TARIFFS AND THE US ECONOMY: IMPACT ON INDIA AND WAY FORWARD

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Context

President Trump imposed Tariffs, intended to boost US manufacturing and shrink trade deficits, have escalated trade disputes, raised consumer prices, disrupted global supply chains, and dampened economic growth prospects for both the US and its trading partners like India.

What are tariffs?

Tariffs are taxes that governments impose on imported goods.

It increase the cost of foreign goods, make domestic products more competitive.

It serve multiple purposes: generating government revenue, protecting domestic industries, and sometimes as a retaliatory measure in trade disputes. 

Types and mechanisms

Specific tariffs: Set a fixed fee per unit of the imported good, regardless of its value (e.g., $15 per pair of shoes).

Ad valorem tariffs: Apply as a percentage of the imported good's value (e.g., a 15% tariff on a $40,000 car adds $6,000 to the cost).

Compound tariffs: Combine both specific and ad valorem tariffs.

Tariff-rate quotas: Involve a lower tariff rate for imports within a specific quantity, with a higher rate applied beyond that limit. 

Economic Theory and Impact of Tariffs

Free trade gains: Comparative-advantage theory says countries specialize and trade to maximize total output. Tariffs reverse that: they protect inefficient domestic producers at the expense of overall efficiency.

• Economists note that trade barriers reduce social surplus and prevent economies from fully exploiting their strengths.

Winners and losers: In general, domestic producers of the imported good gain (they sell more at higher prices) but consumers lose more (they pay higher prices).  

• Government revenues increase by tariff×import quantity, but two deadweight-loss triangles (from lower consumption and production shifts) shrink total welfare.  
• For a large country, some term-of-trade gain is possible (world price falls), but this invites foreign retaliation.

Global effects: Economists warn that if many countries use tariffs, it triggers a mutual “prisoner’s dilemma”: retaliation leads to a trade war that hurts everyone.

• The core WTO principles of non‑discrimination and reciprocity exist to prevent this kind of circumstances.   

Impact on US Economy

Rising inflation and monetary policy challenges: In mid-2025, core Personal Consumption Expenditures (PCE) inflation reached 2.8%, exceeding the Federal Reserve's 2% target.

• Rising consumer price and Higher costs for imported intermediate inputs trickle down to domestically produced goods, as businesses face rising production expenses.

Slowing economic growth: International Monetary Fund forecast US real gross domestic product will grow by 1.9% in 2025, a lower rate than the projected growth of 2.6% this year.

• Higher import prices curb consumer purchasing power, impacting spending patterns. Aggregate wages have grown slower than aggregate spending.
• Over 60% consumers changed their spending habits or expect to change them in response to tariff announcements. (McKinsey Report)
• Businesses experience increased costs and uncertainty, leading to reduced investment and hiring plans.
  • According to Deloitte in their Q2 2025 forecast, business investment in the US is projected to rise only 0.7% in 2025, slowing from 3.7% in 2024.
• Some economists warn that the US economy is on the "precipice of recession," citing slowed employment growth and declining activity in manufacturing and construction.

Other spillovers and challenges

• US Dollar Appreciation: Tariffs initially strengthened the US dollar, making US exports less competitive globally. 
• Strain on Emerging Market Currencies: Stronger dollar put downward pressure on emerging market currencies.
• Volatility in Financial Markets: Higher import prices and slower growth have increased volatility in US financial markets.
• Government Revenue: Tariffs have increased customs duty collections. However, the Congressional Budget Office (CBO) estimates that the revenue increase from tariffs will be offset by the revenue lost.
• Policy Uncertainty: Frequent changes in tariff policies create uncertainty for businesses and consumers, affecting investment decisions and consumer sentiment.
• Inequality: Higher prices due to tariffs disproportionately affect lower-income households who spend a larger portion of their income on imported goods. 

India–US Trade Relations

India and the US bilateral trade is around $212.3 billion (goods+services) in 2024. India runs a surplus: in 2024 it exported around $87.3 billion to the US vs $41.5 billion imported, reflecting strong demand in the US for items like textiles and jewelry.  

In July–Aug 2025 the US imposed 25% tariffs on many Indian imports, with another 25% penalty planned from August 27.

• The stated aim was “reciprocity” – to force India to open its markets on issues like agriculture – and to punish India for buying Russian oil.

Indian government condemned the tariffs as “unfortunate” and stressed safeguarding domestic producers, and India officials signaled readiness to negotiate on Russian oil and other items rather than escalate conflict.

The dispute has strained relations: trade negotiations hit an deadlock over U.S. demands (dairy, agri market access) that India has resisted.

Impact on Indian Economy

Exports at risk: Labour‑intensive exports (textiles, garments, gems, jewelry, leather, footwear, chemicals) account for 25–30% of India’s exports to the US. Most of those sectors are dominated by small and medium firms (MSMEs).

