In trade deal with US, India needs to secure terms harder to reverse

Why in the News

The India-US interim trade deal has stalled for a third time, 20 months after negotiations began, as the legal basis of US tariffs keeps shifting. India’s narrow tariff edge can vanish under the shifting US system, so the stake is durable terms rather than a wider tariff gap.

What was the interim deal meant to deliver?

1. What it is: An interim trade deal covers some tariffs and purchases ahead of a full agreement, like a down payment on a larger bargain.
2. February framework: The joint statement aimed to cut the US tariff on Indian goods from 50% to 18%.
3. India’s side of the bargain: India agreed to cut duties on American industrial goods and to buy more from the US.
4. What went wrong: The rate’s legal basis vanished within two weeks, so India’s promised advantage shrank.
5. The takeaway: A concession tied to a shifting US legal regime has little lasting value.

How has the legal ground under US tariffs shifted?

1. Court ruling: The US Supreme Court struck down the reciprocal tariffs, the country-by-country duties imposed since April 2025 under an emergency law. India’s 18% rate rested on that law.
2. Temporary global tariff: A temporary tariff on most imports followed, and it expired in July.
3. Forced-labour tariffs: From July, rates depend on how well a country blocks forced labour goods. India’s proposed 12.5% was cut to 10% after it banned such imports.
4. Narrow lead: Rival Vietnam pays only slightly more, and several countries pay the same as India.
5. Repeated stalls: A negotiating round was called off in August 2025, and a February visit was postponed.
6. Mixed US signals: The State Department called the deal “90 per cent-plus there”. The US Trade Representative saw nothing imminent.

Why is a tariff advantage a weak thing to rely on?

1. Relative edge: Washington decides who gets which rate. A US deal with Vietnam, reportedly near completion, could erase India’s margin overnight.
2. Shifting baseline: The baseline itself can change, through a wider probe or through sector tariffs:
   • a US probe into “structural excess capacity”, meaning output far beyond home demand, covers 16 economies, including India, and its findings, due by a statutory deadline of March 2027, could reset rates regardless of any deal;
   • generic medicines, the backbone of India’s pharma exports to the US, are exempt from new pharma duties only until a review by April 2027, and steep duties on generics are planned from 2028.
3. Unequal permanence: India’s tariff cuts, farm openings and purchase commitments are long-term and politically hard to reverse. India’s rate is an administrative decision Washington can revise alone.

Should India chase a wider tariff gap or durable terms?

1. New Delhi’s logic: Cutting tariffs and buying more gains India little unless its exporters benefit, so it wants a clear advantage over rivals before signing.
2. Case for durable terms: A rival’s deal, the capacity probe or sector duties can each erase a tariff gap, so bargaining power is better spent on terms harder to reverse.
3. Predictability as the prize: Uncertainty costs exporters more than any single rate, because it pushes firms to hedge. Washington has based tariffs on three laws in eight months.

Challenges

1. Executive discretion: US tariffs can change by presidential action, without legislation.
2. Farm sensitivities: Openings on farm products face strong domestic political resistance in India.
3. Unilateral withdrawal history: Washington has withdrawn trade preferences before. Eg. Revocation of India’s Generalized System of Preferences (GSP) benefits in 2019.

Way Forward

1. Tariff ceiling: Washington commits not to raise duties on Indian goods above the agreed level for the deal’s life.
2. Non-discrimination and notice: Bar less favourable treatment of India than of competitors, and require prior notice and consultation before any new tariff.
3. Written sector carve-outs: Start with pharmaceuticals, where some Indian speciality medicines already pay zero duty under the new pharma tariffs.
4. Phased, conditional concessions: Phase in India’s tariff cuts and purchase commitments, tied to US compliance.

Conclusion

The negotiation now turns on how long agreed terms last, not on how low the US tariff is. Trading India’s concessions for binding ceilings, not a passing rate gap, will decide the deal’s real value.

About India-US trade relations

1. Trade volume: Bilateral trade stood at $149.84 billion in 2025-26.
2. Trade surplus: India’s surplus with the US narrowed to $34.4 billion in 2025-26.
3. Investment: The US is India’s third-largest investor, with cumulative foreign direct investment (FDI) inflows of $70.65 billion (2000-2025).
4. Indian investment in the US: About 163 Indian companies have invested over $40 billion there (Confederation of Indian Industry).

Matching Previous Year Question

“[2026] The Chancellor of Germany visited India in January 2026. Which of the following is/are NOT correct in terms of outcomes? 1. MoU between All India Institute of Ayurveda and University of Hamburg 2. MoU on Youth Hockey Development between Hockey India and German Hockey Federation 3. Establishment of a bilateral dialogue mechanism on the Indo-Pacific 4. Opening of an Honorary Consul of Germany in Lucknow (a) 2 and 3 (b) 1 and 4 (c) 3 and 4 (d) 1 only Answer: B”