Trump Stuns India with 25% Tariff

Ahead of the August 1 deadline for India and other countries to reach a trade agreement or face increased tariffs, US President Donald Trump announced on July 30 a 25% tariff on goods imports from “friend” India, plus an “unspecified penalty” for buying Russian energy and weapons.

With this, India now joins a growing list of countries facing higher tariffs under Trump’s “Liberation Day” trade policy, aimed at reshaping US trade relations by demanding greater reciprocity. Not quite a bolt from the blue since Trump had been vociferous about “tariff king”, India’s high tariff, which is “among the highest in the world”, the move has dealt a severe blow to India and its exporters as the US remains the biggest market for India’s exports and the only major economy with which it enjoys a trade surplus.

The pain will also be felt by foreign companies running or planning to set up shops in India, and with this, the fabled “Make in India” initiative will receive a jolt. Not counting the additional penalty for buying Russian energy and weapons, “when everyone wants Russia to STOP the killing in Ukraine.” The 25% duty places India on par with South Korea and Malaysia, worse off than Vietnam, Philippines, Indonesia, and Japan, but better off than Brazil, Canada, Bangladesh, and Cambodia.

The Indian government, in a statement, said it was studying the implications and remained committed to the mutually beneficial trade deal while attaching “the utmost importance to protecting and promoting the welfare of our farmers, entrepreneurs, and MSMEs. The Government will take all steps necessary to secure our national interest, as has been the case with other trade agreements, including the latest Comprehensive Economic and Trade Agreement with the UK.”

The US is India's largest trading partner. India exported goods worth around $90 billion in 2024. The new tariffs are expected to impact India’s exports, particularly labour-intensive products such as garments, pharmaceuticals, gems and jewellery, and petrochemicals. The bilateral trade between the two countries stood at $190 billion last year. The two nations aim to more than double the tally to $500 billion by 2030. The US runs a $45 billion trade deficit with India.

The pain may persist even after the first tranche of a mutually beneficial, multi-sectoral bilateral trade agreement between the two countries is signed. But that is also shrouded in a big uncertainty. Even after five rounds of discussion, the two nations have failed to clinch the much-touted bilateral trade deal. While the sixth round, slated to take place in New Delhi in the middle of August, is unlikely to break the ice, particularly as the US’s insistence on greater access to Indian markets with reduced tariffs for its agricultural, dairy, and genetically modified (GM) products is too politically and economically sensitive to oblige.

More than 700 million rural Indians live on agriculture, and around 80 million works in the dairy sector. The US also wants India to lower duties on automobiles. A comprehensive trade deal was anticipated to be signed by the end of the current year.

A trade deal between India and the US goes beyond trade, and both sides are keen to preserve the relationship. A mutually beneficial deal, without further delay, will further strengthen and deepen bilateral trade relations, through enhanced mutual market access, reduction of tariff and non-tariff barriers, and closer integration of supply chains.

The importance of a bilateral trade deal, a win-win, between India and the US arises from geopolitical compulsions. The US sees India as a strong partner that can shape the Indo-Pacific landscape. It sees India as a potential alternative to China on the global stage. It is gearing up to position itself against China’s reach into global supply chains. Shifting manufacturing to India becomes a compulsion for the US.

While the US, following its America-first policy, might retain control of the higher end of the manufacturing chain with its superior technology and skilled labour, India can complement it with cheap labour. Beyond tariff cuts, the US is also pushing India for large-scale commercial buys - from oil and LNG to Boeing aircraft, helicopters and nuclear reactors. Washington may also seek FDI easing in multi-brand retail, benefiting firms like Amazon and Walmart, and relaxed rules on re-manufactured goods.

 In the proposed bilateral deal, India is seeking full exemption from the US’s 26% reciprocal tariff and a reduction in US duties on Indian steel, aluminium, and automotive products. The US is also pushing for greater digital market access for American tech firms. However, India has concerns over intellectual property and data protection.

The US considers India’s data localisation rules and strict quality control measures as protectionist in nature. India’s membership in the BRICS group and its role in exploring alternatives to the US dollar are also a concern for Washington. India is in a more vulnerable spot due to the critical economic and social importance of the sectors targeted by US tariffs. India maintains higher average tariffs (17% compared to the US’s 3.3%).

A delay in reaching a final agreement may have broader consequences for both countries. Continued delays in finalising the deal could strain the broader US–India strategic partnership, including cooperation in defence, technology, and innovation under the US–India COMPACT framework.

India may miss out on better access to the American market for its textile, jewellery and other export sectors. With global trade relations shifting fast, a deal could help strengthen India’s position. The US is clearly following the arm-twisting tactic. India needs to expedite efforts to iron out the differences and sign a win-win deal at the earliest.