Trade Tied: US plan to levy reciprocal tariffs may endanger bonhomie of Modi-Trump meet

Prime minister Narendra Modi’s four-hour long meeting with US President Donald Trump on February 13, yielded substantial gains for India. This includes a broad agreement to deepen bilateral trade ties and double it to $500 billion by 2030, as well as negotiate a bilateral trade agreement in the coming months.

However, just hours before that crucial meeting, Trump announced a new system of reciprocal tariffs on trading partners of the US and said India is among the highest tariff nations, underscoring it with his grievance over customs duties India imposed on Harley Davidson motorbikes. India’s trade and industry have welcomed the discussions on deepening bilateral trade ties-after all, the US is India’s largest trading partner and biggest export market. But experts are worried about what the reciprocal tariffs would entail.

A White House memo on Reciprocal Trade and Tariffs has said the administration will counter non-reciprocal trading arrangements including not just tariffs but also “unfair, discriminatory, or extraterritorial taxes” including value added tax, non-tariff barriers and unfair or harmful acts as well as policies around exchange rates.

Abhijit Das, former head of the Centre for WTO Studies at the Indian Institute of Foreign Trade, says it is very difficult to quantify the impact of the reciprocal tariffs, but it will likely be negative.

“Reciprocal tariffs don’t just include import duties but also several other aspects like value added tax, non-tariff barriers, government procurement, lack of protection of intellectual property rights and exchange rate policies,” Das points out. “It is a very comprehensive strategy and the attempt by the US is to get countries to change not only their customs duties but also several other policies,” he adds.

This holds true for India, too. The US is India’s largest trading partner with more than $190 billion in trade and accounts for nearly 18% of India’s exports. Top exports include drug formulations and pharmaceuticals, telecom instruments, gems and jewellery, petroleum products, iron and steel and textiles and clothing.

Madhavi Arora, Chief Economist at Emkay Global Financial Services, points out that India ranked 10th among the top sources of US imports in calendar year 2024 at $91 billion, with Mexico ($510 billion), China ($463 billion) and Canada ($422 billion) as the top three countries. In 2024, the US’ trade deficit with India was substantially lower than with other countries at $49 billion. “This is significant, as the Trump administration is likely to target countries that have extremely heavy deficits with the US,” she says.

However, on a relative basis, India has among the highest tariffs on US imports, which means that it will be disproportionately impacted if reciprocal tariffs are imposed, Arora says. She adds that sectors like chemicals, automobiles, and textiles could be among the worst-hit.

But overall, a very low share of India’s imports (by value) from the US have ‘high’ tariffs. In FY24, about 82% of India’s imports from the US had tariffs of 0-10%, while about 15% of imports had tariffs of 10-20%. “Just 3% of imports had tariffs higher than 20%,” Arora says.

India has also lowered customs duty in the Union Budget 2025-26 on several items, including those being imported from the US.

Government officials have pointed out that India’s effective tariff rate is now down to 10.6%, which is close to the Asean level, from 11.6% in the last Budget and an initial 13%.

A report by Capital Economics notes that a reciprocal tariff strategy rather than a 10% universal tariff could result in a smaller rise in the overall effective tariff rate. While developed markets would come out relatively unscathed, it has warned that emerging economies would suffer a greater loss of competitiveness, with India, Brazil and Turkey amongst the most exposed. “It is possible that their governments would provide concessions to President Trump in an attempt to prevent reciprocal tariffs from being imposed,” it said.

As a sweetener, India has also cut tariff on bourbon whisky to 100% from the earlier 150%, that is likely to help US brands like Jim Beam.

Ajay Srivastava, founder of think tank Global Trade Research Initiative, says the average tariff is less than 5% for 75% of US exports to India by value. He believes that reciprocal tariffs may not hurt India much given the differences in the export profiles of the two countries. For example, if the US charges 50% reciprocal tariffs on Indian pistachios because India charges the same, India is happy as it does not export pistachios.

Officials remain upbeat about the leaders’ meeting and are set to start discussions on the trade pact, which they hope will boost trade. “Once the US Trade Representative is appointed, we hope to start negotiations,” sources said, adding that India has got one of the better deals amongst other nations with the US.

For now, New Delhi is awaiting more details of the Trump administration’s plans to see what the impact of the reciprocal tariffs will be.

@surabhi_prasad