INDIA US TRADE RELATIONS & GEOPOLITICAL DEVELOPMENTS

INDIA US TRADE RELATIONS & GEOPOLITICAL DEVELOPMENTS

Background

• On July 30, 2025, US President Donald Trump announced a 25% tariff on imports from India effective August 1, 2025, accompanied by an unspecified “penalty.”
• The tariff is reportedly an addition over the existing baseline tariff of 10%, making India’s effective tariff one of the highest imposed by the US on any country.
• The move comes amidst ongoing India-US trade talks (6th round scheduled in August), which have been stuck mainly on sensitive sectors like agriculture and dairy.

REASONS CITED BY THE US

• India’s continued purchase of energy and military equipment from Russia, despite Western sanctions and pressure due to Russia’s invasion of Ukraine.
• India’s high tariffs on American goods and other non-monetary trade barriers perceived by the US as obstructive.
• The US accuses India of maintaining protectionist policies that hinder fair trade access.
• The US goods trade deficit with India stood at $45.7 billion in 2024, up 4% from 2023.
• The Trump administration views this rising deficit as evidence of an unfair trading relationship, using it as a key justification for tariff imposition.
• India’s BRICS Membership and Geopolitical Concerns : India’s active participation in the BRICS bloc, seen as challenging the US dollar hegemony, raises concerns.
• BRICS initiatives on alternative payment systems and trade mechanisms threaten US influence over global trade and finance.
• India-Russia Defence and Energy Ties : The US plans a penalty linked to India’s defence and energy imports from Russia, aligned with the Russian Sanctions Act, 2025, which contemplates up to 500% duties on countries importing Russian petroleum products.
• This undefined penalty aims to maximize leverage over India during trade talks.

ECONOMIC & SECTORAL IMPACT

• The US is India’s largest export market, accounting for about 18% of goods exports.
• Elevated tariffs could reduce India’s GDP growth by 0.2 to 0.3 percentage points, primarily affecting labour-intensive sectors such as gems & jewellery, textiles, clothing, and mobile phones.
• Copper exports to the US may decline; however, India’s large domestic consumption could absorb this dip.

India-US Trade Relationship Overview

• The US is India’s largest trading partner, with bilateral trade valued at $131.84 billion in 2024-25.
• Both nations aspire to expand this to $500 billion by 2030 through a multi-sector Bilateral Trade Agreement (BTA).

 INDIA’S RESPONSE: PRAGMATISM & STRATEGIC PARTNERSHIP

• India has avoided tit-for-tat retaliation, choosing a pragmatic approach anchored in its long-term strategic partnership with the US.
• India reiterates the need for a “fair, balanced, and mutually beneficial” trade agreement that safeguards farmers, entrepreneurs, and MSMEs.
• Willing to reduce tariffs on select industrial goods and offer concessions in areas like public procurement and agriculture, if matched by the US.
• Increased imports of US oil by over 270% YoY in early 2025, indicating efforts to bridge the trade deficit through enhanced energy purchases from the US.
• India rejected the notion that its membership in BRICS or dealings with Russia are “anti-American,” emphasizing de-dollarisation and trade in domestic currencies are risk-management tools, not political statements.
• India continues to maintain a strong defence partnership with the US despite the tariff tensions.

CONTENTIOUS ISSUES IN INDIA US TRADE TALKS

Agriculture and Dairy

• India’s agriculture sector, especially dairy, remains a red line in negotiations.
• India refuses to accept US demands related to genetically modified (GM) crops such as corn and soya, due to domestic regulatory concerns and farmer welfare.
• The US insists on market access for GM products, viewing India’s strict regulations as discriminatory.
• Given agriculture’s socio-economic importance in India, this impasse is difficult to resolve quickly.

TRADE CONCESSIONS & TIMING

• Negotiators are eyeing a tentative timeline for an interim trade deal by October 2025.
• If the final tariff on India is capped between 10-15%, similar to the UK and Japan, India may view the deal as acceptable.
• Tariffs above 15%, nearing Vietnam’s 20%, would reduce the deal’s attractiveness, especially with the risk of trans-shipment rules affecting export inputs sourced from other countries, including China.

US PAKISTAN RAPPROCHEMENT & IMPLIOCATIONS

Details

• Alongside tariffs on India, Trump announced a US-Pakistan trade deal with a 19% tariff, lower than India’s 25%.
• Trump also touted cooperation on developing Pakistan’s “massive oil reserves”, implying strategic economic partnerships.

