Will Trump’s India Tariffs Affect a Critical U.S. Partnership?
On July 31, U.S. President Donald Trump announced a 25 percent “reciprocal” tariff on Indian imports, effective August 7, aimed at forcing New Delhi to lower its barriers to trade for American goods. Trump subsequently signed an executive order imposing an additional 25 percent tariff on imports from India, beginning August 27, for its continued purchases of Russian oil. However, after the last week’s summit meeting between Trump and Russian President Vladimir Putin, it is unclear whether this second tariff will still go into effect in late August. If it does, the total tariff on India would be the steepest rate applied to a U.S. trading partner, thus locking the United States and India in their most serious trade dispute in decades.
The Indian government has decried the tariffs, and Indian Prime Minister Narendra Modi has pledged to protect his domestic producers no matter the cost. Nevertheless, both sides have kept diplomatic channels open for discussion of a possible deal. CFR turned to Distinguished Fellow Kenneth I. Juster—who served as ambassador to India during the first Trump administration—to better understand the nuances behind the trade dispute, the response in India, and the pathways that remain to a resolution.
The Trump administration recently raised tariffs on Indian imports to 25 percent and, possibly, to 50 percent. What is the strategy behind the levy, and why has the White House placed its highest tariff level on a strategic partner?
Trump tends to approach issues with other countries primarily with a bilateral focus and largely in the context of a particular set of concerns. He also believes deeply in the concept of reciprocity. From the president’s perspective, the economic relationship between the United States and India has been out of balance for many years. He is concerned about India’s high barriers to trade and the significant U.S. trade deficit with India. The administration’s 25 percent reciprocal tariff on Indian imports is designed to put pressure on India to open the market further opening measures and agree to a trade deal.
The White House has also threatened to impose an additional 25 percent tariff beginning August 27 if India does not eliminate its sizable imports of Russian oil. In this case, the president’s concern is that payments for the large volume of Indian oil imports provide critical financial support for Russia’s war against Ukraine and the killing of many innocent civilians. Trump’s objective, if he moves forward with this second tariff, is to indirectly pressure Putin to agree to a plan to end the war by cutting off some of Russia’s financial resources. Trump could also be trying to incentivize Modi to appeal directly to Putin in this regard. However, following Trump’s meeting with Putin, there are reports that he could suspend the implementation of this additional tariff. Of course, this situation could change depending on Trump’s assessment of progress in the Russia-Ukraine talks.
Ultimately, the high tariff rates on India appear to me to be part of a negotiation. This is a similar tactic to what the president has used in other deals, including the trade agreements with Japan and the European Union. Nonetheless, Trump’s rhetoric and public threats could well make it more difficult domestically for Modi to take the desired measures.
I do not believe that Trump approaches these trade issues as part of a broader Indo-Pacific strategy, or as inconsistent with U.S. and Indian joint strategic objectives in the Indo-Pacific region. It would therefore be a mistake—and certainly premature—for the government of India to view these tariffs as fundamentally undercutting the strategic partnership that the two countries have developed over the last twenty-five years. I believe the president still has a strong interest in the U.S.-India partnership and enjoys his good relationship with Modi. But he also favors the use of tariffs to try to rebalance the economic relationship and, if he imposes the additional tariff, to help close another deal—one between Russia and Ukraine—for an end to hostilities.
What has the reaction been from the Indian side? What position does this put Modi in at home politically and economically?
The reaction in India has been multifaceted. Initially, because the government of India felt the parties were close to announcing a trade deal, the reaction was one of surprise that there were additional issues to address. When the level of the rhetoric from the White House increased by labeling India’s tariffs “obnoxious” and calling the Indian economy “dead,” there was a sense of indignation among Indian commentators. This was exacerbated by the president’s repeated statement that he had brokered a ceasefire between India and Pakistan, which the Indians have publicly disputed (thereby irritating Trump in the process).
More recently, when the president announced the threatened imposition of a 25 percent additional tariff on August 27, India’s Ministry of External Affairs called this action “unfair, unjustified, and unreasonable,” and asserted that India “will take all necessary steps to protect its national interests.” Modi also vowed not to compromise the welfare of India’s farmers, dairy sector, or fishermen, and stated that he is personally ready “to pay a heavy price for it.” Regrettably, respected voices in India are now questioning the value of their strategic partnership with the United States.
The United States, however, is India’s largest and most important trading partner. Almost 20 percent of India’s total merchandise exports go to the United States. Even though the reciprocal tariff exempts some key sectors, such as pharmaceuticals, electronics, and energy—which account for approximately 40 percent of India’s total merchandise exports to the United States—the detrimental impact of the tariff will still be significant, especially in sectors such as textiles, gems and jewelry, and auto parts.
Given the vibrant political discourse in India, Modi needed to respond publicly and firmly to the new tariffs. But he should also be careful not to paint himself into a corner and to remain open to discussing ways to resolve the current trade dispute. I understand that the two leaders are trying to arrange a meeting in the United States in late September, when both plan to attend the UN General Assembly.
