India-US Trade Deal: 25% Tariffs on Textile & Pharma Exporters | UPSC Notes

The India-US trade deal will be essential in reinforcing the economic relationship between the largest economy and democracy in the world. Both countries are strategic partners, and trade and investment are central pillars of the foundation of bilateral relations. The agreement will focus on dealing with tariff barriers, increasing market access, cooperation in goods and services, and fair, balanced, and mutually beneficial trade. It indicates the rising convergence of economic interests and interest in further pursuing the India-US strategic partnership.

The India–US trade deal is vital for UPSC as it falls under GS Paper II (International Relations) and GS Paper III (Indian Economy). It links to subjects like foreign policy, bilateral relations, and trade. Relevant topics include globalisation, economic diplomacy, and India's strategic partnerships. Join the UPSC coaching today and boost your preparation.

Download the Last 10 Years UPSC Question Papers

Download the UPSC Prelims Pointers on India-US Trade Deal 2025!

India-US Trade Deal 2025

The India-US Trade Deal 2025 hit significant glitches even though an early roadmap aimed to double the trade to 500 billion by 2030. The negotiations collapsed due to American insistence on agriculture, tariffs and Russian oil imports in India. In retaliation, the U.S. instated tariffs on Indian imports as high as 50%. This had very bitter impacts on exports such as textiles, gems, and sea products. India did not give in to any pressure on its sovereignty, the desire to diversify trade, the importance of defending its own interests, or the possibility of reopening negotiations in the future.

Enroll for the Nirnay IAS Scholarship Program

About

• On August 27, 2025, under President Donald Trump, the United States implemented steep 50% tariffs on Indian merchandise exports, significantly escalating trade tensions. 
• These tariffs, applied across a wide range of labour-intensive and low-margin products, mark one of India's sharpest trade restrictions in recent years. 
• The move is expected to severely disrupt India's export performance, particularly in sectors like textiles, gems and jewellery, shrimp, carpets, and furniture.
• The rationale behind the additional tariffs lies in the US's objections to India's purchases of Russian oil and defence equipment, which the Trump administration cited as the basis for penalising India. 
• However, the implications of this decision stretch far beyond geopolitical concerns, threatening millions of jobs, export revenues, and investment momentum under India's ambitious Production Linked Incentive (PLI) schemes.

Download the Daily Current Affairs for UPSC Here!

Summary Table

Read the article on the Foreign Trade Policy!

Details of the US Tariffs

The U.S. first levied the 25 per cent reciprocal tariff on Indian products in August 2025. Later, a 25 per cent penalty tariff was declared, connected to India's continued buying of Russian oil. All this led to an increase in the total U.S. tariff on Indian exports to 50%, damaging such industries as textiles, gems and marine products.

• The new tariff regime effectively doubles existing duties, taking tariffs to over 60% in some categories. 
• Nearly 66% of Indian exports to the US, valued at around $59 billion in FY25, are now subject to the 50% tariff. 
• According to the Global Trade Research Initiative (GTRI), exports could plummet by as much as 40-45% in FY26, reducing shipments to the US from $87 billion in FY25 to $49.6 billion.
• Duty-free Exports (30%): Pharmaceuticals ($12.7 billion), electronics ($10.6 billion), and petroleum products remain exempt.
• Moderate Tariffs (4%): Auto parts will face 25% tariffs.
• Heavy Tariffs (66%): Apparel, textiles, gems and jewellery, shrimps, handicrafts, carpets, and furniture will face the brunt.

Read the article on the Free Trade Agreement (FTA)!

India-US Trade Deal 2025: Key Highlights

The India–US Trade Deal 2025 collapsed over agricultural disputes, tariffs, and Russian oil imports, leading the U.S. to impose steep 50% tariffs on Indian goods, straining economic ties and pushing India to seek trade diversification.

Breakdown of the Trade Deal

• Initial Agreement Efforts: In February 2025, during a visit of PM Modi to Washington, the two sides developed a vision to increase bilateral trade to 500 billion dollars by 2030, and the offers of both sides include reduced tariffs on both sides and a significant rise in imports of U.S. energy and defence items.
• Areas of Stall: Discussions faltered on safeguards for Indian farming and dairy, Indians continue buying Russian oil, and there is a discrepancy between political messaging and expectations. 
• India: Lobbied to protect national interest and strategic independence, especially in farm policy, energy independence, and foreign policy integrity.

Escalation and Tariff Warfare

• Tariff Actions: The U.S. passed a 25 per cent reciprocal tariff that would go into effect on August 1, 2025, and after that, added a 25 per cent additional increment as a penalty linked to India-Russian oil imports that was to be enforced on August 27 to bring the total tariff to 50 per cent.
• Impact on India: Key export sectors, textiles, gems, marine products, furniture, and chemicals are under severe pressure, risking a 40 to 70% drop in exports, job losses, and economic distress in hubs like Surat.

