India - U.S. Trade Frictions: The Ripple Effect of Reciprocal Tariffs

Concept of Reciprocal Tariff

A tariff is a tax imposed by a country upon the goods and services that are imported. The primary purpose of tariff is to make the imported goods to be costlier that’s the domestic goods so that the domestic players in the market are protected from the foreign competition. Also, the countries generate revenue out of such tariffs. On the contrary, reciprocal tariff is a retaliatory tariff matching what the other country charges on its exports. It is considered to be a tit for tat approach to demand fair and equal treatment within the international trade practices and protect their domestic industries. It basically means “You charge us, we will charge you the same.”

For India, dealing with trade restrictions isn’t new; India-U.S. trade ties have seen reciprocal tariffs, from India’s 2018 retaliation on U.S. goods after steel and aluminium duties as well as the withdrawal of benefit of Generalised System of Preferences (GSP) by the U.S. to the 2025 U.S. reciprocal tariffs, straining exports and bilateral relations. This shift presents a fresh challenge. Indian exporters, who have mostly relied on trade talks and agreements to resolve tariff issues, now need to prepare for the long-term impact of such measures. Both sides have often used tariffs as bargaining tools: the U.S. has tightened visa rules not just for Indian IT professionals but also for international students and scholars linked to elite institutions like Harvard, where applicants now face hard vetting, making the process to be more complex. Also U.S. restricted imports like steel, aluminium, and dairy, while India has kept high duties on sensitive sectors like agriculture, automobiles, and electronics to protect local industries under Atmanirbhar Bharat. Still, both countries agree that lowering tariffs could unlock growth by boosting competitiveness, creating jobs, and strengthening supply chains.

The bigger worry is that reciprocal tariffs threaten the WTO’s Most Favoured Nation principle, which promises equal treatment for all trading partners. The application of tariffs selectively by the U.S., India would lose the fair and predictable access to markets that the WTO guarantees. This would directly affect key export sectors like textiles, gems and jewellery, making Indian goods less competitive. More importantly, it would shake India’s trust in the global trade system, which depends on fairness and stability. For a country like India, which relies heavily on open and rule-based trade, such uncertainty could have long-term economic consequences. The primary goal of U.S. in imposing reciprocal tariffs is to encourage domestic manufacturing; to create job opportunities and wage growth in the U.S.; to counter the unfair trade practices; to use it as a negotiating tactic; and to reduce the trade deficits of the U.S. with other countries.

Potential effects on the India economy

Reciprocal tariffs have become an important feature of recent U.S. trade discussions. For India, this approach poses considerable challenges. The United States is not only one of India’s largest trading partners but also a vital market for key exports such as pharmaceuticals, textiles, gems, and IT services. The U.S. reciprocal tariffs, would make Indian products to be costlier and less competitive, potentially straining trade ties. Assessing these effects is essential to understand how such protectionist measures influence India’s economy and global trade outlook.

1.      Export Competitiveness: Indian goods such as the textiles, gems and jewellery, leather products, have a high demand within the U.S. market, and the reciprocal tariffs on these goods would make them to be expensive in U.S. market and reducing their competitiveness with other countries that have been imposed with lower tariffs. This could shrink India’s export earnings and affect industries that generate large-scale employment.

2.      Trade Balance concerns: India currently enjoys a trade surplus with the U.S. Reciprocal tariffs would narrow this gap, potentially destabilising India’s foreign exchange earnings and putting pressure on the rupee.

3.      Foreign Investment: The levying of higher tariffs and trade frictions would discourage U.S. businesses from expanding operations in India which would in turn slow down foreign direct investment (FDI) inflows. It would also make India seem less integrated into global supply chains, primarily affecting its long-term goal of becoming a manufacturing hub.

4.      Domestic Policy Shift: India-U.S. trade often runs into trouble because of the big gap in their tariff policies. India, under its Atmanirbhar Bharat vision, keeps higher import duties to protect farmers and domestic industries. For example, tariffs on cars can go up to 100%, and farm products like dairy and poultry face heavy restrictions. Even electronics and textiles carry higher-than-average duties. On the other hand, U.S. tariffs are much lower, averaging around 2–3%, though India has been hit with steep duties of 25% on steel and 10% on aluminium. This imbalance clashes with the WTO’s Most Favoured Nation (MFN) principle, which is meant to ensure fair treatment among trading partners. While the U.S. sees India’s approach as protectionist, India insists these tariffs are vital for self-reliance and local growth. But if reciprocal tariffs continue, India could lose valuable access to the U.S. market, hurting revenues and pushing businesses to seek less profitable alternatives.

5.      Effects on different sectors: India is the major supplier of affordable generics to the U.S. Reciprocal tariffs would raise costs, impacting both Indian manufacturers and U.S. healthcare systems. Also, U.S. tariffs would restrict Indian textiles, gems and jewellery, and marine products, undermining the businesses to have access to a premium market. Further, while tariffs mostly apply to goods, a protectionist stance by the U.S. might spill into stricter regulations on visas and outsourcing, affecting India’s IT service exports.

6.      Strategic and Geopolitical dimension: Trade tensions can spill over into other areas of bilateral cooperation such as defence, technology transfer, and clean energy partnerships. Reciprocal tariffs could weaken the broader strategic partnership India seeks with the U.S. in countering global economic and geopolitical challenges.

Legal Basis for the U.S. Tariff Action

The United States has several laws that give the President wide-ranging powers to regulate trade, especially during times of national emergency or when unfair trade practices are alleged. These laws extend authority beyond the usual trade remedy mechanisms such as anti-dumping or countervailing duties. The key legal foundations are:

1.      International Emergency Economic Powers Act (IEEPA): The IEEPA was enacted in 1977 and allows the President to regulate or restrict international commerce once a national emergency is declared in response to an external threat. Although primarily designed for imposing economic sanctions, asset freezes, or financial restrictions, it has been cited as a tool to justify broad tariff actions.

