New tariff threat: Additional duties on exports will raise risks for India

Rising US tariff threats over Russia ties are straining India's trade outlook, putting exports, investment flows and economic stability at fresh risk

The unease in India’s relations with the United States (US) is showing little sign of relenting. Recent statements made by American President Donald Trump and members of his administration about India did not offer much hope. Although India’s response has been restrained, as should be the case, Mr Trump last week backed a Bill that would empower him to impose a tariff of at least 500 per cent on countries buying Russian-origin uranium and petroleum products. The Bill has bipartisan support and may not face much difficulty in getting passed, possibly in the coming days. It could seriously affect India’s chances of arriving at a trade deal with the US in the near future. Thus, even if the US Supreme Court rejects the imposition of tariffs on legal grounds, India may not benefit if the proposed Bill is passed. 

The Trump administration has particularly targeted India over its imports of Russian oil by imposing an additional 25 per cent tariff. It is charging a 50 per cent tariff on about 55 per cent of goods imported from India. Notably, the US did not target China, the largest importer of Russian energy with much deeper trade ties with Russia, largely because of China’s ability to retaliate. Thus, it is possible that, armed with new legal authority, the Trump administration will put more pressure on India. According to reports, India’s import of Russian oil has declined significantly. India’s daily purchase at the beginning of January was reported to be worth 72.92 million euros compared to the high peak of 189.07 million in July 2023. 

Since prices of crude oil have been relatively soft, Indian importers could have moved away from Russian oil with comparative ease. Given what is at stake and the track record of the Trump administration, Indian oil importers should be appropriately advised by the government. As an expert aptly noted in this newspaper, a 500 per cent tariff will effectively shut out India’s exports to the US. India enjoyed a goods trade surplus of $45.8 billion in 2024 on exports of $87.3 billion. India also exported services worth $41.6 billion during the year, and ran a small deficit. It is not clear how the US government would impose tariffs on services. It has been argued that it might put pressure on US companies importing Indian services, possibly through additional taxes. 

The possibility of imposing a 500 per cent tariff would have serious implications for the Indian economy and was reflected in the stock market’s nervousness last week. Thus, it will be extremely important for India to persuade Mr Trump and his administration about its position. Any additional tariff on exports to the US could expose India to a variety of risks, both in real economic terms and financially. Barriers in exports, to the US for instance, could seriously affect foreign investment flows — both portfolio and direct. Foreign portfolio investors last year sold Indian stocks worth about $19 billion, one of the reasons why the rupee has been under pressure. More broadly on the trade front, India is expected to close a deal with the European Union (EU) in the coming weeks. However, engagement with the EU should not distract Indian policy managers from the US. The removal of the additional tariff threat and a trade deal with the US in the near future will remain critical.