Context: The Ministry of Commerce and Industry has stepped up efforts by expanding its NAFTA division (which handles India’s bilateral trade with the United States, Canada, and Mexico) to strike an early trade deal with the US, and potentially sidestep the 26% reciprocal tariffs.
Relevance of the Topic: Mains: Impacts of Reciprocal Tariffs on India; India-US Trade deal- challenges.
US Reciprocal Tariffs on India
- Recently, the US has imposed 26% reciprocal tariffs on all Indian exports to the US.
- The US goods trade deficit with India was $45 billion in 2024.
- India's main exports to the US: Drug formulations and biologicals, telecom instruments, precious and semi-precious stones, petroleum products, gold and other metal jewellery, ready-made garments of cotton, and products of iron and steel.
- India’s Imports from the US: Crude oil, petroleum products, coal, coke, cut and polished diamonds, electric machinery, aircraft, spacecraft and parts, and gold.
Impacts of Reciprocal Tariffs over India
1. Potential Negative Impacts:
- The sectors expected to be most impacted include: Electronics and smart phones, Marine products, gold and other metal jewellery, electrical machinery, textiles.
- Global Trade Research Initiative (GTRI) estimates that India’s exports to the US might decline by over 6% or around $5.7 billion in 2025.
2. Window of Opportunity: Relative Tariff Advantage
- India has a relative advantage over other countries, as the tariffs over India (26%) are lower than that in other countries, like, China (34%), Thailand (36%), Bangladesh (37%), Vietnam (46%) etc. This differential could encourage the US firms to diversify supply chains away from high-tariff economies towards India.
- Certain sectors can benefit, particularly electronics manufacturing, Textiles and apparel etc.
India’s Options
- Selective Tariff Reductions: Identify sectors where tariff reductions would have minimal domestic impact and could accommodate U.S. interests. India is considering slashing tariffs on 55% of the US exports to India, worth about $23 billion.
- Negotiating bilateral trade agreement: India can push towards negotiating a bilateral trade deal with the US. If India delays, it could risk losing market share in the US to countries (like Vietnam, Cambodia) which are aggressively pursuing trade deals with the US.
- Trade diversification with other countries and regional groups, like the UK, European Union, African countries, ASEAN countries etc. to reduce the reliance on the US markets.
Bottlenecks in negotiating bilateral trade agreement
- Limited progress on Trade Agreements: India has not yet signed a comprehensive trade agreement with any major Western country, including the US, UK or EU. The major hurdle is India's resistance to incorporating labour and environmental standards, which are often prerequisites for Western trade deals.
- Data localisation norms: The US has raised objections to India’s data localisation requirements for payment service providers, which restrict foreign firms from freely transferring user data abroad.
- Weak Intellectual Property Rights (IPR) protection: India remains on the US 'Priority Watch List’ due to delays in patent approvals and the absence of strong laws for trade secret protection. This deters American innovators and firms from entering the Indian market.
- Non-tarriff barriers: E.g., The US is critical of India’s price caps on coronary stents and knee implants. These controls are viewed as non-tariff barriers that hinder US companies’ ability to operate profitably in India.