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The imposition of tariffs by the Trump administration has thrown a wrench into India's carefully laid plans and expectations regarding a potential bilateral trade agreement with the United States. Prior to the tariff announcement, the Indian government operated under several key assumptions. Firstly, it was anticipated that any trade deal would involve a reciprocal exchange of concessions and compromises from both sides. Secondly, there was an implicit understanding that the US would maintain a tariff differential of 10-20% between China and other countries like India, acknowledging India's distinct economic circumstances and strategic partnership. Lastly, India expected the US to respect India's long-standing redlines, including concerns related to genetically modified (GM) food crops and the need to protect its extensive, subsistence-level manufacturing sector, which contributes significantly to the country's labor-intensive exports.
However, Trump's unexpected announcement of a 25% tariff on Indian goods, effective August 1st, accompanied by an unspecified "penalty" for defense and energy imports from Russia, has cast a shadow of doubt over these assumptions. The Indian government, through its Commerce and Industry Ministry, has officially acknowledged Trump's statement and is currently assessing its potential implications. Simultaneously, the ministry has reaffirmed its commitment to engaging in negotiations aimed at achieving a "fair, balanced, and mutually beneficial" bilateral trade agreement, emphasizing the importance of safeguarding the interests of Indian farmers, entrepreneurs, and micro, small, and medium-sized enterprises (MSMEs). Despite this public stance, there is a growing sense of unease within the Indian government regarding the clarity and fairness of the proposed tariffs and penalties. One senior official conceded that the tariff level, which approximates the original "reciprocal tariff" of 26%, was somewhat anticipated. However, the official reiterated India's firm position that trade negotiations cannot be conducted under duress or with a "gun to the head." The primary concern lies in the ambiguity surrounding the additional penalties announced by Trump and their cumulative impact on various sectors, particularly in conjunction with the headline tariff.
The Indian government's view is that many nations that have hastily entered into trade agreements with the US have ultimately found themselves on the losing end, effectively giving up more than they gained. Examples cited include countries like the United Kingdom and Australia, which both have significant trade deficits with the US. Given this precedent, India is reluctant to rush into a deal that could negatively impact its farmers and small businesses. As one official succinctly stated, "No deal is better than a bad deal." Despite this cautious approach, there is also some unease within the Indian government regarding the recent US-Pakistan deal to explore Pakistan's "massive oil reserves," especially in light of a similar cryptocurrency deal previously signed by Islamabad. The official noted that each country has the prerogative to determine its negotiating priorities and concessions, implying that India's willingness to compromise may be more constrained than that of other nations. India remains committed to pursuing an equitable agreement with the US, even if it means enduring some short-term pain in the form of tariffs. The official emphasized that this short-term pain is preferable to suffering long-term consequences from a disadvantageous trade deal.
Initially, the Indian government had set an informal deadline of around October for concluding a deal with the US. However, this timeline may be accelerated if upcoming negotiations prove promising. A significant complicating factor is the progress of trade negotiations between the US and China. If China secures a favorable deal with lower tariff rates and potential waivers on secondary tariffs, including those related to Russian oil imports and the proposed BRICS tariff, India's negotiating position will be further challenged. China is currently subject to a 30% tariff. From India's perspective, a successful trade agreement is crucial to maintaining a tariff differential between India and China, even in the context of a limited "early-harvest" type of deal. It's important to remember that India previously withdrew from the Regional Comprehensive Economic Partnership (RCEP) due to concerns regarding its agricultural sector. There appears to be growing acceptance within Indian policy circles to consider tariff reductions on some industrial goods and grant concessions in areas like public procurement and agriculture, provided that the US reciprocates with similar concessions, as seen in the UK deal.
India has also expressed a willingness to increase imports from the US, particularly in the areas of defense equipment, fossil fuels, and nuclear energy, in an effort to address Trump's persistent focus on the trade gap. There is a recognition within the Indian government that the US has historically maintained an open trade policy, which facilitated decades of globalization and benefited numerous countries, including the US itself. Prior to Trump's presidency, the effective US duty on Indian goods was just 4%, with minimal non-tariff barriers. However, some experts argue that this historical openness does not justify the current administration's attempt to seek "payback" from all nations. A higher-than-anticipated US tariff rate, particularly compared to other countries, could negatively impact India's economic growth prospects.
