New US tariffs leave India better off than competitors; Trump’s tariff mania is inextricable from his politics

Why in the News?

The Trump administration began imposing permanent tariffs under Section 301 of the US Trade Act, 1974 on 60 trading partners after its earlier International Emergency Economic Powers Act (IEEPA) tariffs were struck down by the US Supreme Court. This places India in a more favorable bracket than China and Vietnam even as such tariffs function as domestic politics rather than sound economics.

How does the new four tier tariff structure actually work, and where does India sit in it?

1. Legal foundation shift: The administration is rebuilding the tariff regime under Section 301 of the Trade Act, 1974 (targeting alleged forced labour in imports) after its International Emergency Economic Powers Act (IEEPA) tariffs were declared illegal by the US Supreme Court in February.
2. The four tiers: The most favourable group (EU, Taiwan) faces a Section 301 tariff calculated only to bring the total to 10% where the Most Favoured Nation (MFN) rate is below that; the second tier, including India and 16 others such as Pakistan, Sri Lanka, Canada, and Mexico, faces a flat additional 10%; the third tier (Japan, South Korea, Switzerland) faces a flat 12.5%; the least favourable tier of 38 countries, including China and Vietnam, also faces a flat 12.5%.
3. India’s rate fell during negotiation: India’s tariff dropped from 12.5% first proposed in March to 10%, after India amended its Foreign Trade Policy on 14 June to explicitly ban imports made using forced labour.
4. India’s export performance defied predictions: Despite tariff measures since early 2025, India’s merchandise exports to the US grew 0.9% (from US$86.5 billion to US$87.3 billion) in 2025-26, according to an ICRIER report, though this was driven entirely by products on the US exclusion list (pharmaceuticals and electronics), while non-excluded exports fell 11.2%.

What is the real reason the USTR gives for the tariffs, and is that reason coherent?

1. The stated aim: The US Trade Representative (USTR) says countries that import forced labour goods gain an unfair cost advantage, harming American workers.
2. The geopolitical tell: All 60 countries under investigation were found “guilty,” with the most favourable grouping being the EU and Taiwan and the least favourable being China and Vietnam, a grouping that tracks geopolitical alignment more than measurable differences in forced labour enforcement.
3. The stated target is explicit: The tariffs are primarily meant to force countries to reduce dependence on China, with which the US is engaged in a trade war.
4. New textile quotas complicate India’s advantage: Tariff Rate Quotas (TRQs) granted to Bangladesh, Cambodia, Indonesia, and Malaysia for importing US cotton could divert textile and apparel sourcing away from India, despite its overall favourable tariff position.

Why do tariffs persist as policy despite weak economic evidence for them?

1. Tariffs function as a domestic tax, not a foreign penalty: Research by economists Mary Amiti, David Weinstein, and Stephen Redding shows tariff costs are largely borne by American businesses and consumers through higher prices, not by foreign producers.
2. Global supply chains blunt the intended effect: More than half of global trade consists of intermediate goods; tariffs on inputs such as steel or electronics raise costs for the very domestic manufacturers they are intended to protect.
3. Trade deficits have not shrunk: The US continues to run a record merchandise trade deficit despite successive tariff rounds, since deficits are driven by savings, investment, and consumption, not tariffs, while global supply chains have rerouted through Vietnam, Mexico, and other intermediary economies.
4. The political logic that survives the economic failure: Every successful political narrative needs someone to blame, someone to protect, and a visible policy action signalling resolve; tariffs provide all three even when they fail economically, whereas structural reforms require patience and produce fewer immediate political gains.

Conclusion

India’s tariff position is more favourable than China’s or Vietnam’s largely due to geopolitical considerations presented through the language of forced labour, rather than a consistent trade policy standard. At the same time, while India may benefit in the short term from trade diversion, new textile sourcing quotas for competing countries could reduce that advantage over the longer term.

PYQ Relevance

[UPSC 2018] What are the key areas of reform if the WTO has to survive in the present context of ‘Trade War’, especially keeping in mind the interest of India?

Linkage: The PYQ examines the implications of global trade wars, protectionism, WTO reforms, and India’s trade interests in the evolving international trading system. The article analyses the new US tariff regime, its geopolitical and economic motivations, its implications for the multilateral trading order, and the opportunities and challenges it creates for India’s exports and trade strategy.