The Donald Trump administration has reduced additional tariffs on most goods exported from India to the US from 12.5% to 10%. This will provide some relief to Indian exporters and India may gain an advantage in trade compared to many competing countries. However, the price of Indian goods in the American market will remain higher than before.
The new tariff regime came into effect immediately after the temporary section 122 duty expired on 24 July. This will apply to about 70% of the exports from India to America. According to reports, India has recently tightened rules on the import of goods made with forced labour. Additionally, the US decided to reduce tariffs following talks between New Delhi and Washington on labor standards.
Why did India get lower tariffs?
This decision was taken under the US Section 301 investigation. Under this law, the US can impose additional tariffs on goods from countries whose products are made with forced labor. When the proposal was first made in June, India was placed in the 12.5% tariff bracket.
However, according to Indian officials, the US has reduced tariffs for India to 10% following positive negotiations on labor standards and India’s decision to ban imports of products made with forced labour. According to the US Trade Representative (USTR), the 10% tariff applies to countries that have already banned, pledged to do so, or have taken effective steps to prevent imports of goods made with forced labor. Apart from India, the 10% tariff will apply to a total of 16 countries – including Bangladesh, Pakistan, Canada and the United Kingdom – while several other countries under scrutiny will face 12.5% tariffs.
What will be the impact on Indian exporters?
The impact of this decision will vary from sector to sector. According to the Global Trade Research Initiative (GTRI), steel, aluminium, copper, auto components and other products under Section 232 will continue to attract an additional tariff of 25% or 50%. These items constitute about 8% of India’s total exports.
Standard ‘Most Favored Nation’ (MFN) tariffs will apply only to certain products. Its biggest impact will be on those products which constitute about 70% of India’s total exports to America. These include engineering goods, machinery, chemicals, plastics, leather products, gems and jewellery, furniture and many other manufactured items. In addition to the standard MFN duty, ‘Section 301 tariff’ of 10% will also be imposed on these goods. However, GTRI said India did not get the ‘tariff-rate quota exemption’ for textiles and clothing that was given to countries like Bangladesh, Cambodia, Indonesia and Malaysia for certain products made from American cotton and fiber.
What will be the benefits to India?
Trade experts believe that even if India does not get complete relief from this decision, it will definitely give it a competitive edge. According to Manoj Mishra, partner, Grant Thornton India, India has now joined the group of countries like Bangladesh, Sri Lanka, Malaysia, Indonesia and Pakistan, which attract 10% tariff. In contrast, the effective tariff on certain products from Japan, South Korea, Switzerland, Vietnam, Thailand, Singapore and the European Union could be up to 12.5%.
He says that this can strengthen India’s competitive position in sectors like engineering goods, auto components, electronics, specialty chemicals, pharmaceuticals, medical devices and textiles. However, GTRI founder Ajay Srivastava says that America has not presented any evidence to show that India imports products made with forced labour. They believe that this new tariff appears to be part of the Trump administration’s strategy to continue its comprehensive tariff policy even after the temporary ‘Section 122 duty’ ends.
He also warned that in the future, additional tariffs could be imposed on industrial products based on a separate US ‘Section 301 investigation’ related to excess production capacity. Additionally, the possibility of imposing country-specific tariffs on India based on geopolitical issues such as purchasing oil from Russia cannot be ruled out.