Introduction
While India remains engaged in negotiations with the United States of America to achieve a bilateral trade agreement (“BTA”), the proposed imposition of reciprocal tariffs by the U.S. Administration, on April 2, 2025, is a matter of concern for Indian and global stakeholders. From India’s perspective, this concern arises primarily from the fact that the U.S. is the largest market for Indian exports.
Bilateral trade between India and the U.S. reached a record high of USD 118.2 billion during the financial year 2023-2024. Notably, Indian exports to the U.S. amounted to USD 77.5 billion, significantly surpassing U.S. exports to India, which stood at USD 40.7 billion. Key Indian export categories to the U.S. included engineering goods (USD 17.6 billion), electronic goods (USD 10.0 billion), gems and jewelry (USD 9.90 billion), drug formulations and biologicals (USD 8.72 billion), petroleum products (USD 5.83 billion), and readymade garment (RMG) cotton including accessories (USD 4.71 billion).
President Trump has called on India to address the trade deficit, which currently stands at approximately USD 45 billion in India’s favor. As part of its broader strategy to achieve fairness and reciprocity in trade, the Trump administration’s ‘America First’ policy focuses on increasing tariffs to reduce the trade deficit and enhance economic security by promoting domestic production in the U.S.
Reciprocal Tariffs
A reciprocal tariff is a trade measure under which a country imposes tariffs on imports from another country at the same rate that the latter applies to its exports. The primary objective of adopting reciprocal tariffs is to establish parity in trade relations by matching the tariff rates imposed on its own exports. Additionally, the prospect of reciprocal tariffs can serve as a strategic negotiating tool, compelling the other country to engage in discussions aimed at reducing tariff barriers.
The memorandum on reciprocal trade and tariffs, issued by the U.S. Administration on February 13, 2025, introduced the Fair and Reciprocal Plan (“FRP”). The FRP aims to counter non-reciprocal trading arrangements by determining equivalent reciprocal tariffs for each foreign trading partner. To establish these tariffs, the U.S. administration will evaluate the impact of foreign tariffs, taxes, non-tariff barriers, exchange rates, and other factors on the U.S. economy. The overarching objective of the FRP is to restructure U.S. trade relationships by (i) matching the import duties imposed on U.S. goods and services by other nations; and (ii) compensating for additional trade barriers affecting U.S. exports.
With respect to India, the memorandum cites tariff disparities that disadvantage U.S. exports. While the U.S. average applied Most Favored Nation (“MFN”) tariff on agricultural goods is 5%, India’s average applied MFN tariff stands at 39%. Additionally, the memorandum highlights that India imposes a 100% tariff on U.S. motorcycles, whereas the U.S. levies only 2.4% on Indian motorcycles.
Potential Impact
Reciprocal tariffs are expected to have a significant impact on India’s trade relations with the U.S. In particular, these tariffs are likely to reduce the share of Indian goods and services in the U.S. market, intensify competition from imports, and lead to declining investments. An immediate consequence will be the increased cost of Indian exports to the U.S. While a report published by the State Bank of India’s research team remains optimistic about the extent of the actual impact, it still anticipates a decline in exports by 3-3.5% if the U.S. imposes a retaliatory tariff of 15-20%. Meanwhile, a report by the Indian Gem and Jewellery Export Promotion Council (GJEPC) estimates that as much as 50% of existing exports to the U.S. in gems and jewelry could be wiped out, forcing exporters to shift their focus to other markets. Similar concerns exist for exports from India’s pharmaceutical, agriculture and automobile sectors.
India’s Approach
Given the stakes involved, and the need to maintain stable trade relations with the U.S., India has already initiated measures on multiple fronts to address the concerns raised by the U.S. and to mitigate the impact of the reciprocal tariff policy. These measures include a reduction in customs duty and taxes, trade facilitation initiatives, and bilateral trade negotiations with an aim to increase market access, reduce tariff and non-tariff barriers, and deepen supply chain integration.
The proposed BTA between India and the U.S., announced during the Indian Prime Minister’s visit to the U.S. in February 2025, remains the focal point of the ongoing trade discussions and a key driver for a mutually agreeable resolution to tariff disputes. While negotiations are ongoing, the successful conclusion of the BTA’s first phase is expected to partially offset the adverse impact of reciprocal tariffs and bolster trade relations between the two nations.
Implications of India’s Approach
India’s strategic approach to U.S. trade relations – marked by tariff reductions and a commitment to fast-track the BTA - demonstrates its intent to balance trade policy while mitigating risks of U.S. retaliatory measures. The U.S. has already acknowledged India’s recent tariff reduction on bourbon, motorcycles, metals, and information and communication technology (ICT) products, as well as its efforts to enhance market access for key U.S. exports, including alfalfa hay, duck meat and medical devices.
A BTA with the U.S. could help reduce exposure to retaliatory measures under Section 301 of the Trade Act, 1974, which provides the legal framework for the U.S. authority to initiate action against foreign nations if it determines that:
- U.S. rights under a trade agreement are being denied; or
- A foreign country’s act, policy, or practice is unjustifiable and burdens or restricts U.S. commerce; and
- A foreign country’s act, policy, or practice violates or is inconsistent with a trade agreement, thereby denying benefits to the U.S.
India’s proposed BTA with the U.S. can serve as a structured framework for resolving trade disputes, thereby reducing the likelihood of unilateral trade measures or retaliatory tariffs under Section 301. By establishing formal dispute resolution mechanisms, the BTA is expected to ensure that the U.S. government first exhausts these options before resorting to any unilateral action under Section 301. Additionally, the BTA is likely to enhance market access for Indian exports, encourage investment, and create a predictable trade environment for Indian exporters.
Looking Ahead
While the specific details of President Trump’s proposed reciprocal tariff regime remain unclear and the terms of reference of India’s proposed BTA with the U.S. are yet to be finalized, it is possible that India may secure a reduction or an exemption in exchange for trade concessions. However, there is also a possibility that the U.S. may not accord favorable treatment to India.
Although uncertainties abound with respect to the new U.S. tariffs - in terms of targets, size and scope - a recent statement issued by President Trump suggests that while there may be some exceptions to his reciprocal regime, they will likely be limited. Rather than applying reciprocal tariffs universally, the U.S. government may adopt a country specific approach, assigning individual tariff rates based on each nation’s trade policies and market access commitments.
Although India and the U.S. share a strong economic and diplomatic relationship, India may not receive a blanket exemption from President Trump’s reciprocal tariff regime because the primary aim of his policy is to reduce the U.S.’s trade deficit with other countries, including – and notably – with India.
Accordingly, it is vital for the Indian Government to secure exemptions or concessions on critical export sectors, particularly those on which the U.S. economy is dependent and/or has increasingly pivoted towards – such as semiconductors, electronic goods, auto parts and petroleum. In addition, India should aim to ensure that it does not get grouped together with countries like China, Mexico and Canada on which the U.S. has imposed significant tariffs, arguably initiating a ‘trade war’.
To address the legal consequences of reciprocal tariffs or trade barriers that may be imposed by the U.S., including future measures, India should push for an effective dispute resolution mechanism in the BTA. Alternatively, and/or in addition, Indian exporters may consider diversifying their geographic focus to reduce reliance on the U.S. market.
This insight has been authored by Ajinkya Gunjan Mishra, Dr. Deborshi Barat, Avani Tewari and Sameer Gupta from S&R Associates. They can be reached at [email protected], [email protected], [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.