Navigating trade headwinds: India’s strategic imperative

THE visit of a US team to India for the sixth round of negotiations on tariffs has been postponed from August 25 to an unspecified later date, according to news reports. Meanwhile, a 25 percent tariff on Indian exports is in effect from August 1. This 25 percent tariff, a slight adjustment from the originally threatened 26 percent, is accompanied by an additional 25 percent penalty on India for its purchases of crude oil and defence equipment from Russia, yielding a total tariff of 50 percent. The additional penalty is set to take effect on August 27, and will make India one of the most heavily taxed US trading partners.

AI Brief

The US is using tariffs to push foreign policy goals, sidelining multilateral norms and straining global trust.
New US tariffs threaten key Indian export sectors, risking major losses and GDP slowdown amid fragile global trade.
India must counter with diplomatic talks, market diversification, and domestic reforms to protect its interests.

The use of trade policy by countries to achieve domestic political and geostrategic goals is not new. However, what was once a more guarded and limited practice, often involving a subtle bending of rules, has evolved into a blatantly aggressive approach, with little to no attempt to operate within established multilateral norms. Tariffs have been weaponised.

This has been enabled by the US government’s stifling — since December 2019 — of the dispute settlement function of the World Trade Organization (WTO), the lifeblood of the multilateral system. With no disputes being settled, might becomes right, allowing powerful nations to impose their will without accountability. A primary reason why countries such as India and many smaller nations embraced the multilateral trading system, and continue to support it, is precisely to prevent such bullying and ensure that the law of the jungle is avoided in global commerce.

We may still get there, but only after recent events exact a hefty toll. Trust will be the biggest casualty. Rebuilding it will require years of patient diplomacy, along with free-flowing goods and services across borders to serve as proof of intent. Trust, after all, is a commodity in short supply these days. As the inimitable Sir Humphrey from the political satire series Yes, Minister once declared to his minister: “The Civil Service is not in the business of creating artificial shortages.” Nor, for that matter, is the government.

The new equilibrium, when reached, will be devoid of some of the niceties that defined the earlier multilateral system. For example, special provisions for developing countries, collectively known as Special and Differential Treatment, and preferential market access schemes such as the Generalized System of Preferences, designed to help them integrate into the global trading system, will look very different.

A clear reason is the rise of hyper-nationalism, with powerful nations showing little appetite to grant concessions to poorer nations and instead demanding reciprocity. But what does reciprocity mean between two countries, one with a per capita income of $US 90,000 and the other struggling at US$1,000?

Against this background, the recent US tariff imposition on several countries, notably India, is the most palpable manifestation of the new regime.

US demands and India’s options

Justifications, unlike trust, are never in short supply. While India’s purchase of Russian oil is the immediate trigger for the additional 25 percent tariff, the US administration’s broader justification extends to other perceived grievances, including the accusation that India is the “maharaja of tariffs”. President Trump has even called India’s tariff regime “obnoxious”.

The US has also expressed frustration with India’s reluctance to open certain sectors, particularly agriculture and dairy, arguing that its protectionist stance harms American farmers and businesses. US lobbies are keen to sell more cheese, milk, maize, soy, corn and other genetically modified products. Add nuts and fruits, and the threat to India’s vast agriculture and dairy sector — together, they account for about 45 percent of employment and support more than 80 million farmers — becomes clear.

For India, this has been a red line due to the overwhelming number of small farmers, and the potentially damaging political consequences. Allowing heavily subsidised US farm produce, including from animals that may have been fed meat, would spell political disaster. This is especially true when the government has had to face severe criticism on the unsuccessful policy to double farmer incomes. What’s more, the infamous farm laws had to be withdrawn, and massive, pitched farmer protests had to be managed.

In this background, even a nuanced and limited opening of agriculture that protects small farmer interest would fall prey to a narrative of the deal being anti-farmer and therefore, against national interest. For this reason, India has maintained its protectionist stance in recent Free Trade Agreements (FTAs) with Australia and the UK. The US, meanwhile, seeks to weaken India’s long-standing ties with Russia and align India more closely with its own geopolitical objectives.

The latest tariffs are expected to hit several Indian export sectors—how hard, only time will tell. Initial estimates suggest industries such as textiles and apparel, gems and jewellery, shrimp and marine products, organic chemicals and carpets could see export declines of more than 50 percent, because their slim profit margins make it difficult for them to absorb such high duties. Competitors such as Vietnam, Bangladesh and Pakistan are likely to benefit.

According to the Engineering Export Promotion Council, India’s exports of aluminium and related products plunged by 58 percent year-on-year, while iron and steel exports declined by 40 percent in February 2025, even before the full implementation of the new duties. The auto component industry faces considerable exposure. Nearly 50 percent of India’s US$7 billion in auto parts exports to the US is expected to be impacted by the new tariff regime, which includes levies of up to 50 percent on several product lines.

While sector-specific impacts vary, these figures suggest that export declines in the range of 30–50 percent—particularly in aluminium, iron, steel, and auto components—are both plausible and already unfolding in response to the US protectionist shift.

Pharmaceuticals, electronics and energy products are currently exempt, but the fickle nature of recent US trade policy inspires little confidence. Goldman Sachs projects a potential 0.1-0.6 percentage point hit to India’s GDP growth due to disruption in labour-intensive industries and negative knock-on effects. Multipliers work in both directions—in this case, downward.

Way ahead

India has condemned the tariffs as “unfair, unjustified and unreasonable”, and argues it has a right to secure energy and employment security for its people against such blatant economic aggression. The government is weighing its options: continuing high-level talks with the US, diversifying export markets to the European Union (EU) and Latin America, and intensifying the Make in India initiative to boost domestic production.

The country might also diversify crude oil imports over time, while working with other members of the BRICS (Brazil, Russia, India, China, South Africa) grouping of nations on unified responses and alternative trade and payment systems. India could also consider challenging these tariffs at the WTO, although the effectiveness of such a challenge is currently uncertain due to the WTO’s paralyzed dispute settlement function.

The US’ grand design of coercive unilateralism, using its economic might to impose foreign policy objectives, makes for a decidedly unequal contest. A 50 percent tariff from India’s largest export market presents an unsustainable proposition for India’s declared economic aspirations.

High tariffs, whether imposed by India or against it, contradict the ambition of leveraging a “China Plus One” strategy to attract global value chains. Securing the relocation of global value chains to India requires, above all, a low tariff regime and other facilitative measures. A US-India trade pact could be one such measure, but only if India negotiates benefits that serve its interests. That will require guile and gumption.

For India, robust export markets are the indispensable foundation for economic progress, a lesson powerfully demonstrated by China’s historical engagement with open global markets. At a time when multilateral trade is not working well, the imperative to generate demand must be met through strategic FTAs, including the pending pact with the EU.

This moment calls not for extravagant rhetoric, but for astute and pragmatic engagement. Even as Goliath holds a commanding position with all the trump cards in this new era of weaponised trade, India must strive to engineer its own “David moment” through intelligent strategic action.

Sustained domestic structural reforms, particularly in labour, taxation, and ease of doing business, among others, will be crucial to enhancing India’s export competitiveness and boosting productivity at home, offering an essential, albeit incomplete, remedy to the emerging global order.

Rajat Kathuria is Dean, School of Humanities and Social Sciences and Professor of Economics at the Shiv Nadar University. Views here are personal.