India-US Trade: Balancing Tariffs, Exports, and Negotiations Ahead

Syllabus

GS-2:

Bilateral Groupings & Agreements , Effect of Policies & Politics of Countries on India’s Interests , Indian Diaspora , Groupings & Agreements Involving India and/or Affecting India’s Interests

Focus:

The US, under Trump’s “reciprocal tariffs” policy, may impose higher import duties on Indian goods, especially agricultural exports like shrimp and basmati rice. With India’s higher tariff structure, trade relations face challenges. The situation presents both risks and opportunities for India to reform its trade and agricultural policies.

America First: Impact on India’s Agricultural Trade

  • The Trump administration has proposed reciprocal tariffs to reduce the US trade deficit, aligning with the “America First”
  • The US trade deficit increased to $918.4 billion in 2024, with China being the largest contributor ($295.4 billion), while India accounted for $45.7 billion.
  • India’s high tariffs on American goods have been criticized, making it essential to rethink trade strategies in agriculture.

Reciprocal Tariffs: Definition and Calculation

  • Definition: Tariffs are taxes on imported goods, making them more expensive for domestic buyers.
  • Example: A Banarasi saree imported into the US will have additional tariffs, increasing its price.
  • Impact: Higher tariffs reduce affordability and slow down global trade by increasing costs.
  • Reciprocal Tariffs: The US plans to impose tariffs matching those of other countries to ensure fair trade.
  • Calculation: The exact method is under review, with the US trade department expected to finalize country-wise rates by April.

India-US Tariff Disparity:

Tariff Comparison

  • According to WTO data, India’s simple average tariff is 17%, while the US imposes only 3.3%.
  • Trade-weighted tariffs are 12% in India and 2% in the US, showing a stark difference in market access.
  • Agricultural tariffs are the most unequal, with India’s simple average tariff at 39% and trade-weighted tariff at 65%, compared to US agricultural tariffs of 5% and 4%, respectively.

Impact on Agricultural Exports

  • The US is India’s largest agri-export market, with a $3.46 billion trade surplus (2023-24).
  • India’s key exports to the US: Shrimp, basmati rice, processed foods, honey.
  • US exports to India: Almonds, cotton, ethanol, soybean oil.
  • If reciprocal tariffs are implemented, India’s agri-exports could become uncompetitive, leading to market shrinkage.

Opportunities in Negotiations:

Key US Demands

  • The US seeks lower tariffs on:
    • Whiskey (150%)
    • Walnuts, chicken legs (100%)
    • Skimmed milk powder (60%)
    • Wheat (40%), Soybean (45%), Maize (50%)
  • Non-tariff barriers on Genetically Modified (GM) crops are another US concern.
  • India allows Bt cotton but continues to ban GM soybean and maize, despite their use in animal feed and ethanol production.

India’s Concerns

  • India aims to protect its farmers while maintaining market access for its high-value agricultural products.
  • India wants better access to the US market for dairy, meat, and processed food
  • Negotiations must ensure a balanced trade agreement without excessive dependence on protectionist policies.

Strategic Shift from Protectionism to Competitiveness:

Need for Policy Reforms

  • Instead of relying on high tariffs, India must focus on improving agricultural productivity.
  • The Mission 500 initiative aims to increase India-US bilateral trade to $500 billion by 2030, making trade negotiations critical.

Key Measures for Competitiveness

  • Reduce Tariff Barriers Gradually:
    • Selective reductions in tariffs on low-risk imports while maintaining support for domestic producers.
    • Immediate reductions on items like walnuts, cranberries, blueberries to boost trade relations.
  • Investment in Agricultural Research & Development (R&D):
    • Currently, India’s R&D spending is below 0.5% of Agri-GDP; it should increase to at least 1%.
    • Research should focus on high-yield crops, pest-resistant varieties, and sustainable farming.
  • Strengthening Agri-Value Chains:
    • Cold storage expansion, logistics improvement, and quality certification to make Indian exports globally competitive.
    • Developing agri-export hubs for mangoes, bananas, pomegranates, targeting Russia, Korea, Japan, and Australia.
  • Streamlining Trade Regulations:
    • Simplify export procedures to reduce costs and improve market access.
    • Align regulatory standards with global norms to facilitate seamless trade.

Challenges:

  • High Agricultural Tariffs – India’s average agricultural tariff (39%) is significantly higher than the US (5%), making Indian exports less competitive.
  • US Reciprocal Tariffs – If imposed, Indian exports like shrimp and basmati rice may lose their cost advantage, affecting trade balance.
  • Non-Tariff Barriers – The ban on GM crops (soybean, maize) limits US exports to India, straining trade negotiations.
  • Lack of Market Access – Indian agri-products face high duties in the US (e.g., bovine meat, dairy products) restricting export potential.
  • Inadequate R&D Investment – India spends less than 0.5% of Agri-GDP on R&D, reducing crop yields and efficiency.
  • Weak Supply Chains – Cold storage, logistics, and certification gaps hinder India’s global competitiveness.
  • Dependence on Subsidies – Excessive reliance on fertilizer and power subsidies reduces focus on long-term productivity improvements.

Way Forward:

  • Gradual Tariff Reduction – Lower tariffs on selected imports (walnuts, ethanol, dairy) while protecting key domestic sectors.
  • Boost R&D Funding – Increase investment to 1% of Agri-GDP for high-yield crops and technology-driven farming.
  • Strengthen Agri-Value Chains – Develop export hubs, modernize logistics, and improve quality certification for better access to global markets.
  • Enhance Trade Negotiations – Leverage India’s competitive agri-exports (fruits, processed food) for better US market access.
  • Diversify Export Markets – Expand exports to Russia, Japan, Australia to reduce dependence on the US.
  • Liberalize GM Crop Policy – Allow GM soybean and maize for better trade relations and higher productivity.
  • Promote Sustainable Farming – Shift from subsidy-driven policies to technology-led agricultural growth for long-term competitiveness.

Conclusion: Turning Challenge into Opportunity

  • Trump’s tariff threats should be viewed as a wake-up call for India’s agricultural policymakers.
  • Instead of relying on trade protectionism, India should build a robust, productivity-driven agri-export strategy.
  • Strategic investments in R&D, infrastructure, and trade negotiations can help India expand its agricultural exports while ensuring long-term benefits for farmers and exporters.

Source: IE

Mains Practice Question:

How can India transition from a protectionist agricultural trade policy to a productivity-driven export strategy? Discuss the impact of US-India trade relations on India’s agriculture sector and suggest policy measures to enhance competitiveness in global markets.