While Trump has not specified the exact penalty rate for India's imports of Russian oil and defense equipment, previous statements suggest a potential figure of 100%. This could effectively eliminate India's tariff advantage over China, at least until a trade agreement is reached, even if China faces similar penalties for importing from Russia. Some experts contest Trump's accusations of non-tariff barriers imposed by India, arguing that India's tariffs are compliant with World Trade Organization (WTO) regulations. The Global Trade Research Initiative (GTRI) issued a statement highlighting that by refusing to compromise on its fundamental interests, particularly in agriculture, India has successfully avoided a potentially unfavorable trade deal. GTRI also noted that India's tariffs are WTO-compliant, non-tariff barriers are commonplace globally, and discounted Russian oil has helped India manage inflation during a period of global volatility. The statement further emphasized that India is not alone in facing pressure from the US, as over 90 countries are in a similar situation. While a trade deal may still be possible, it will only be on fair terms. For now, India's principled stance has prevented it from falling into the "trap" of a one-sided agreement, which is considered a success.
Trump recently shortened the deadline for Russia to make progress toward a peace agreement in the Ukraine war, threatening secondary tariffs of 100% on countries buying Russian oil if progress isn't made within 10-12 days. US Treasury Secretary Scott Bessent warned that any country buying sanctioned Russian oil should be prepared for this potential penalty. China is currently the largest buyer of Russian oil, importing approximately 2 million barrels per day, followed by India, importing just under 2 million barrels per day, and Turkey. In May, China agreed to reduce tariffs on US goods from 125% to 10%, while the US agreed to lower tariffs on Chinese goods from 145% to 30%. Given the progress of negotiations between Indian and US officials, an interim trade deal seems unlikely to be finalized before September, with October being a possible outer deadline. There are indications that a sixth round of talks between the two negotiating teams will take place in August to further the discussions. Without the BRICS levy and the Russian oil penalty, India's 25% tariff compares favorably to countries like Indonesia (19%) and Vietnam (20-40%), which have already concluded trade agreements. It could even provide an advantage over China's current tariff levels (30-34%) and Bangladesh's (35%). However, the equation shifts when additional levies are factored in, especially the penalty triggered by Russian oil purchases. The exact application of this penalty remains unclear.
If the final US headline tariff on India falls between 10% and 15%, aligning with the tariff levels offered to the UK and Japan respectively, India would likely be satisfied. However, the advantage diminishes as the tariff approaches 20%, similar to the offer made to Vietnam. A trans-shipment clause, like the one imposed on Vietnam, which adds a 20% tariff, could also pose a challenge for India, given that many of its exports rely on inputs and intermediate goods from external sources, including China, particularly in sectors like pharmaceuticals, engineering goods, and electronics. The sanctity of any trade deal negotiated by the current US administration is also a subject of concern. Recent actions, such as the proposed BRICS tariff, new tariffs on copper and pharmaceuticals, high duties on strategic partners like Japan and South Korea, and Trump's potential reneging on the USMCA deal with Canada and Mexico, raise doubts about the reliability of any agreement signed by the current administration. The uncertainty surrounding the future of US trade deals has potential implications for global economic stability and cooperation. Businesses worldwide are struggling to develop strategies in the face of constantly changing policies, making it difficult and costly to shift manufacturing operations.
New Delhi is closely monitoring the final American duty offer to China, based on the expectation that Trump will maintain a tariff differential between the two countries. US and Chinese officials recently concluded two days of discussions in Stockholm, but no breakthrough was announced. Following the talks, China's chief trade negotiator, Li Chenggang, stated that both sides agreed to push for an extension of the 90-day tariff truce that was established in mid-May, although the timeframe for the extension remains unspecified. The effective duty on Chinese products, landed at US ports in commodity categories where Indian producers are reasonably competitive, is being continuously tracked. The net tariff differential with India, and its trajectory, is of particular interest, given the expectation that Washington DC would ensure a reasonable tariff differential between China and India. Officials believe that a 10-20% differential would help offset some of India's inherent challenges, such as infrastructure bottlenecks, logistical issues, high interest rates, the cost of doing business, and corruption. For Indian negotiators, additional tariffs on steel and aluminum, beyond the baseline, present a further complication, along with the proposed BRICS tariff. The new 50% tariffs on copper products, effective August 1, also pose a problem for India, which exported $2 billion worth of copper and copper products globally in 2024-25, with the US accounting for 17% of that amount. Trump's demand for zero-duty access to Indian markets, as seen in deals with Vietnam and Indonesia, is another challenge for India.
It is believed that once the official-level discussions conclude by mid-August, the final decision on a trade deal could depend on a conversation between Prime Minister Narendra Modi and President Trump. This is especially likely given Trump's active role as the de facto trade negotiator-in-chief. From India's perspective, the ideal scenario would be to secure some kind of deal now and then build on it through future negotiations that could extend into 2026. With Trump's announcement of tariffs and penalties on India, this crucial phone call may occur sooner than anticipated.