to be narrowed. He wants India to buy more petroleum oil, natural gas and defence equipment from the US. 

Also read: India was first-time lucky with Trump's tariffs. But it doesn't want to take a chance

During prime minister Narendra Modi’s recent visit to the US, the two leaders agreed to work towards growing bilateral trade to $500 billion by 2030.

It remains unclear if the Trump administration will impose reciprocal tariffs even as negotiations for BTA are underway. But it is amply clear that Trump is determined to play tough this time. 

Meanwhile, on 18 February, Trump announced about 25% tariffs on imported cars, pharmaceuticals and semiconductors. This comes after the 25% tariff announced on steel and aluminium.

Mint examines if these tariffs and trade agreements will be detrimental to India’s interests.

Can the tariffs announced so far hurt Indian exports?

India is among the top 10 sources of goods imported into the US. India’s exports to the US include pharmaceutical products, pearls, precious stones and jewellery, telecom instruments, petroleum products, and cotton fabrics and apparel. Aluminium and products made of iron and steel are also important exports from India.

Tariff increases on steel, aluminium and pharmaceuticals can potentially hurt India’s exports. The higher tariffs on iron and steel announced on 10 February kick in on 12 March. The date for implementing higher tariffs on pharmaceuticals will be announced in due course, and companies setting up manufacturing facilities in the US will be exempted.

Trump may announce more such tariff increases in the coming days as he pressures trading partners to reduce import duties on American exports and incentivise manufacturing within the US. The reciprocal tariffs, if and when imposed, will also hurt many developing countries including India, as it will make their goods more expensive in the US market.

Should India be worried about Trump’s reciprocal tariff threats?

India’s goods exports to the US are about twice as large as its imports from the world’s largest economy. The US is the largest destination for India’s merchandise exports and reciprocal duties will hurt competitively priced Indian goods.

Tariffs on imported goods in the US are generally low – a simple average tariff for all products is 3.3% and the trade-weighted average is 2.2% under the most favoured nation principle.

The corresponding rates in India are 17% and 12%, respectively, and are the highest in the top 15 trading partners of the US. There are just a handful of African countries with higher simple average tariffs, according to the World Tariff Profile, 2024. 

India’s tariffs on agricultural products are among the highest, only Turkiye and the Republic of Korea have higher rates. This is perhaps why Trump refers to India as “tariff king".

India will need to bring down its tariffs and become less protectionist to do business with Trump’s America, with or without a bilateral trade agreement. The finalisation of this agreement depends on how much each side is willing to concede on tariff adjustments.

India's dilemma is that if it lowers tariffs for goods imported from the US, without entering into any form of a free trade agreement, it has to extend the same concessions to such goods imported from all other countries under the most favoured nation principle.

Overall, there is pressure on India to reduce tariffs and finance minister Nirmala Sitharaman indicated recently that the government would review and reduce import barriers. A small beginning to counter potential reciprocal tariffs was made in the budget - duties on Harley-Davidson motorcycles were lowered. Subsequently, duties on bourbon whiskeys were reduced.

What will be the impact of India lowering tariffs?

One, India can avert the imposition of reciprocal duties by the US on a whole host of goods if it lowers duties significantly enough to satisfy Trump. That will help protect India’s market in the US.

Two, consumers in India’s domestic market will enjoy more choice as many more exporters will find India’s market more attractive. Prices of imported goods would see some softening, and that may pressure domestic manufacturers to rework their pricing strategies for goods that have seen increased competition from imports.

Luxury goods and products for niche markets may experience increased demand after a fall in import duties.

Three, domestic manufacturers will be forced to become more competitive and offer better-quality products. Some manufacturers may find the going tough and may seek to sell out their operations to bigger and more profitable companies or close shop. This would mean a new phase of mergers and acquisitions.

Should India buy more petroleum oil from the US as sought by Trump?

The US is already the largest producer of petroleum crude oil and the Trump administration wants to ramp up production. It is also one of the top five exporters of crude oil. 

India, on the other hand, is one of the top three importers of crude oil. Most of India’s crude oil imports originate in Russia, Iraq, Saudi Arabia and the United Arab Emirates. Imports from the US are small in comparison.

Trump wants a larger share in India’s oil import basket to partly narrow the trade deficit. However, that is not an easy decision for India - given that over 85% of the crude oil requirement is met from imports, India buys from those offering it at the most competitive prices. That is why India started buying oil from Russia after it was placed under sanctions for attacking Ukraine. 

Also read: Trump's tariff war: How India might avert damage

If the US offers oil at prices low enough to offset the higher cost of transportation, India can buy American oil.