How India should respond to Trump’s reciprocal tariff threat – Firstpost

The India-US relationship is taking a new turn as discussions progress to provide a strategic framework for trade relations through the proposed Bilateral Trade Agreement (BTA). As per the joint statement released during Prime Minister Narendra Modi’s visit to the US, plans are in place to negotiate the first tranche of a multisectoral BTA by September 2025.

While the US is one of India’s biggest trade partners, India has never secured a free trade agreement with the US. However, with the threat of reciprocal tariffs looming over trade relations, it is high time that Washington and New Delhi secure a trade agreement to provide a platform for continued engagement. India may have to make some big promises and abandon its protectionist stances in its sensitive sectors to secure a deal with Washington.

Since Trump came into power, global trade dynamics have been shifting swiftly. After a series of tariff measures against China, Canada, and Mexico, India faces the pressures of reciprocal tariff threats from the Trump administration.

The administration announced that it would raise its import taxes to match the tariffs imposed on American goods by its trading partners on April 2. India could lose $7 billion annually if the reciprocal tariff rate is imposed.

Additionally, sector-specific 25 per cent tariffs were imposed on steel and aluminium, which came into effect on March 12. The US is also considering a 25 per cent tariff on pharma imports and tariffs on auto parts and semiconductors.

The United States has a trade deficit of $45.7 billion with India as of 2024, a 5.4 per cent increase from 2023. President Trump is pushing India to lower its high tariffs to narrow this deficit.

Despite the US being India’s major trading partner and increasing strategic convergences, India and the US have repeatedly failed to secure a comprehensive trade agreement.

Although the trade partnership has strengthened over time, a framework for free trade never materialised due to misaligned expectations, protectionism in sensitive sectors, and a lack of sustained will for mutual concessions. While there were some efforts for a mini-trade deal during Trump’s first term in 2019, it was too late, as the administration was looking for a bigger and more ambitious trade deal. Back then, India sought to restore its beneficiary status under the US Generalised System of Preferences (GSP). At the same time, Washington pushed for greater market access and lower tariffs.

However, today, in an increasingly fragmented world order with no WTO system to dictate rules for global trade, India and the US are at a crossroads. They must either quickly build a framework for a trade agreement or face the consequences of tariffs and disengagement.

If Trump imposes reciprocal tariffs, India could face steep barriers to its exports and lose its competitiveness in global trade. However, BTA will be a good place to start in a world where Trump’s economics mean that tariffs are being used as a legitimate tool for public policy.

Although India may have to make specific, significant reductions in tariffs, a trade deal would provide a framework for negotiations and help ensure US commitment to free trade. India can negotiate for reciprocal zero tariffs.

A few potential contestations remain in a possible BTA between India and the US. India’s simple average tariff rate is 17 per cent compared to the US’ 3.3 per cent, which is particularly high in agriculture.

This will be an area of contention for India-US trade negotiations, as agriculture remains a sensitive area for India while the US wants to push for market access. Additionally, India has been imposing Quality Control Orders (QCOs), expanding bureaucratic control over trade. QCO ensures that even foreign imports adhere to the standards set by the Bureau of Indian Standards (BIS), which are sometimes different from international standards.

India has also been added to the watchlist of intellectual property violators, as stated in Trump’s Trade Policy Agenda for 2025. India’s Minimum Support Price (MSP) on rice and wheat, as the subsidy figures are more than the WTO-agreed levels, could be another area for discussion, as Trump is looking for a market for its agricultural exports.

Trump’s administration is focused on India reducing tariff barriers in several sectors, including medical devices, IT, and agriculture. Trump may push for ambitious negotiation over a gradual, incremental approach, and to achieve a deal, India has to open up some of its closed sectors.

India and the US have successful business models in data flow and labour mobility, especially in the IT sector, and these have to remain open for mutual interests. India has to take some initiative in market-opening measures to maintain its long-standing relationship with the US. In contrast, the US has to acknowledge the long-term benefits of having India on its side in the broader Indo-Pacific geopolitical landscape. If the new trade order is based on reciprocity, India must show that it can meet the US on a more nearly equal level of reciprocity in trade.

Anisree Suresh is a researcher at the Takshashila Institution, which is an independent think tank and school of public policy. Views expressed in the above piece are personal and solely those of the writer. They do not necessarily reflect Firstpost’s views.