A Test of Economic Diplomacy for India

As trade tensions between India and the United States escalate, a looming tariff hike from Washington could challenge one of the world’s most important economic partnerships.

The Tariff Crossroads

The United States is set to impose tariffs on Indian goods starting April 2. Despite the long-standing economic relationship between the two democracies, recent frictions over reciprocal tariffs have brought new pressure to the table. President Donald Trump’s push for economic retribution against perceived trade imbalances has sparked concerns over long-term consequences for global trade.

While Trump’s tariff policy has faced backlash from major trade partners like Canada, Mexico, and the EU, India now finds itself caught in the crosshairs. Should New Delhi retaliate, negotiate, or seek global arbitration? The choices are complex, but India must act decisively.

Understanding the Flashpoint

The root of the dispute lies in what the U.S. calls “unfair” Indian tariff practices. India imposes high tariffs—100% on certain agricultural goods and 150% on American alcohol. The U.S. argues that these obstruct its exporters and contribute to a growing trade imbalance.

India defends its stance, citing the need to protect local industries and maintain economic sovereignty. It has also criticised U.S. tariffs on Indian steel and aluminium. As Trump’s tariffs approach, India has warned of negative impacts on global supply chains and bilateral ties.

The Stakes: Trade, Industry, and Politics

Bilateral trade hit $119.71 billion in FY 2023-24, with India maintaining a $35.31 billion trade surplus. The U.S. remains India’s largest export destination, receiving $74 billion in goods—from textiles to pharmaceuticals to electronics. Key sectors contributing to India’s GDP are now at risk.

The political climate in both countries adds complexity. In the U.S., protectionist rhetoric is politically potent, while in India, the Make in India initiative discourages tariff reductions. These domestic priorities constrain negotiation space.

Strategic Paths for India

There are ways to de-escalate the tension. India and the U.S. must consider direct talks, evaluating their tariff structures and aligning their interests. India’s Union Budget for 2025-26 already proposed tariff reductions on EV parts, wines, and Bourbon whiskey.

Engaging the WTO as a mediator could offer a neutral platform. India could also consider increasing imports from the U.S. in select sectors to address imbalances.

If negotiations fail, India may return to retaliatory tariffs—as it did in 2018, targeting apples, almonds, and motorcycles after U.S. tariffs on steel and aluminium. These measures hurt American exporters and can force a return to the table.

Diversification and Domestic Fortification

India must simultaneously diversify trade ties, strengthening relationships with the EU, ASEAN, and the Middle East. Agreements like the India-UAE CEPA and the India-EU FTA can buffer future shocks.

Further, India must scale up domestic manufacturing. The Production-Linked Incentive (PLI) Scheme should be expanded to secure self-reliance in key sectors.

This tariff battle is not just about numbers. It is a litmus test for economic diplomacy, political maturity, and long-term strategic thinking. India and the U.S. must rise above short-term impulses and reaffirm their commitment to a rules-based trade order. In doing so, they can set a precedent the world urgently needs.