Trump reciprocal tariffs: Here’s the best-case scenario for India

Also Read: Trump tariffs: Is the US president doomed to repeat history?

Scenario 1—A full-blown trade war: A trade war triggered by reciprocal tariff hikes can upend bilateral trade and is not unlikely. India imposes an average tariff of around 15% on US imports, and the US imposes around 4% on Indian imports. This means the US may hike tariffs by around 10 -11 percentage points to match our rates, and this does not count how America will quantify the impact of India’s non-tariff barriers, such as cumbersome customs and standards accreditation procedures for certain goods.

Key Indian exports, including chemicals, metal products and jewellery, are particularly vulnerable to US tariff hikes. Goldman Sachs estimates that a 10-percentage-point increase in American tariffs could reduce India’s GDP by up to 60 basis points as exports fall by 11-12%.

If India responds with counter-tariffs on US goods, especially in politically sensitive sectors such as agriculture and defence, Trump is sure to react badly. A vicious and impractical escalatory spiral is already on full display in US-Canada trade relations, which is telling, given that the two countries are seen to be joined at the hip. 

This week, Trump threatened to double the tariffs he previously announced on Canadian steel and aluminium imports to the US—to 50%. This was in response to a 25% surcharge Ontario announced on electricity it sends to northern US states. De-escalation talks on this have reportedly begun.

Also Read: Self-harm alert: Trump’s ‘man of steel’ ambitions will make America grate again

Scenario 2—India and the US strike a free-trade deal: The two countries could technically conclude a comprehensive trade agreement that accelerates trade growth towards the $500 billion target. But a deal which redirects Trump’s interests is unlikely, as he wants his negotiators to reduce US trade deficits, not increase them. India enjoys a $46 billion surplus with the US. This means that we will have to buy much more from America, while finding a way to increase bilateral trade.

Where will India find the appetite for nearly $50 billion in US goods? And how can we be expected to do this while the world seems precariously close to a secular recession and our consumption story is so weak?

The seemingly impossible balancing act between growing trade volumes and reducing the trade gap is perhaps only possible to achieve in the limited context of sectors like electronics and digital technologies, where both sides have something to give the other. 

For instance, the US leads in high-tech design but lacks skilled and cheap labour for large-scale manufacturing, which India now has thanks to transnational firms diversifying away from China. Similarly, digital businesses like Google, Meta and Amazon are prominent in India, and local firms like Zoho and Freshworks are using this interconnected ecosystem to expand into the US market—a path that remains open as long as hawkish digital regulations or compliance regimes don’t create roadblocks on either side.

Also Read: Think different: Consider a smartphone tariff cut to sustain an Apple-led export boom

Scenario 3—Negotiated sectoral compromises: Both countries could alternatively engage in targeted sectoral negotiations even outside a free-trade deal setup to avoid extreme hikes and deepen bilateral commerce. This would involve adjustments, such as India lowering tariffs on American automobiles in return for exemptions on Indian exports such as pharmaceuticals and textiles.

Trump’s reciprocal tariffs will have limited impact on the Indian economy only as long as he doesn’t put major restrictions on our key exports to the US. This means that moderate trade growth is within the realm of possibility if both countries avoid major retaliatory measures. This scenario also buys India enough time to diversify its trade partnerships and strengthen ties with the EU and Asean to hedge against Trump’s policies.

Trump’s meeting in February with Prime Minister Narendra Modi set the stage for such cooperation, with productive discussions in sectors like nuclear energy, defence, and oil and gas. Both leaders stated their commitment to implementing the 123 Civil Nuclear Agreement, outlining plans to localize and potentially transfer technology for US-designed nuclear reactors in India. They also announced new defence collaborations, including for co-production.

Also Read: Arming up: ‘Be Indian, buy Indian’ is a useful mantra for strategic autonomy

Aim for a soft landing: Union commerce minister Piyush Goyal’s expedited US visit to address economic concerns reflects our realization that the stakes are high. The US government, on its part, has begun an expansive review of all types of trade barriers that American firms face in India—and this may result in an additional 4-5-percentage- point hike in reciprocal tariffs.

If diplomatic efforts stall, the first scenario of a trade war could very well ensue, stifling trade and economic growth. Cooler heads must prevail. Both countries would do well to prioritize the pragmatic combination of a limited trade deal and targeted sectoral concessions for now.

These are the authors’ personal views.

The authors are with Koan Advisory Group, New Delhi.