2.      National Emergencies Act (NEA): This Act provides the procedural framework through which the President can formally declare a national emergency. Once an emergency is declared under the NEA, statutes like the IEEPA can be triggered to expand executive authority over trade and commerce.

3.      Section 604 of the Trade Act of 1974: This Act empowers the President to modify the Harmonised Tariff Schedule of the United States (HTSUS) to implement trade actions. This provision is often used to adjust tariff rates or classifications to enforce trade policies.

4.      3 U.S.C. ss. 301: This Act authorises the President to delegate statutory functions to other executive branch officials. This is significant because it allows the administration to operationalise tariff policies through agencies like the U.S. Trade Representative (USTR) or the Department of Commerce.

In essence, these statutes collectively provide the U.S. President with a broad legal toolkit to impose tariffs unilaterally, but Trump’s reliance on the IEEPA to levy tariffs marked a historic expansion of executive authority in trade, with implications for international trade law and U.S. trading partners like India.

Consequences if U.S Courts rule against reciprocal tariffs

Following are the consequences if the U.S courts rule against reciprocal tariffs:

1.      Relief for Indian Exporters: A ruling against reciprocal tariffs would prevent sudden tariff hikes on Indian goods in the U.S. Export-heavy sectors like pharmaceuticals, textiles, gems, and IT-enabled services would benefit from stable and predictable access to the U.S. market.

2.      Strengthening Rules-Based Trade: Such a decision would reaffirm the importance of the WTO framework and multilateral trade rules, discouraging unilateral protectionist measures. India, as a developing economy that depends on fair market access, would gain from this global precedent.

3.      Encouragement for Negotiated Solutions: Without reciprocal tariffs as a unilateral tool, the U.S. would be more inclined to resolve trade differences through dialogue, negotiations, or trade agreements. This would open doors for India to push for better terms in areas like services, technology, and investment.

4.      Positive Impact on Bilateral Relations: Removing the threat of reciprocal tariffs would reduce trade tensions, allowing India and the U.S. to focus on strategic cooperation in defence, clean energy, and digital technology. It would also help align economic ties with the broader Indo-Pacific strategic partnership.

5.      Boost for Investor Confidence: Predictable trade rules and fewer tariff disputes would make India more attractive for U.S. investors. Indian businesses, in turn, could plan exports and investments in the U.S. with greater certainty.

6.    Global Significance: A court ruling against reciprocal tariffs would not only benefit India but also send a signal globally that domestic protectionist tools cannot override international trade norms. This could prevent other nations from adopting similar retaliatory policies.

Free Trade Agreements (FTAs) and Reciprocal Tariffs

Free Trade Agreements (FTAs) are designed to lower or remove tariffs, giving businesses a stable and predictable environment to trade and grow. They embody the idea of open and liberalised markets, making it easier for goods and services to move across borders. Reciprocal tariffs, on the other hand, go against this principle by reintroducing trade barriers that FTAs are meant to dismantle. The U.S. imposition of reciprocal tariffs outside of frameworks like the WTO or bilateral trade pacts, risks undermining the very sanctity of these agreements. For businesses, this creates uncertainty, since exporters and importers rely on the tariff commitments made under FTAs to plan investments and pricing strategies.

For India, the issue is particularly significant. It already has agreements with partners like ASEAN and is negotiating new FTAs with the EU and UK. If reciprocal tariffs can override such deals, exporters may begin to doubt whether FTAs truly safeguard their interests. This also raises broader questions about the effectiveness of WTO rules in protecting smaller economies from unilateral trade actions by major powers.

However, if U.S. courts strike down reciprocal tariffs, it would reaffirm the binding nature of FTAs and strengthen faith in a rules-based global trading system. For India, this would be an encouraging sign, boosting confidence to pursue new trade agreements while pushing for stronger safeguard clauses to protect against sudden policy shifts. It would also give India greater ground to advocate for the credibility of trade agreements at multilateral forums.

Conclusion and Suggestions

Reciprocal tariffs bring significant challenges for India, especially as the U.S. is one of its most important trading partners. Higher tariffs would make Indian goods like textiles, gems and jewellery, less competitive, reducing export earnings and putting pressure on jobs. Over time, this could strain India’s trade surplus, weaken investor confidence, and even slow progress under initiatives like Atmanirbhar Bharat. Such trade frictions also risk eroding trust in the rules-based system of the WTO and creating tensions in the wider India–U.S. strategic partnership.

To respond effectively, India needs a balanced approach. Diversifying export markets, improving product quality and innovation, and investing in stronger global supply chain linkages can help reduce over-dependence on the U.S. At the same time, India should use platforms like the WTO tpush back against unilateral actions, while also pursuing FTAs with the EU, UK, and Indo-Pacific nations to secure more reliable market access.  At the recent SCO Summit in Tianjin, where leaders from China, Russia, and others gathered, India used the moment to show its independent stance and explore new regional partnerships at a time of trade strains with the U.S.

Photo Credit: South China Morning Post

---

Follow us on our socials to read more articles on Business, Finance & Corporate Law.

(Disclaimer: The views expressed in this article are strictly personal opinions of the author and do not necessarily reflect the views or opinions of the company or organisation they may be associated with. This article is intended for informational purposes only . It should not be construed as legal or professional advice and no legal or business decision should be based on its content. Readers are encouraged to seek professional guidance or consult relevant experts for specific legal or professional matters.)

For Corporate Governance Services & Advisory reach out to us at shaily.co@outlook.com