 "Trump tariff: Time for India to make manufacturing more competitive")
On July 30, 2025, US President Donald Trump imposed a 25 per cent tariff on Indian exports to the United States, citing India’s high trade barriers, its energy ties with Russia, and its continued participation in BRICS. Accompanying this was a vaguely defined “penalty,” framed around India’s strategic decisions rather than any immediate trade infraction.
The timing of the announcement, on a day after Trump extended a tariff truce with China and praised Beijing for resuming rare earth exports, speaks volumes. India, the world’s fastest-growing large economy and a constitutional democracy, is being penalised for its sovereign choices, while China, a geopolitical rival and the largest buyer of Russian oil, is being courted. This is the perfect archetype of Trumpian diplomacy, i.e., be tougher on friends than on adversaries.
India exported $86.5 billion worth of goods to the US in FY25, an 11.6 per cent year-on-year increase, with imports standing at $45.3 billion. This yielded a bilateral trade surplus of $41.2 billion, the highest India has with any country. The exports most exposed to this tariff regime are concentrated in five sectors. Petroleum products, primarily refined fuels like diesel and jet fuel, accounted for over $20 billion.
Pharmaceutical exports, comprising generics, vaccines, and active pharmaceutical ingredients, stood at $7.5 billion, supplying nearly 40 percent of U.S. generic drug needs. Gems and jewellery exports, mostly diamonds and gold, amounted to $8.5 billion. Smartphone exports crossed $3 billion in January 2025 alone, with India becoming the top supplier to the U.S. (44 percent market share). Textile and apparel exports added another $2.5 billion, heavily tied to MSMEs. Collectively, these five sectors account for over half of India’s total goods exports to the United States.
Despite the scale of these flows, the macroeconomic exposure is limited. Goods exports to the U.S. constitute just 1.85 per cent of India’s GDP. Even a 30 per cent decline in U.S.-bound exports would shave off only 0.5 per cent of India’s GDP, which should be a manageable impact. Moreover, this tariff is not unprecedented in Trump’s economic playbook. Vietnam, despite signing a bilateral trade deal and eliminating over 99 per cent of tariff
Impact Shorts
More Shortsbarriers on US goods, still faces a 19 per cent tariff. Importantly, the Indian rupee has depreciated 4 percent against the Vietnamese dong over the past five months, partially offsetting the competitive disadvantage. The net additional cost imposed on Indian exporters, after accounting for currency shifts, is roughly 2 per cent, a gap that could be neutralised through improvements in logistics, customs clearance, and compliance reforms.
Where the Trump administration’s action becomes most problematic is in the nature of the “penalty”. It is not anchored in a specific trade violation or a WTO-compliant measure. Instead, it is framed around India’s continued energy engagement with Russia, currently accounting for 22 per cent of its crude oil basket, and its role in BRICS.
However, this logic collapses upon comparison. China, also a BRICS member, imported over 2.2 million barrels per day of Russian crude in 2024, more than India’s 1.7 million barrels per day. Beijing has not only refused to align with Western sanctions but has actively become a conduit for re-exporting Russian defence components. Yet China is exempt from penalties and instead rewarded with economic détente. This glaring asymmetry reflects a strategic calculus. Apply coercion where resistance is unlikely and make examples of partners rather than adversaries.
This is not new. For over a year, Trump has repeatedly attempted to bring Pakistan into the India-U.S. trade conversation. He has publicly claimed, more than 25 times, that he “brokered peace” between India and Pakistan during Operation Sindoor, asserting that India scaled down its military posture in exchange for the promise of a trade deal.
The Government of India has consistently and firmly rejected this claim, stating that the ceasefire was a unilateral and sovereign decision. The imposition of the 25 per cent tariff confirms New Delhi’s version of events. Had India accepted a “ceasefire-for-trade” conditionality, such a tariff would never have materialised. Trump’s own actions disprove his narrative and further expose the hollowness of the opposition’s domestic claims that India had conceded strategic ground.
Most recently, Trump announced a prospective U.S.-Pakistan oil partnership, stating, “Who knows, maybe they’ll be selling oil to India someday!”. This is part of a broader strategy of using Pakistan as a wedge, resurrecting it as a pressure point even in non-security contexts. That a country with a long record of economic mismanagement and security concerns is being offered new deals while India faces penalties shows the deeply distorted incentives now driving American economic statecraft under Trump. It is being used as a lever to bring India on the table. To make India concede on areas on the trade front which it is seemingly “protecting”.
India’s response must be measured, strategic, and grounded in long-term interests. First, India should facilitate market entry of our products in other geographies. We should double down on our FTA negotiations with the EU and the developed world. Second, India must accelerate structural reforms: logistics costs in India remain at 13 per cent of GDP compared to 8 per cent in OECD economies; port dwell times average three days, versus less than one in East Asia.
Closing these gaps could yield 3-4 per cent efficiency gains, which would more than offset the tariff disadvantage. Third, India must engage with the United States, but only on its own terms. Regulatory sovereignty in agriculture, data, and digital services must be non-negotiable. India must resist any trade pact that threatens public health safeguards or opens floodgates to genetically modified imports.
From a theoretical standpoint, Trump’s coercive trade policy validates the concerns long raised by realist theorists in international political economy. While liberalism argues that trade promotes mutual benefit and institutional cooperation, the current situation reflects Robert Keohane and Joseph Nye’s concept of “asymmetric interdependence,” where economic ties become tools of pressure for the dominant partner.
Trump’s strategy is about enforcing geopolitical alignment through economic compulsion. It is also emblematic of a broader global shift, from rules-based multilateralism to transactional bilateralism. In such a world, strategic autonomy must be protected not just through military and diplomatic posture, but through resilient and competitive economic policy. India has to soon develop areas where it has strategic and comparative advantage. That is what allows China to trade its own terms.
Regardless, India is not without strength. Its services exports, valued at $339 billion in FY25, have surpassed goods exports and are growing faster. Domestic consumption remains the primary driver of GDP, contributing close to 58 per cent of total output. Even if exports to the U.S. fall by 30 per cent, the overall impact on GDP would remain below 0.5 per cent. Moreover, India’s strong foreign exchange reserves ($715 billion as of June 2025), diversified trading partners, and growing strategic convergence with key players in Europe and the Indo-Pacific provide room for manoeuvre.
If coercion is the new language of trade, India must respond in the grammar of resilience, credibility, and reform. This has been a perpetual wish list of many, but India should make its manufacturing more competitive so that it can bear such shocks, however temporary they may be.
Aditya Sinha (x:@adityasinha004) writes on macroeconomic and geopolitical issues. Views expressed in the above piece are personal and solely those of the writer. They do not necessarily reflect Firstpost’s views.
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