INDIAN CONCERNS

• India views the US-Pakistan reset with suspicion, noting Pakistan’s deep mistrust and antagonistic history.
• Pakistan’s rapid engagement with Trump’s inner circle, including investments in US cryptocurrency firms and diplomatic gestures, suggests a strategic recalibration by Islamabad.
• Delhi questions whether the US will rebalance its South Asia policy more favorably towards Pakistan, possibly undermining India’s interests.
• The ongoing US defence support to Pakistan (e.g., F-16 jets) adds to Delhi’s strategic unease.

US TARIFF POLICY & PREFERENTIAL TREATMENT TO COMPETITORS

 TARIFFS OVER OTHER COUNTRIES

• After securing trade agreements with the EU, Japan, South Korea, Trump’s administration imposed lower tariffs on over 50 countries compared to India’s 25%.
• Pakistan and Bangladesh, India’s direct competitors in various sectors, face tariffs of 19% and 20% respectively, lower than India’s.
• Other ASEAN nations like Vietnam (20%), Malaysia, Indonesia, Philippines (19% each) have also been assigned preferential tariffs.
• This preferential tariff structure gives these countries a competitive advantage over India in the US market.
• Notably, Bangladesh’s lower tariffs could hurt India’s Ready-Made Garments (RMG) exports, as Bangladesh is a key supplier globally.
• Vietnam, Malaysia, and others could capture greater shares in the electrical, electronics, and non-leather footwear sectors, sectors where India is expanding rapidly.
• Pakistan, despite historical tensions, signed a trade deal with the US at 19% tariffs, with promises of cooperation in developing Pakistani oil reserves, although Pakistan’s oil exploration has struggled.

IMPLICATIONS

• India’s exports risk losing competitiveness, especially in labour-intensive sectors like textiles, electronics, footwear, and garments.
• The tariffs come into effect August 7, 2025, putting immediate pressure on Indian exporters.
• The tariff differential could lead to trade diversion, with US buyers sourcing more from competitors with lower tariffs.
• This policy reflects US frustration with the slow progress of India-US trade talks.

INDIA CHINA TARIFF DIFFERENTIAL

• China currently faces a 30% tariff, higher than India’s 25%.
• US-China trade talks are ongoing but without major breakthroughs; the tariff truce was extended for 90 days in Stockholm talks.
• India hopes for a 10-20% tariff advantage relative to China to offset India’s domestic structural disadvantages (e.g., infrastructure, logistics).
• India closely monitors US port-level tariffs on Chinese imports to find export opportunities.

USA’s PENALTIES ON INDIA’S RUSSIAN ENERGY & DEFENCE IMPORTS

Context

• Trump threatens penalties on India for buying Russian oil and military equipment, imposing a 100% secondary tariff on oil buyers of Russia.
• India imports about 36% of its oil from Russia (FY 2024-25), a figure that had been declining prior to the US announcement.
• Defence dependency on Russia remains significant (~60-70%), a legacy of Soviet-era ties; however, India has diversified to other suppliers including the US.

INDIA’S STAND

• India insists its bilateral ties with Russia are sovereign and based on strategic and security needs.
• Defence purchases are driven by national security imperatives, not external pressures.
• India has already curtailed Iranian oil imports (from 2019) under previous US sanctions; recent US sanctions target Indian firms connected to Iranian energy trade.

US MILITARY POSTURING

• Trump ordered two US nuclear submarines to move closer to Russia due to Moscow’s rejection of an August 8 ceasefire deadline in the Ukraine war.
• The move follows hostile exchanges between Trump and Russia’s Dmitry Medvedev, with nuclear threats exchanged.
• The US and NATO are developing new mechanisms to supply Ukraine with weapons using NATO funds.
• Russia controls about 20% of Ukraine’s territory, demands Kyiv’s capitulation, and insists on Ukraine’s permanent neutrality.
• Kyiv demands a full Russian withdrawal and seeks NATO membership.

STRATEGIC & POLICY IMPLICATIONS

• India’s Pragmatism: Despite US pressure, India balances economic interests, strategic autonomy, and global partnerships.
• Trade Negotiations: India remains firm on protecting sensitive sectors while seeking to expand market access.
• US-Pakistan Ties: India must carefully monitor and respond to evolving US-South Asia dynamics.
• Russia-Ukraine Conflict: India maintains neutrality, balancing ties with Russia and the West amid escalating tensions.
• Global Trade Patterns: India’s competitiveness in the US market is challenged by preferential tariffs given to other countries.
• Long-term Outlook: The developments underscore the complex interplay of trade, geopolitics, and strategic partnerships in a multipolar world.

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