USA is the biggest trading partner of India for decades. China too is one of the top two trading partners of India. But, the difference between the two is that USA is pivot to India’s export boom and China is the trigger for import, inculcating wide trade deficit. Consequently, India is favoured by large trade surplus with USA, in contrast to China held responsible for wide trade deficit.

With Trump administration emphasizing on America First policy, USA succumbed to tariff as an weapon to cudgel USA’s trade deficit, instead of using economic means.

There are 6 major items which map out India-USA trade. India exports mainly diamonds and jewellery, textile and garments, drugs and pharmaceuticals, petroleum refinery products and electronic components. Together they accounted for 63.7 percent of India’s export basket to USA in 2023-24.

The triggers in India’s export basket were diamonds and jewellery and textile and garments. Together they accounted for 24.8 percent of total export to USA in 2023-24. Recently, export of electronic components made a jump in Indian basket of exports to USA. From a mere 3.9 percent share in 2021-22, it boomed to 13.5 percent in 2023-24. In contrast, major products imported from USA are crude petroleum oil, aircrafts and spacecrafts parts, electrical machinery and electronic goods.

India’s trade surplus with USA soared more than double during last five years, despite Trump’s high tariff on steel and aluminium and doing away with GST scheme during his first term. Currently, USA accounts for 17.8 percent of India’s global exports.

The crucial issue of Trump’s retaliatory tariff policy is how to curb India’s trade surplus and win a political mileage among American voters. Will it jeopardize favourable trade balance with India, leaving a concurrent impact on India’s overall exports and India will succumb to lower tariff giving more space to USA products to adjust the wide trade balances?

Assuming USA tariff retaliation follows by product group-wise, studies revealed that the most affected areas will be agriculture and related food product group, automobile, drugs and pharmaceuticals, diamonds and jewellery, electronic goods and the least affected areas are textiles and garments.

According to a study by GTRI, the tariff gulf between the two nations was highest in case of agriculture, meat and processed foods, followed by automobile, diamonds and jewellery, drugs and pharmaceuticals, electronic goods.

Incidentally, there is some solace if tariff retaliation is made in accordance to product group-wise. While textile and garment, the second biggest item group in India’s export basket to USA (12.1 percent in 2023-24), attract minimal tariff differences , viz, 1.37 percent, agriculture and related food products and automobile , which attract high tariff differences, do not pitch for major stakes in export basket to USA.

India is the 3rd biggest exporter of garments to USA, after China and Vietnam. Logically, garments from China and Vietnam do not pose threat to India, as because Indian garments have different market segments. It mostly feeds casual wear market, unlike China. Indian garments are popular in USA due to combination of factors like intricate design, skilled craftsmanship, low prices, large variety of styles and growing ethnic design and fashions.

Another aspect in favour of India in relation to retaliatory tariff is that even though diamonds and jewellery attract higher tariff differences, viz, 13.32 percent, USA does not have potential to manufacture indigenously the diamonds and jewellery in accordance to American requirement and design tastes. Diamonds and jewellery require special artisan skills, which Indian iconic labour adopted over decades together.

Hence, In these two product groups, Trump’s high tariffs could prove boomerang, leaving American consumers in dismay facing higher prices. India is fourth biggest exporter of pharmaceutical products to USA. In 2023, it accounted for 5.4 percent of total imports of pharmaceutical products in USA. In terms of tariff differences, it is 8.69 percent.

Notwithstanding, the characteristics of the American drug market is that Americans rely on standard prescriptions like antibiotics, which are predominantly sourced from developing nations where production costs are low, according to Coalition for a Prosperous America

Nevertheless, the trade weighted average tariff difference between USA and India for all product group, is 4.9 percent, according to GTRI study.

Nonetheless, USA has been the driving force for progressive growth in India’s external economy. In addition to biggest export destination for merchandise products, USA emerged pivot to service exports and export of skilled human resources, such as IT talents. Service exports gained a momentum growth, spearheaded by software exports, so much so that service exports excelled merchandise exports in November, 2024.

In 2023-24, India exported software worth US$ 190.7 billion to USA. It accounted for 54 percent of total software export from India. In other words, USA played a key role in boosting GDP growth through India’s export segment, notwithstanding manufacturing striving for survival. Against these backdrops, any counter retaliation by India would not be desirable, a solution through bilateral talks will benefit India. (IPA Service)