Why a US trade deal won’t be enough for India

This week, India and the US finalized the terms of reference for the impending negotiations on a free trade agreement. The roadmap is expected to be guided by an integrated approach toward lowering tariffs and non-tariff barriers, better market access and a robust enmeshed supply chain. 

The “Liberation Day” tariffs announced by Donald Trump on April 2 cannot be more shackling for most countries, including India. The effects of Trump’s 26% tariff on India will not only significantly hurt Indian exports but will cast more than a shadow of doubt on its ability to adapt quickly to the realignment of global supply chains, which Trump’s draconian tariffs seek to alter fundamentally. 

As the situation evolves, the quantum of tariffs and counter-tariffs has been reduced to mere numbers. Hopes for a fast US-China deal to resolve trade tensions have all but evaporated.

The 90-day pause on reciprocal tariffs, except for China, which faces a whopping 145% tax, is a breather for most nations. But no government would dare make long-term plans in this uncertain situation. In some sense, global trade is being rewritten in real-time.

Two developments have signaled a slight softening of Trump’s stand. On April 11, he paused the higher reciprocal tariffs on targeted countries, except for China, for 90 days to allow time for countries to negotiate with the US.  On April 13, he announced exemptions of tariffs on goods that the US does not produce, like phones, computers and other electronics.

There is also the looming threat of tariffs on pharmaceuticals, which if implemented, would spell near doom for India’s sector. By some estimates, India could potentially stand to lose around 30% of its exports to the US alone.

India should not rejoice at the fact that China (145%), Vietnam (46%), Thailand (36%), Cambodia (49%), Indonesia (32%) and Bangladesh (37%) have been hit with higher impositions. But this does present export opportunities and market space for India primarily in textiles, machinery, automobiles, toys and semiconductors.

India should interpret the new Trump-imposed reality as both a challenge and an opportunity. In a sense, India is facing a situation similar to 1991 when dwindling foreign exchange reserves literally forced the country to open up.

The new US tariff regime and its showdown with China present an opportunity for some serious soul-searching on lost opportunities, to recognize and identify areas of fragility and confront its economic policy demons.

Many in India are unrealistically pinning their hopes on a landmark Bilateral Trade Agreement (BTA) with the US as a way out of this mess. Confronted with an increasingly protectionist global trading system, India’s approach to free trade deals will still be underpinned by its multi-vector foreign policy and its firm belief in a multi-polar world.

Though there was no public show of dissent, India may already feel betrayed by the US after what happened after the visit of Prime Minister Narendra Modi to the US in February this year.

During his visit, “Mission 500”, aimed at doubling bilateral trade to US$500 billion by 2030, was envisaged and discussed. In that direction, a commitment was made to iron out the first stage of a mutually beneficial BTA by the fall of 2025.

And yet, just prior to announcing the new reciprocal tariff regime on April 2, Trump publicly reiterated his persistent refrain by berating India for being a “tariff king” and a “big abuser” of trade ties.

Between that visit and the “Liberation Day” tariff announcement, India courted the US, signaling its intention to seriously pursue defense supplier and F-35 fighter deals with Washington while also committing to US energy imports.

In preparation for the BTA, India hastily removed a 6% digital ad tax and slashed duties on solar cells, luxury cars, bourbon whiskey and a few other goods. India also hinted at approval for Elon Musk’s Starlink in India. Despite all those early concessions, India still got slapped with the baseline and reciprocal tariffs, just like most other nations.

But for Trump, a trade deal is an instrument to make the US more self-sufficient and reverse the balance of trade in its favor. In trade negotiations so far, the US is pressuring India to unlock its politically sensitive agricultural and dairy sectors.

At the same time, the US has several ticklish issues with India, including non-GMO certification on fish and dairy products, stringent approval processes for genetically modified products and intellectual property right enforcement. 

India’s response has been more or less predictable. It will almost certainly not yield on agriculture and dairy, giving itself a bargaining chip for later negotiations. To address the negative trade balance, India will likely commit to higher imports of energy products and US-made defense equipment.

It might even consider 0% tariff in sectors where it already enjoys low costs and well-developed manufacturing bases, such as pharmaceuticals and autos. Beyond this, it is hard to see India ceding further concessions.

However, India might encounter challenges from competitor countries like China, Vietnam, Thailand and others that are likewise grappling with higher US tariffs. China has retorted by slapping equally high counter-tariffs, but Vietnam has taken a totally divergent view by signaling it will drop all tariffs to 0% to notch a trade deal with the US. 

A senior Vietnamese official, recently on an official visit to the US, committed to early negotiations for a free trade deal and procurement of defense supplies from the US. He also announced Vietnam’s plan to procure $300 million worth of Boeing-made aircraft for its VietJet commercial carrier. Clearly, the US tariffs are serving as bargaining chips.

In its negotiations with the US, India’s low dependence on merchandise exports might seem like an advantage, but because of Vietnam’s precedent-setting commitment to 0% tariffs on all US imports, India should be ready for US expectations for a similar deal.

Given the protracted nature of these negotiations thus far with the UK, EU and US in particular, India should, at best, be cautiously optimistic about outcomes, particularly given that ongoing trade talks with the US did not shield it from Trump’s high reciprocal tariffs.

As a rule of thumb, an emerging economy like India should not worry too much about a reasonable trade deficit as long as a BTA provides better access to US markets, boosts its exports and overall trade, and brings in new technologies and investments. But India should know that a free trade deal by itself will not alleviate structural weaknesses in the Indian economy. It squarely rests with India to address them simultaneously.

India should thus look at Trump’s tariff crisis as a golden opportunity to unilaterally reduce tariff rates across the board to boost competitiveness. This, in turn, will spur an inflow of superior foreign technologies that increase productivity and quality and boost national exports, especially those of emerging industries. Only then will India be able to optimally leverage opportunities created by Trump’s global supply chain disruptions.

The debatable question is, will India seize the chance? Or will it miss the bus once again? How successfully India navigates the looming negative effects of Trump’s tariffs depends not just on how swiftly it moves to strike a bilateral free trade deal with the US but also on how other countries negotiate with the US on tariffs.

Concluding a favorable FTA with the US is important, but the bigger question for India concerns how fast it can ramp up manufacturing capacities, adopt smart technologies, develop skilled workers, build modern logistical infrastructure and legislate progressive regulatory reforms that can adapt to newly emerging global value chain alignments.

Only when global supply chains actually feed and integrate into Indian manufacturing can India count itself well-positioned to become a key global manufacturing and export hub in the coming years and ultimately a net-net Trump trade war winner.

Raghu Gururaj is a retired ambassador and an Indian Foreign Service officer. The opinions expressed here are his own.