India’s Response and Next Moves

• Diplomatic Blowback: India condemned the tariffs as unjust, reaffirmed its independent path, and cancelled further US-bound high-level visits, while simultaneously seeking to deepen ties with BRICS partners.
• Political and Industrial Reactions: Farmers were prepared to fight off any deal threatening the local farming industry. India was again reminded of its commitment to a Bilateral Trade Agreement (BTA) that should be concluded within three months (September-October) 2025.
• Economic Strategy: Authorities are urging export diversification, policy reforms, and reduced reliance on U.S. markets.

Sectoral Impact on India

• The US is India's largest export market, accounting for nearly 20% of total merchandise exports and about 2% of GDP. 
• Labour-intensive sectors with high US dependence are at maximum risk:
• Textiles & Apparel: Units in Tirupur, Noida, and Surat have already reported halts in production. The fallout could be devastating, with the US accounting for nearly 60% of home textiles and 50% of carpet exports.
• Gems & Jewellery: Exports worth over $10 billion to the US (30% of the industry's total) face erosion, raising fears of widespread job losses.
• Shrimps: The US contributes nearly 48% of revenue for Indian shrimp exporters, making the marine sector highly vulnerable.
• Handicrafts & Furniture: Both industries, dependent on American demand, risk sharp revenue contractions.
• According to industry estimates, export volumes from these affected sectors could plunge by up to 70%, leading to widespread unemployment, particularly for low-skilled workers.

Read the article on the Trade Deficit!

Tariff Shock and Its Effect on PLI Schemes

The U.S. tariff shock undermines India's PLI schemes by reducing export competitiveness in key sectors. Still, it may also push firms to strengthen domestic manufacturing ecosystems and explore alternative global markets.

• The timing of the US tariffs is particularly sensitive, as India is banking on the PLI scheme to boost manufacturing and exports in high-value sectors. 
• However, the tariffs could derail capital-intensive industries by deepening the private capex slowdown:
• Weak PLI Uptake in Key Sectors: Applications for advanced chemistry cells, solar PV modules, and drones have lagged due to high investment needs.
• Investor Caution: Tariff-related uncertainty has made firms wary of long-term commitments in export-dependent sectors.
• Crisil Analysis: Nearly 50% of planned industrial capex is exposed to global trade risks, including US tariffs and EU climate policies.
• While lower capex-intensive sectors like food processing and pharmaceuticals under PLI have seen strong uptake, sectors like electronics, solar, and batteries face setbacks that could delay India's manufacturing growth trajectory.

Read the article on the US Trade War!

Balancing Growth and Geopolitics

India faces the dual challenge of sustaining economic growth while navigating geopolitical pressures, as U.S. tariffs test its trade resilience, strategic autonomy, and global positioning.

• According to trade experts, tariffs imposed by the US may bring down India's GDP growth rate to 5.6 per cent, against 6.5 per cent. 
• India also faces the risk of losing its competitiveness in the major export markets since competitors such as Vietnam, Bangladesh, and Cambodia enjoy cheaper tariffs.
• The tariffs highlight geopolitically the tenuous state of both Indian-American trade relations, where growing strategic synergy on security-related issues is becoming at cross-purposes with protectionist economics. 
• Moreover, with Trump threatening 200% tariffs on pharmaceuticals unless companies localise production in the US, further disruptions cannot be ruled out.

Key Challenges in India‑US Trade Deal Negotiations

Despite the strategic alignment and continuous dialogue, the India-US trade deal is characterised by several persistent roadblocks:

• Agriculture and Dairy: This is still the most sore point. India has continuously declined to give access in these markets to the US on the grounds of the livelihoods of the Indian farmers and a breach of religious diversities on the consumption of dairy products.
• Trade Barriers: The US has repeatedly voiced concerns over India's high tariffs on products like motorcycles and alcoholic beverages and complex non-tariff barriers.
• Geopolitical Issues: The current negotiations are further complicated by the US administration's linking trade to geopolitical decisions, such as India's continued energy and defence trade with Russia. This pressure on India's strategic autonomy has become a significant point of contention.

Read the article on the North American Free Trade Agreement (NAFTA)!

Benefits of the India-US Trade Relationship

A successful India-US trade deal offers immense potential for both nations. For India, it provides stable market access, boosts exports, and attracts foreign investment, bolstering its economic growth. It opens up a massive consumer market for the US and strengthens a key strategic partner. The path forward requires a pragmatic approach from both sides, focusing on areas of convergence while finding creative solutions for contentious issues. A strategic, forward-looking approach, coupled with India's focus on diversifying its export markets and strengthening domestic production, can help navigate these challenges and ensure the long-term health of this critical bilateral India-US relationship.

Read the article on the North American Free Trade Agreement (NAFTA)!

Conclusion

The dynamic between the India-US trade deal and the imposition of India-US Tariffs is more than just an economic issue; it is a lens through which to view modern international relations. It highlights the intricate balance between national economic interests, strategic autonomy, and geopolitical partnerships. 

Testbook provides a set of comprehensive notes for different competitive exams. Testbook is always at the top of the list because of its best quality assured products like live tests, mocks, