August 30, 2025

Context: The US has imposed 50% tariffs on most US imports from India with effect from August 27, 2025. 

Relevance of the Topic: Prelims: Concept of Tariff, WTO, MFN Principle, India-US Trade. Mains: US’s Tariffs - nature, impact, and lesson for India.

What is Tariff?

• A tariff is a tax or duty imposed on imported or exported goods by a government.
• It is one of the oldest instruments of trade policy used to regulate cross-border trade.
• Objectives:
  • To protect domestic industries from foreign competition
  • To raise government revenue
  • To be used as a tool of foreign policy or retaliation. 

Under the WTO framework, members commit to tariff ceilings and must follow the Most Favoured Nation (MFN) principle, applying equal tariffs to all members except under FTAs or customs unions.

Nature of US Tariffs on India: 

• The US has imposed two layers of tariffs on Indian products: 
  • a reciprocal tariff of 25% (effective August 7, 2025)
  • secondary tariff of 25% (effective August 27, 2025).
• The tariffs apply to a broad range of Indian exports, sparing only a few critical sectors such as pharmaceuticals, semiconductors, mobile phones, lumber, and certain chemicals.
• The tariffs have been imposed unilaterally by the US without negotiation or consultation, making them a violation of WTO commitments.
• The tariffs directly breach the Most Favoured Nation (MFN) principle, since India is being treated less favourably compared to other WTO members such as the EU and China, which are not subjected to similar duties.
• The tariffs violate binding tariff commitments under WTO schedules, where the US had agreed to maintain duties below certain ceilings for all members.
• The tariffs are discriminatory in nature, the US has not imposed any tariff on the EU and China, the two largest buyers of energy from Russia. 

The tariffs demonstrate the weaponisation of trade policy, where tariffs are being used to pursue geopolitical objectives such as pressuring countries on Russian oil purchases. 

The paralysis of the WTO’s Appellate Body since 2019 has been exposed further, as countries like India have no effective mechanism to challenge such unilateral actions.

India’s Concessions to the US: 

• India reduced tariffs on bourbon whiskey, high-end motorcycles, and electric vehicles.
• India withdrew the equalisation levy on offshore entities, a long-standing US objection.
• India offered zero or near-zero tariffs on most industrial products and some agricultural products.
• India expressed willingness to increase energy imports from the US to reduce the bilateral trade deficit.

At the same time, India drew red lines by refusing concessions on GM foods, soya, maize, cereals, and dairy products, citing farmer livelihoods and food security.

Likely Impact on India: 

Impact on Exports: 

• Tariffs are expected to affect 55% of India’s $89-billion goods exports to the United States.
• Labour-intensive industries such as textiles, clothing, gems and jewellery, and engineering goods will be among the worst hit.
• Indian exporters in low-to-medium value segments will lose competitiveness, as South and Southeast Asian countries like Vietnam and Bangladesh enjoy lower tariff regimes.
• China may gain an advantage because of the 90-day tariff extension it received from the US and a lower 30 per cent tariff rate, thereby diverting some orders away from India.

Impact on Imports: 

• India’s imports from the US, which include mineral fuels, uncut diamonds, capital goods, machinery, organic chemicals and plastics, and edible fruits and nuts, will not be directly protected by retaliation.
• Any counter-tariffs by India on these imports would hurt domestic industries that depend on these products as raw materials or intermediates. 

Impact on Services and Investments: 

• Tariff retaliation by India may provoke the US to adopt cross-sectoral retaliation in services trade, threatening India’s IT and professional services exports.
• Indian professionals may face stricter visa regimes or regulatory hurdles in the US, which would affect India’s services sector earnings.
• The US investors may become more cautious about investing in India if trade relations deteriorate, thereby affecting foreign direct investment flows.

Impact on Employment and Economy: 

• Job losses are likely in labour-intensive industries like textiles, jewellery, and engineering goods, where export demand will shrink.
• Export slowdown may create inflationary pressures in India by reducing foreign exchange earnings and widening the current account deficit.
• Small and medium enterprises (SMEs), which form the backbone of India’s export ecosystem, will be particularly vulnerable to these shocks.

Way Forward

• India must recognise the risks of overdependence on a single market, as nearly 17% of its goods exports currently go to the United States. It shows the urgent need to diversify export destinations, particularly towards Latin America, Africa, West Asia, and other emerging economies.
• India must broaden its export basket by moving beyond traditional sectors such as textiles, gems, and jewellery to high-value areas like electronics, green technologies, and services.
• Strengthening and fast-tracking trade agreements with partners such as the EU, Japan, Korea, ASEAN, and Australia is necessary to secure alternative markets.
• India should expand intra-BRICS and South-South trade, thereby reducing dependence on Western economies and creating alternative trade corridors.
• India must invest in skilling, technology, and innovation ecosystems to ensure its workforce and industries remain competitive in a rapidly changing global economy.

The episode should be seen as a wake-up call similar to the 1991 reforms, pushing India towards deeper economic reforms and stronger integration with global trade networks.