Can India stay unscathed as Trump’s trade war threatens to escalate?

While tariffs are often imposed to protect domestic industries, reduce trade deficits and raise government revenue, countries like South Korea have used them strategically to negotiate concessions in trade agreements. India employs tariffs to promote its ‘Make in India’ initiative.

Recently, President Trump imposed a 25% import tax on all steel and aluminium imports, despite warnings of retaliation by China, Canada and the EU. While this has escalated the fear of an all-out trade war, countries are also trying to work out alternative ways to respond, such as whether there is scope for legal recourse through trade agreements or for relief through bilateral dialogue.

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The tariffs may impact the American economy, with its businesses facing higher production costs and consumers paying higher prices, but, as seen in India and elsewhere, the retaliation by domestic firms is often limited. Trump’s actions also raise broad questions of whether trade agreements can ensure a predictable trade regime (or trade war risks will prevail), and if tariffs can be used to solve geo-strategic problems and strengthen national security and safety.

Canada, Brazil and Mexico are key suppliers of steel to the US, with Canada also being its largest aluminium supplier, accounting for over 50% of US imports of this metal in 2024. While trade accounts for 67% of Canada’s GDP and 73% of Mexico’s, it constitutes only 24% of America’s GDP. Thus, for the US, the core issue is its large trade deficit, but for its neighbours, the issue is of over-dependence on trade (and the US market).

Prime Minister Narendra Modi’s US visit this week is at a critical juncture, with the fear of a global trade war looming large. Trump repeatedly raised concerns about India’s tariffs, calling the country “a big abuser on trade" during his election campaign and bringing up the issue on platforms like the India-US Trade Policy Forum. So, the tariff-reduction ask list of the US is not new to India. 

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The US Trade Representative’s 2024 National Trade Estimate Report on Foreign Trade Barriers states that “India maintains high applied tariffs on a wide range of goods, including vegetable oils (as high as 45 percent); apples, corn, and motorcycles (50 percent); automobiles and flowers (60 percent); natural rubber (70 percent); coffee, raisins, and walnuts (100 percent); and alcoholic beverages (150 percent). 

In addition, India maintains very high basic customs duties (in some cases exceeding 20 percent) on drug formulations, including life-saving drugs and finished medicines listed on the World Health Organization’s list of essential medicines. High tariff rates also present a significant barrier to trade in other agricultural goods and processed foods (e.g., poultry, potatoes, citrus, almonds, pecans, apples, grapes, canned peaches, chocolate, cookies, frozen French fries, and other prepared foods used in fast-food restaurants)."

India’s budget for 2025-26 selectively reduced import duties on some of these items, including pharma products, bikes (including Harley Davidson) and synthetic flavouring essence. 

While this is a step in the right direction, it may not be enough to keep Trump happy. India may have to keep another list handy for unilateral tariff reduction. Using tariff reduction as a bargaining tool, India can try to ensure a predictable regime for its exports and protect service-sector interests on the issue of H1-B visas for high-skill workers.

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The US trade report of 2024 mentioned specific non-tariff measures by India, including price caps on coronary stents by the National Pharmaceutical Pricing Authority, BIS standards for chemicals and petrochemicals, etc, which may feature in bilateral talks. 

Regulatory cooperation agreements and mutual recognition of standards between the two countries will enhance certainty on both sides; this matter could also be raised by India. 

Broadly, discussions could range from immigration to energy security, intellectual property protection and purchases of defence equipment from the US. The US accounts for around 17% of our merchandise exports and nearly 60% of service exports. Both need each other, and given the trade complementarities, there is significant space for constructive talks.

Attracting US investments to India could be a key aim. Our budget proposals include liberalizing foreign direct investment (FDI) in insurance. The prospect of further opening up other sectors of interest to US companies, including retail and inventory-based e-commerce, could be leveraged to negotiate better deals. 

A bilateral investment treaty with the US may be examined. The 2019 US withdrawal of benefits to India under its generalized system of preferences was on the grounds that India does not provide reasonable and equitable market access. Today, a US-friendly strategy, without compromising domestic interests, an outline of which was visible in the budget, may help India to avoid the trade war started by Trump’s policies.

The authors are, respectively, a professor and an external consultant, Indian Council for Research on International Economic Relations (ICRIER)