Context: 

On February 1, 2025, U.S. President Donald Trump signed an executive order imposing tariffs on imports from Canada, Mexico, and China, as part of his protectionist economic strategy. 

·        The new tariffs, set to take effect on February 4, 2025, include a 25% levy on goods from Canada and Mexico and a 10% levy on Chinese imports.

·        This marks the beginning of a new trade war with America’s top three trade partners, who collectively contribute significantly to the country’s nearly $1 trillion trade deficit.

What is a Trade War?

A trade war is an economic conflict that typically arises when countries adopt extreme protectionism. In such conflicts, one country imposes tariffs or other trade barriers, prompting the other to respond in kind. This often leads to an escalating cycle of retaliatory measures, where each country raises its tariffs in response to those imposed by the other, resulting in higher trade barriers on both sides.

India’s Strategic Response to Avoid Tariffs

In response to Trump’s protectionist measures, India has proactively reduced tariffs on several goods primarily exported by the U.S. The Union Budget 2025-26 introduced significant tariff cuts, including:

• Reductions on motorcycles with engines under 1,600cc
• Cuts on ground installations for satellites
• Reductions on synthetic flavoring essences

Experts suggest that these tariff reductions are aimed at securing favorable trade terms with the U.S., especially with Prime Minister Narendra Modi scheduled to visit the U.S., which could signal potential bilateral negotiations.

India’s Potential Gains from the Trade War

While India avoided direct tariffs from Trump’s latest executive order, the 10% tariffs on Chinese goods create an opportunity for Indian exporters. According to Oxford Economics, India benefitted significantly from trade diversions during the earlier U.S.-China tariff disputes from 2017 to 2023. As China faces increased tariffs, India could see higher demand for its products, positioning itself as a more competitive alternative to Chinese imports in the U.S. market. However, this could also lead to concerns about inflation in the U.S., which might impact India’s trade relations with its largest export market.

India’s Position in U.S. Trade

Although India contributes only 3.2% to the U.S. trade deficit, making it a less immediate target for tariffs, it could still be vulnerable in specific sectors. India enjoys significant trade surpluses in the following sectors, which could be scrutinized if the U.S. broadens its tariff strategy:

• Pharmaceuticals
• Gems and jewelry
• Fisheries

The U.S. could focus on high-value sectors such as pharmaceutical exports, which accounted for a significant portion of India’s $20 billion in goods exported to the U.S. in 2023. Additionally, sectors like chemicals, textiles, and wood pulp could face potential restrictions, further impacting India’s trade with the U.S.