• Around 45% of Indian exports come from MSMEs, these firms operate on thin margins; higher US duties (from 25% to 50% total) will squeeze their profits and curb shipments.

Sectoral impacts: Pharmaceuticals and IT services are largely exempt, so they remain unaffected. The US gets over 40% of generic medicines from India, including vital treatments for cancer, chronic illnesses, and infectious diseases. 

• Targeted sectors (garments, gems, toys, certain chemicals) will lose competitiveness. Exporters warn that India’s cost disadvantage versus competitors (Bangladesh, Vietnam, etc.) will widen.

Macroeconomic outlook: India’s overall economy is resilient, exports to all countries grew in 2024–25, and according to report by the National Stock Exchange (NSE), India's share in global merchandise exports rose from 0.9% in 2005 to 1.8% in 2023, in services 2% to 4.3%.

• A resilient domestic market, high investment, and reforms (e.g. GST rationalization) are expected to sustain 6–7% growth.
• Rating agencies (S&P Global) note India’s low trade-to-GDP ratio, which cushions the tariff impact, reaffirmed strong growth momentum, and projected only a modest cut to India’s outlook.
• Government is accelerating efforts to diversify markets: leveraging the new UK–India FTA and pursuing an EU trade deal. India–UK deal will boost textiles, gems, seafood exports by making them more competitive than Bangladesh/Vietnam.

WTO and the Multilateral Trading System

The WTO framework requires members to use agreed rules, not unilateral tariffs, to settle trade disputes. Under WTO law, a country raising trade barriers should first consult and arbitrate, not impose retaliatory tariffs.  

In August, 2025 Brazil asked the WTO to review the US “reciprocal tariffs,” highlights the tension between Washington’s bilateral pressure tactics and the WTO’s rulebook.  

WTO economists warn that the recent wave of U.S. trade measures is dragging down global trade. The 2025 WTO Global Trade Outlook projects merchandise trade volume to decline (–0.2%) because of such policies.

India and other members have argued that only a cooperative, multilateral approach can sustain world trade.

• India advocate for a more equitable global trading system, restoration of the WTO Appellate Body to ensure an effective dispute resolution mechanism.

Global Trade War Implications

Rising U.S. tariffs (on China, India, allies) are slowing down world economy. The WTO forecasts that World GDP is now expected to grow at 2.2% instead of the baseline 2.8% in 2025. The impact varies by region: Asia and Europe grow more slowly than expected.  

Chinese exporters increase shipments to markets outside North America as U.S. import of Chinese textiles and electronics declined. This trade diversion may help some developing exporters, but it also fragment supply chains.  

Services trade is hurt too: weaker goods trade dampens logistics, travel and business services.

Economists warn that tariff wars have unintended costs (higher inflation, reduced competitiveness, geopolitical frictions).  

Way Forward for India

Diversify export markets: Push existing and new FTAs to reduce dependence on the U.S. The UK–India trade pact (signed July 2025) and talks with the EU and ASEAN should be accelerated. Expanding ties with East Asian and African markets can help absorb displaced exports.  

Boost competitiveness at home: Continue domestic reforms to lower costs. Recently announced GST rate cuts (moving many items from 12%/28% into 5%/18%) will stimulate consumer demand.

• Government has already removed cotton and other input duties to help exporters.
• Easing of red tape, improving logistics and technology adoption can help MSMEs scale up.
• Financial support (e.g. credit guarantee schemes) and skilling can cushion affected workers in export sectors. 

Negotiate skillfully: Keep diplomatic channels open with the U.S. Experts suggest the U.S. left room for negotiation (the tariffs take effect after 21 days, giving time for talks).  

• India could explore compromises (for example, gradually reducing oil imports from Russia or offering concessions in non-sensitive areas) to get tariff relief.  
• India should press for a comprehensive trade dialogue, as the U.S. has indicated trade negotiation is the ultimate goal. Engaging with U.S. businesses and legislators can also help bring the costs of high tariffs.

Leverage multilateralism: Work with partners to uphold rules. India can advocate for consensus statements at forums (G20, WTO) urging rule-based trade.

• Strengthening institutions (WTO dispute settlement, reforming global trade rules) will help prevent trade wars.

Attract global supply chains: India should accelerate “Make in India” to attract shifting investments. The current geopolitical shift has pushed companies to diversify out of China; India can capitalize by offering stable policy, skilled labor and improved infrastructure.  

• Initiatives like production-linked incentives (PLIs) and larger export promotion zones can draw more U.S. companies and justify tariff relief, a win-win situation for India.

Conclusion

India’s way forward is to combine domestic reforms and diversification with continued dialogue and rule-based pressure internationally. This dual approach — strengthening domestic demand and competitiveness while addressing trade grievances through negotiation and WTO channels — will help India maintain high growth despite external tariff shocks.

Source: INDIAN EXPRESS