India must rethink trade strategy as US pushes reciprocal tariffs

Among the most significant, but also confounding, announcements by President Donald Trump in his first month in office is the imposition of “reciprocal tariffs” by the US on its trade partners. The White House memo of February 13, 2025, specifies a comprehensive approach to measuring non-reciprocity by US trade partners based on five detailed criteria. In addition to tariffs imposed on US products, this includes non-tariff barriers, subsidies and/ or any measures, policies —including on exchange rates, taxes, practices or regulatory requirements in the partner country —that, in the judgement of the US administration, are discriminatory or impose limitations on market access for US businesses, workers, and/or consumers.

 

A systematic evaluation of all these measures, for almost 13,000 tariff lines traded by the US for each of its trade partners, seems like a near-impossible exercise to undertake. Speculation is therefore rife on whether the evaluation of tariffs will be product-specific or will sector averages be considered. Furthermore, there are questions about whether this will be unidirectional or if the US will also reduce its tariffs correspondingly in sectors where it imposes relatively high tariffs, such as in apparel and clothing. Given that there are yet no answers to these and many related queries, it may be best to wait and watch how the reciprocal tariffs unfold in April and beyond. In the interim, though, it may be useful to consider other options for trade.

 

So, what are India’s options? India has, thus far, adopted a pre-emptive approach. This is unlike Mexico and Canada, the first two countries targeted by President Trump for the imposition of 25 per cent tariffs. Both responded, post-announcement, by promising to reinforce their border with the US to prevent illegal migration and the flow of Fentanyl opioid. This was, in effect, only an intensification of their ongoing border security policies.

 

India, in comparison, has responded to broad criticism of its tariff levels by President Trump. In the February 2025 Budget, tariffs in some product categories, including on 1,600 cc motorcycles, were brought down. This was followed, a few days later, by a reduction in tariffs on imports of Bourbon whiskey, clearly aimed at appeasing the US. Notwithstanding these pre-emptive moves, President Trump has continued with his adverse comments on India’s tariffs with no indications of concessions for India in his plans to impose “reciprocal tariffs”. India, it may be noted, is among the top 15 trading partners with which the US runs a deficit in goods trade. 

 

While India is preparing for a bilateral deal with the US, this may not be sufficient to combat the challenge posed by US trade policy under Trump 2.0. The imposition of tariffs on Mexico and Canada serves as evidence of his willingness to violate the United States-Mexico-Canada Agreement crafted under Trump 1.0.

 

India, therefore, needs to secure its trade opportunities through a systematic approach of diversification of its export markets and products. It could perhaps learn from the recent trade initiatives of other countries. For example, some have hastened the pace of their negotiations to conclude Free Trade Agreements (FTAs) as part of a diversified trade strategy. Mexico and the European Union recently concluded an upgrade of their earlier trade agreement with substantial tariff reduction and modern-day high-standard provisions, including on sustainability and green growth. Similarly, the EU-Mercosur (Uruguay, Paraguay, Argentina, Brazil) trade deal, long under negotiation, was finalised in December 2024 in anticipation of Mr Trump’s imminent presidency. The trade deal goes beyond tariffs to include environment standards as well as critical minerals. The UK has similarly begun its process of reviewing the economic cooperation agreement with the EU, having accomplished its membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2024. For Asean economies, membership of the mega-regional trade agreements like the Regional Comprehensive Economic Partnership (RCEP) and CPTPP provides avenues for further trade intensification. Furthermore, unlike India, some of the Asean economies continue to enjoy concessional market access through the Generalized System of Preferences (GSP) in the US.

 

While India has also announced the resumption of FTA talks with the UK and EU, more groundwork will be needed to conclude the negotiations. Tariff reduction must be undertaken more systematically to achieve an actual reduction of effective tariffs. For most commodities for which basic Customs duty was reduced in the Budget in February, the additional levy of a cess has kept the effective duty rate unchanged. As the threat of reciprocal tariffs by the US looms large, it may be opportune and useful for India to formulate a time-bound plan to reduce and align its average applied tariffs with its comparator Asian economies. Coupled with an early review of the model Bilateral Investment Treaty, also announced in 2025 Budget, this will assist India in concluding deeper trade agreements and attracting export-oriented foreign direct investment.

 

On sustainability issues, too, India needs to evolve a suitable negotiating stance, given that trade today takes place in a milieu of global challenges such as climate change and political backlash related to worker conditions and rights. The EU-Mercosur FTA, wherein the Latin American economies with major agro and forest-based export interests have successfully negotiated these elements, may provide useful inputs in this context. Simultaneously, India should initiate its participation in the CPTPP, as its provisions have been formulated to respond to modern-day trade contours, and with its membership, existing and potential, it may soon be the largest, open rules-based trade bloc.

 

India also needs to evolve its perspective on the multilateral front. It should contribute more to collective action towards creating an alternative rules-based trade order. This is necessary as the principle of fairness in global trade can only be achieved through an overarching supra national institution — a role the WTO, in its present form, is unable to perform. India has thus far stayed away from plurilaterals, questioning their legality. This viewpoint may now need reconsideration and, in fact, it may be time now to collectively re-define plurilaterals through a set of common parameters while keeping membership open to individual country choice. 

 

Therefore, for India, the need of the hour is a strategic trade policy that is multi-pronged and responsive to the varied challenges of the present-day global trade environment.

 

  The author is professor of economics, School of International Studies, JNU, and author of India’s Trade Policy in the 21st Century, Routledge: London, 2022. The views are personal