U.S.-India relations have progressed a long way over the past two-and-a-half decades. How do these tariffs affect the U.S.-India relationship and their respective relationships with China?
The steady progress in U.S.-India relations over the past twenty-five years, through changes in government on both sides and across political parties, has been extraordinary. This includes Trump’s first term, when he and Modi developed a warm friendship. However, the economic component of the bilateral relationship has always underperformed relative to its potential.
While there have been trade disputes in the past between the United States and India, this one is more acute though still solvable. Despite the initial rhetorical flourish by both sides, Washington and New Delhi are keeping open lines of communication and, hopefully, beginning to discuss constructive ways to close a trade deal. Ultimately, the planned meeting in September between Trump and Modi is probably needed to resolve outstanding issues and get the relationship back on track.
Continuation of this trade dispute would inevitably have a negative impact on certain sectors of India’s economy, as the tariffs affect over 55 percent of Indian shipments to the United States. For example, in the textile and apparel sector, India competes with Vietnam and Bangladesh, which each have a lower reciprocal tariff rate. If American companies shift their sourcing away from India and toward these other countries, the damage to India in terms of lost business and jobs would be significant. In the estimation of some experts, the loss of export trade could lower India’s domestic growth by approximately 0.5 percent or more, depending on how long the high tariffs last.
The tariffs will also impose costs on U.S. companies and consumers. To the degree that U.S. companies incorporate Indian parts or components into their products, the cost of these inputs will increase (or substitute inputs will need to be found where possible). And U.S. consumers of Indian products will have higher costs and less choice in sectors such as textiles, gems and jewelry, auto parts, and certain foodstuffs. The impact in both countries will depend on a combination of factors, including product differentiation, demand, quality, and contractual arrangements.
Beyond these economic issues, the failure to conclude a deal could cause spillover collateral damage to other aspects of the bilateral relationship, including in defense and technology cooperation. The weakening of the U.S.-India relationship would inevitably be of strategic benefit to China—and that is not in the interest of either the United States or India. Both Washington and New Delhi should recognize that their bilateral relationship is more significant and impactful than any arrangement either of them can work out with China, which remains a strategic challenge for both countries.
Both sides have emphasized their desire to make a deal in the past. What is their best path to progress from this moment of trade tension?
The United States and India need to address two issues: The 25 percent reciprocal tariff related to a trade agreement and the possible additional 25 percent tariff related to India’s oil imports from Russia.
Regarding the potential tariff relating to Russian oil imports, India’s initial position seems to be to wait and see what the impact will be of the talks between Trump and Putin. While an early resolution of the Russia-Ukraine conflict would eliminate any tariff on Russian oil imports, this protracted conflict is unlikely to be settled soon. Accordingly, while it would probably be impractical for the Indians to terminate all oil imports from Russia, they could wish to quietly lower their level of Russian oil imports and substitute them with more energy imports from the United States. Some reports indicate that this process could already be starting. If so, that could enable New Delhi to request Washington to delay any implementation of the threatened tariff. And if Trump and Modi can resolve outstanding trade issues when they meet in late September, perhaps the United States will agree to drop the extra 25 percent tariff altogether, even if the Russia-Ukraine conflict has not been resolved.
Regarding the 25 percent reciprocal tariff, Trump’s imposition of this is, in my mind, a negotiating tactic rather than a desire to jettison the U.S.-India strategic partnership. Under these circumstances, New Delhi should avoid the temptation to impose retaliatory tariffs on U.S. imports, which would likely be counterproductive. Fortunately, I see no evidence that India is planning to take such action. However exasperated the Indian government could be by recent events, it should try to be as creative as possible in presenting further ideas for discussion with its U.S. counterparts.
Perhaps the Indians can carefully review other U.S. trade deals to see if there are elements that they could borrow to enhance what they have already put on table. This could include pledges of further investment by Indian companies in the United States, the allowance of duty-free access for certain agricultural items such as cotton and blueberries, and the acceptance of some other items under limited quotas. I also recall during Trump’s first term that the two countries had outlined a proposal for limited U.S. dairy imports. Perhaps that could be resurrected.
Based on my experience, Modi is an extremely skillful interlocutor and is well suited to a high-stakes meeting with Trump. The prime minister would likely want to emphasize the strategic importance of the bilateral relationship and his appreciation for the good rapport between the two leaders over time. While Modi should be prepared to provide ideas on how to sweeten India’s offers on trade, procurements, and investments, he could also reference his own constraints as the head of a democratic government and the areas where he will need some U.S. understanding and flexibility.
Hopefully, the two leaders can then reach an agreement, with a final reciprocal tariff rate conceivably at 15 percent but in no event greater than 20 percent. Such a resolution would also pave the way for a visit by Trump to New Delhi later in the year for the Quad summit.
