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With India-US trade talks gaining momentum, negotiations will test India’s tariff strategy, Trump’s policies, and the road to a US$500 billion trade target.

The recently announced Bilateral Trade Agreement (BTA) between India and the United States (US), following Indian Prime Minister Narendra Modi's visit to meet US President Donald Trump on 13 February 2025, marks a key moment in trade relations between the two countries. India had a US$45.7 billion trade surplus with the US in 2024. Trump’s second administration is particularly averse to striking bilateral trade deals with any country, especially if they have a huge trade surplus with the US. The case of the US’ neighbours, Canada and Mexico, are particularly important in this regard. The first Trump administration cancelled the North American Free Trade Agreement (NAFTA) framework with both Mexico and Canada and negotiated a new United States-Mexico-Canada (USMCA) agreement on terms more favourable to the US. The fact that the Trump administration has agreed to work on a BTA with India may be a good signal for India-US trade ties.

Trump’s second administration is particularly averse to striking bilateral trade deals with any country, especially if they have a huge trade surplus with the US.

As much as the actual deal, it is equally important to make Trump realise that India has the right intent to strike a deal or come up with a workable frame on a trade deal with the US. India, on its part, has mixed right signals with initial steps slashing peak tariffs from 150 percent to 70 percent. India also announced in its latest budget that it will lower tariffs on Bourbon whiskey, wines, and Electronic Vehicle (EV) segments, among other sectors. Although these might not be critical sectors in terms of trade value, it signalled the right intent on the part of India's willingness to be conciliatory in certain areas and to meet the US halfway.

India faces the challenge of navigating a trade landscape with the US amidst a mercurial Trump presidency which prioritises optics as much as substance. Some numbers that have stood out for Trump are the stark contrast with countries like India in the average tariffs applied. For instance, India’s simple average tariff rate stands at 17 percent compared to the US’s 3.3 percent. This contrast widens further in sectors like agriculture. India shouldn’t expect Trump to see the nuances between these high numbers; it should instead devise strategies to present its case better.  While high tariffs on key US exports to India are limited, India seeks to balance strategic conciliations with protecting domestic industries, such as agriculture. What could also work for a potential India-US trade deal now is India’s deeper integration into the global value chain, allowing it some leeway to reduce its average customs duty across the board.

Due to Trump’s push for domestic and metal production, India’s aluminium exports to the US could face hurdles.

As one of the largest exporters of gems and jewellery, India may see opportunities for tariff reductions in this sector, particularly for polished diamonds and gold jewellery, to ensure greater market access in the US. The latter is the largest importer of Indian jewellery and gems, with  US$9.9 billion in value in 2023-24, making it a critical sector in trade negotiations in both signalling and value. Another key area in trade negotiations will be aluminium and steel. In 2023, India’s aluminium exports to the US were worth US$947 million. Importantly, in Trump’s recent announcement of reinstating the full 25 percent tariff on steel imports and increasing tariffs on aluminium imports to 25 percent on a host of countries, India is absent. However, the BTA negotiations are almost certain to bring it up. Due to Trump’s push for domestic and metal production, India’s aluminium exports to the US could face hurdles. To a large extent, the degree of demand for aluminium and steel in the US will also depend on whether the Trump administration continues basic infrastructure projects of the “Build Back Better” programme of the Biden administration in part to focus on development, even under another name.  Textiles and clothing exports to the US from India, which stood at US$10.8 billion annually, could also be at the centre of US demands for tariff concessions.

The energy sector will be another important sector for India in the BTA. India is among the largest importers of oil and gas. A simple strategy which could work, and perhaps India has agreed to it, is to import more oil and gas from the US to reduce trade imbalance. This month, in February, imports from the US witnessed a big jump, catapulting them to the fifth position. The latest India-US joint statement emphasised that the US intends to become India’s leading supplier of crude and petroleum products. With Trump prioritising energy exports, India’s growing energy needs could make this sector a significant contributor to bilateral trade growth. However, a lot will depend on the advantageous pricing of oil and gas, sanctions on other suppliers like Russia and the viability of peace and security in the Middle East to ensure functional supply chains. Here, Trump’s plan to strike a peace deal in the Middle East and connect the region in a trans-connectivity project with Italy in Europe to India in the Indo-Pacific could be aligned with a plan.

The latest India-US joint statement emphasised that the US intends to become India’s leading supplier of crude and petroleum products.

Two key areas where negotiations could prove tricky will be electronics and smart devices, where the Trump administration is serious about imposing reciprocal tariffs on Indian exports in the sector. High tariffs in this category could mean larger capital outflow and upsetting a whole range of value chains in India. Apple Inc. is just an example of a company which is invested heavily in India in manufacturing and supplies from India. This could face disruptions amidst the growing Make America Great Again (MAGA) chorus that American companies should return home. Trump's focus onMake in America policies and his drive to bring American companies back home could pose a new set of challenges to India’s role in global value and supply chains.

The India-US defence relationship is one of the strongest pillars in bilateral relations, and defence sales from the US to India could be the easiest way to alter trade asymmetry one way or the other. The Trump administration is almost certain to offer India new defence sales to reduce the trade deficit through big-ticket purchases like F-35 fighter jets, P-8I Poseidon, helicopters, and other advanced military systems. While India will have a vigorous debate over the need for expensive fighter jets, if at all, Trump is certain to see defence sales as the easiest way to reach the US$500 billion figure in bilateral trade announced in the recent joint statement.

The Trump administration is almost certain to offer India new defence sales to reduce the trade deficit through big-ticket purchases like F-35 fighter jets, P-8I Poseidon, helicopters, and other advanced military systems.

Unlike its approach during Trump's first term, where India imposed retaliatory tariffs, this time, it is prepared with targeted, strategic concessions while drawing its red lines. By selectively lowering tariffs, India aims to ensure a favourable negotiation environment without compromising core sectors. India has signalled its willingness to adjust tariffs rather than take a confrontational stance against the US, particularly in areas symbolic of trade openness. The 2025 budget included tariff reductions as a great starter and may have paved the way for talks on a potential BTA. The India-US joint statement sets a deadline around September of this year when both sides should be able to design a workable framework. This may also be the time when India would host the Quad summit. In the coming month, India’s balancing will be tested through the reassessment of tariffs on a host of items that currently face higher tariffs, including solar cells and luxury cars from the US and safeguarding domestic interests.

The India-US bilateral trade target of US$500 billion by 2030 is ambitious as it necessitates an additional US$250–270 billion in trade over the next five years. This could require both countries to insert a roadmap in the BTA charting a clear course for specific sectors and could include a mix of steps such as expanding imports in high-value sectors like defence and energy, encouraging US investments in India despite Trump’s protectionist policies and navigating potential trade barriers while maximising economic cooperation.

Vivek Mishra (Deputy Director ORF)
21 March 2025

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