Context: India and the US have been negotiating an interim trade deal for nearly two years, with the terms repeatedly changing.
- The proposed agreement initially envisaged a substantial reduction in US tariffs on Indian goods, but subsequent US tariff changes have weakened India's prospective advantage.
- The key issue is therefore shifting from “how low will the tariff be?” to “how durable and enforceable will the agreed terms be?”
Evolution of the Trade Negotiations
- In February 2026, India and the US announced a framework under which the US proposed reducing tariffs on Indian goods from 50% to 18%, while India agreed to reduce or eliminate duties on selected American industrial goods and purchase more products from the US.
- The legal basis for the proposed 18% tariff was subsequently affected by changes in US tariff policy and legal developments.
- The US initially imposed a temporary global tariff, followed by country-specific tariffs based on how effectively countries addressed US concerns regarding trade and forced-labour-related imports.
- India eventually moved into a lower tariff category at around 10%, after taking steps to reduce certain imports from countries associated with forced labour.
- Meanwhile, competing countries such as Vietnam have secured relatively favourable terms with the US, potentially reducing India's comparative advantage.
Why India's Earlier Tariff Advantage is Weakening
- A tariff reduction is valuable only if it provides a durable advantage over competing exporters.
- If competing countries obtain similar or lower tariff rates, India's negotiated advantage can disappear.
- Vietnam, for instance, is reportedly close to concluding a trade agreement with the US and could secure terms that make its exports more competitive.
- Thus, India cannot rely solely on securing a lower tariff; it must negotiate stable and predictable market-access conditions.
Three Ways India's Tariff Advantage Could Disappear
1. Relative Advantage Can Change
- Even if India secures a favourable tariff rate, the US can negotiate similar or better rates with competing economies.
- India's advantage would therefore depend on the relative tariff treatment of competing exporters, rather than India's tariff alone.
2. US Investigations Could Alter Tariffs
- A US investigation into “structural excess capacity”, initiated in March, covers 16 economies, including India and Vietnam.
- The investigation has a statutory deadline of March 2027.
- Its findings could lead to changes in tariff rates across the economies under investigation, creating uncertainty even after an agreement is concluded.
- Sector-specific tariffs may also remain outside the broader trade agreement.
3. The US Can Change Its Own Tariff Policy
- Even if both sides agree to tariff reductions, Washington could subsequently revise tariffs through administrative or legal mechanisms.
- This creates uncertainty for Indian exporters making long-term investment and production decisions.
- India could therefore end up making permanent concessions in exchange for a temporary US tariff advantage.
Sector-Specific Concerns
- India's pharmaceutical exports to the US are particularly important because the sector forms a major component of India's exports to the American market.
- Pharmaceuticals are currently exempt from the new general tariff structure, but this exemption is reportedly under review until April 2027.
- The US has also announced plans for steep duties on imported generic drugs from 2028, creating significant uncertainty for India's pharmaceutical industry.
- Some Indian specialty medicines already qualify for zero-duty treatment, indicating that sector-specific exemptions and arrangements may be more valuable than simply negotiating a broad tariff reduction.
What India Should Negotiate
1. A Ceiling on US Tariffs
- India should seek a binding maximum tariff ceiling rather than merely a temporary tariff reduction.
- Washington should commit not to raise duties on Indian goods above the agreed level unless clearly defined conditions are triggered.
2. Protection Against Future Discrimination
- The agreement should ensure that India is not treated less favourably than competing economies if the US subsequently negotiates better terms with them.
- Any new US tariff measures affecting Indian exports should be subject to prior notice and consultation.
3. Sector-Specific Exemptions
- India should seek explicit exemptions for strategically important sectors, beginning with pharmaceuticals.
- Such exemptions should preferably be written into the agreement, rather than left dependent on administrative decisions.
4. Reciprocity
- India should avoid making permanent concessions without corresponding long-term commitments from the US.
- If Washington subsequently raises India's tariffs or withdraws agreed exemptions, India's own obligations should be capable of adjustment.
5. Purchase Commitments
- Any Indian commitments to purchase American goods should be linked to US compliance with agreed tariff and market-access commitments.
- This would create greater negotiating symmetry and prevent India from making irreversible concessions for uncertain benefits.
Why the Legal Dimension Matters
- The recent US tariff framework has been affected by legal challenges and changes in the statutory basis for imposing tariffs.
- The article notes that the US has relied on multiple legal routes for tariffs, including an emergency economic law, a temporary measure and a separate forced-labour-related tariff mechanism.
- Therefore, an agreement based only on the current US tariff rate may not provide sufficient certainty if the legal basis for that rate changes.
Broader Significance for India
- The issue is not merely about reducing India's current tariff burden but about creating a predictable trade environment for Indian exporters.
- Long-term certainty is particularly important for sectors requiring substantial investment and global supply-chain integration.
- A stable agreement can encourage Indian firms to invest in export capacity, while uncertain tariffs may encourage firms to delay investment or diversify production locations.
- India's negotiating strategy therefore needs to shift from pursuing the lowest headline tariff towards securing durable, enforceable and reciprocal commitments.
