The announcement from Washington that the United States will lower its reciprocal tariff on Indian goods from 25 per cent to 18 per cent marks a significant moment in the often turbulent economic relationship between the two democracies. Tariffs are not merely technical instruments of trade policy; they are tools of geopolitical signalling, domestic political posturing, and economic leverage. Over the past few years, India and the US have oscillated between partnership and pressure, cooperation and confrontation. The latest move by the Trump administration must therefore be seen not as a gesture of goodwill alone, but as part of a broader recalibration of American trade strategy, especially in a world reshaped by great-power rivalry, supply chain realignments, and the Ukraine war. The decision gains added weight because it follows an even sharper punitive tariff of 50 per cent imposed in August 2025 on certain Indian goods, which had sent a chill through several labour-intensive export sectors in India. For New Delhi, the rollback to 18 per cent is both a relief and a reminder that access to the American market remains contingent on political and strategic alignments rather than purely economic logic.
At the heart of Washington’s grievance lies its persistent trade deficit with India. Successive US administrations have complained that India maintains high tariffs and non-tariff barriers that restrict American exports, particularly in agriculture, medical devices, and manufactured goods. From the American perspective, trade deficits are often equated with unfairness, even though economists routinely point out that such imbalances stem from differences in savings, investment, and consumption patterns. Trump’s insistence that India reduce its barriers to zero and increase purchases of American energy, technology, and agricultural products reflects a transactional approach to diplomacy in which trade becomes a bargaining chip rather than a mutual growth strategy. The added demand that India reduce its dependence on Russian crude oil and shift purchases toward the US, and even Venezuela, links commerce directly to geopolitics. This places India in a delicate position, as it must balance its strategic autonomy, its long-standing energy ties with Moscow, and its expanding partnership with Washington. The deal, therefore, is as much about global power politics as it is about bilateral economics.
From India’s standpoint, the immediate gains are likely to be felt in sectors that have traditionally relied heavily on the US market. Garments, leather products, footwear, carpets, handicrafts, and gems and jewellery are labour-intensive industries that employ millions, particularly women and small entrepreneurs. The steep tariffs had eroded their competitiveness, pushing buyers toward alternatives such as Bangladesh, Vietnam, and Thailand. Even a modest reduction to 18 per cent can revive order books, restore margins, and encourage fresh investment in manufacturing clusters across India. However, the absence of clarity on the full scope of the deal remains a concern. Without a detailed executive order from Washington or a formal trade agreement specifying covered sectors, safeguards, and timelines, exporters must still operate in an atmosphere of uncertainty. India has seen similar episodes before, where initial political announcements raised hopes that were later diluted by bureaucratic delays or narrow carve-outs.
The broader bilateral trade picture suggests that India enters this negotiation from a position of relative strength. Between 2021 and 2025, the US emerged as India’s largest trading partner in goods, accounting for nearly one-fifth of its exports. In 2024-25 alone, bilateral trade touched 186 billion dollars, with India enjoying a sizeable surplus of over 41 billion dollars. This surplus has steadily widened over the past three years, reflecting the deep integration of Indian pharmaceuticals, telecom equipment, jewellery, auto components, and petroleum products into American supply chains. On the import side, India buys significant quantities of crude oil, coal, diamonds, machinery, aircraft, and gold from the US, underscoring the interdependence of the two economies. In services, too, India runs a surplus, driven largely by its IT and consulting industries, which remain indispensable to American corporations. This structural reality gives New Delhi leverage, even as Washington seeks concessions.
Yet the asymmetry of power in trade relations cannot be ignored. The US continues to impose extraordinarily high tariffs on several categories, including dairy, cereals, fruits, vegetables, beverages, minerals, metals, and chemicals. These rates far exceed those applied to most developing nations and severely limit India’s agricultural export potential. Unless these distortions are addressed, any deal risks being cosmetic rather than transformative. Moreover, Trump’s framing of the agreement as a personal bargain with Prime Minister Modi reinforces the unpredictability of US policy under his leadership. India must therefore pursue a dual strategy: welcome immediate relief for its exporters while pushing for a more institutionalised, rules-based framework that reduces vulnerability to unilateral American pressure. Ultimately, the real test of this deal will not be in celebratory announcements, but in whether it fosters a stable, fair, and mutually beneficial economic partnership that transcends personalities and politics.