Of Comforts and Consequences: How US Tariffs Force India to Rethink Its Trade Strategy

The recent imposition of steep US tariffs has starkly exposed a critical vulnerability in India’s trade strategy: its deep overreliance on the American market. This dependence, cultivated by years of easy access and streamlined processes, has now jeopardized low-margin, job-intensive export sectors. In response, a strategic pivot is urgently needed to de-risk the economy. This involves aggressively diversifying exports into new territories and seriously considering joining multilateral agreements like the CPTPP to integrate into alternative supply chains.

India must also reframe the trade narrative with the US by highlighting its overall surplus in services and digital trade. Concurrently, domestic reforms to reduce import tariffs on inputs and enhance competitiveness are crucial. Ultimately, this disruption presents a necessary opportunity to build a more resilient and diversified trade foundation for the future.

Of Comforts and Consequences: How US Tariffs Force India to Rethink Its Trade Strategy 

For years, India’s export engine hummed along, comfortably powered by the vast and welcoming American consumer market. The relationship was easy: streamlined customs, minimal barriers, and a steady demand that allowed industries from textiles to gems to thrive. This comfort, however, has bred a critical vulnerability, now laid bare by the stark reality of a 50% tariff wall erected by the Trump administration. 

This isn’t merely a temporary trade dispute; it’s a wake-up call. It exposes an economic strategy that has become dangerously over-reliant on a single partner and underscores an urgent need for India to fundamentally redesign its approach to global trade. 

The High Cost of Overreliance 

The core of the problem is strategic inertia. The U.S. market, accounting for nearly 18% of India’s total exports, became a crutch. Indian exporters, buoyed by average tariffs of just 4% and seamless procedures, had little incentive to navigate the more complex, but ultimately more resilient, landscapes of other regions. This contrasts sharply with China, which has consciously diversified its export destinations, reducing its reliance on the U.S. from 20% to 14% since 2017. 

The immediate casualty of this new tariff regime is jobs. The sectors hardest hit—apparel, textiles, leather goods, furniture—are precisely those that are most labour-intensive. The halt in production units in Tirupur, Noida, and Surat is not just an economic statistic; it’s a signal of profound distress for low-skilled workers. While the overall impact on India’s GDP may be limited (exports to the U.S. constitute less than 2% of it), the social and employment ramifications are outsized. 

Furthermore, the tariffs hand a direct advantage to competitors like Vietnam, Bangladesh, and Cambodia, who now enjoy a significant cost advantage. India’s potential losses are their gains, a shift that could permanently alter global supply chains if not addressed decisively. 

A Three-Pronged Path to De-Risking 

The current crisis, while painful, offers a clear policy roadmap to build a more robust and diversified trade future. 

1. Strategic Diversification Beyond Bilateralism The immediate reflex is to seek bilateral deals, but the real strategic play lies in multilateral engagement. One option stands out: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This Japan-led bloc, which now includes the UK and has the EU applying, represents a massive, high-standard free trade area.

A compelling view gaining traction in New Delhi is that India should formally apply for CPTPP membership before China attempts to do so. Key members like Japan and Australia are keen to bring India into the fold. Joining such a pact would be a complex undertaking, requiring significant domestic reform, but it would forcefully integrate India into alternative global supply chains, reducing its singular dependence on the U.S. market. 

2. Reframing the Trade Deficit Narrative The U.S. has repeatedly cited its goods trade deficit with India as justification for tariffs. This is a narrow and misleading picture. When the full spectrum of economic exchange is considered—including digital services, royalties, financial activities, and the vast revenues from Indian students in the U.S. and arms purchases—America actually runs an overall surplus of close to $40 billion with India.

Policymakers and diplomats must weaponise this complete data. Countering the U.S. narrative with the full economic ledger is crucial to strengthening India’s negotiating position when talks eventually resume. It shifts the conversation from a deficit that needs punishing to a surplus that deserves protecting. 

3. Accelerating Domestic Reforms and Realism The recent UK trade deal revealed a promising shift in India’s approach: a new realism. By showing willingness to open up sectors where it is relatively weak, particularly on intermediate goods, India demonstrated an understanding that high input tariffs hurt its own manufacturing competitiveness.

This mindset must be accelerated. A stop-gap package of cheaper credit for exporters is a temporary balm, but the long-term cure requires deeper structural changes. Simplifying the tariff structure, improving logistics, and fostering a more competitive manufacturing environment are essential. Additionally, heeding exporters’ calls for better access to domestic government procurement (like Indian Railways) can provide a valuable demand cushion during this transition. 

Turning Crisis into Opportunity 

History shows that periods of disruption often breed the most significant innovation. The steep US tariffs are undoubtedly a blow, but they also force a necessary reckoning. They create an imperative to look beyond the familiar comforts of the American market and genuinely engage with the untapped potential of Africa, Latin America, and Southeast Asia. 

The path ahead is challenging. It requires overcoming entrenched defensive instincts within sections of industry and government. But the alternative—remaining tethered to a volatile and unpredictable trade partner—is a far greater risk. This moment is India’s chance to shed its inertia, leverage its strengths in services and digital trade, and build a diversified, resilient export economy that cannot be derailed by the whims of a single administration. The comfort zone is gone; the opportunity zone awaits.