By Pradeep S Mehta and Sudip K Paul
A BTA, with India lowering its tariffs to US levels, will open up the Indian market for American producers, and lower prices faced by our consumers.
In the evolving landscape of global trade, President Donald Trump’s return to the White House brings renewed focus on the “America First” trade policy. Fortuitously, his threats present opportunities for India’s economic aspirations.
In his first term, Trump’s tariffs on Chinese exports to America proved to be a double-edged sword. While aimed at reducing America’s trade deficit and creating jobs there, those measures drove inflation, slowed GDP growth, increased business uncertainty, and reduced productivity and investment. China, on the other hand, deftly circumvented them by relocating its assembly operations to Southeast Asia while retaliating with targeted tariffs on American goods.
ow, as Trump signals an expansion of this approach to include America’s key trading partners such as Canada, Mexico, and India, many have warned about potential destabilisation of the global trade system. The resulting business uncertainty could reduce foreign direct investment flows and productivity worldwide, potentially pushing the US towards recession.
Yet, within this brewing trade storm lies significant opportunities for India. Rather than engaging in a destructive tariff war, India and the US are keen on signing a Bilateral Trade Agreement (BTA). According to the India-US joint statement last month, signed by President Trump and India’s Prime Minister Narendra Modi, its negotiation is expected to be completed by autumn/fall of 2025.
Its economic case is compelling. Currently, India’s average tariff is 20% higher than of the US, with even larger differentials in agriculture and allied sectors as compared to those in manufacturing.
A BTA, with India lowering its tariffs to US’ level — another form of reciprocity — will open up the Indian market for American producers, and lower prices faced by Indian consumers, other than enhancing our competitiveness as many imports of ours from the US are intermediates.
Why win-win?
In case of India’s exports to the US, 63% are final goods directly consumed by American consumers and the rest (37%) are intermediate inputs. If America increases tariffs on those final goods, it will create significant inflationary pressure in the US. Moreover, reciprocal tariff treatment by America will increase its cost of importing intermediate inputs, which will have negative impact on its competitiveness.
On the other hand, 65% of India’s imports from the US consist of intermediate inputs. India’s lower tariffs on them will enhance the cost competitiveness of Indian industries that rely heavily on such inputs. Additionally, our lower tariffs on final goods from the US will benefit Indian consumers by making them more affordable.
India’s primary exports to the US include jewellery, pharmaceuticals, iron and steel, textiles, leather products, and information technology services — broadly goods which are both price- and income-elastic. That of America’s are mineral fuels, machinery, aircraft, and advanced technology. They are neither price- nor income-elastic. This natural complementarity sets the stage for mutually beneficial trade expansion under a well-designed agreement.
Just do it
For India, this opportunity aligns perfectly with its aspiration to become a manufacturing powerhouse of labour-intensive goods which will create jobs. An India-US BTA will position us advantageously in the “China Plus One” strategy being adopted by multinational corporations seeking to diversify their supply chains. This is true for labour- as well as capital-intensive goods.
Therefore, India must approach this negotiation strategically, not reactively. Our trade negotiators should adopt a data-driven, tariff line-wise impact evaluation before signing the deal. Commerce and industry minister Piyush Goyal rushed to Washington DC to discuss the framework and also familiarise himself with the new team, comprising United States Trade Representative Jamieson Greer and commerce secretary Howard Lutnick.
The desire of both countries is to raise the annual trade volume to $500 billion from the current level of $190 billion. The agreement is likely to be product-specific like the one that Japan and America signed in 2019. In the past, Trump has been accusing India for being a tariff king, which is also conflated with high trade surplus that she enjoys with the US. One problem area is agriculture where the US wants greater market access, but India has a political problem with its large farmer community which will march on the streets. However, even in case of politically sensitive agriculture commodities, “side letters” can be exchanged, like the Japan-US agreement, to safeguard our interest.
As global trade dynamics are evolving quickly, India must take a pragmatic approach to ensure that the BTA (the first tranche as per the joint statement of February) benefits both Indian as well as American consumers and producers. It should set the stage to fully reflect the aspirations of the “US-India COMPACT (Catalysing Opportunities for Military Partnership, Accelerated Commerce and Technology)”. Our ultimate aim should be a comprehensive agreement that encompasses trade, technology, and innovation. Hopefully the US government, including the trade officials, will be able to see the big picture.
The authors work for CUTS International, a global public policy research and advocacy group.
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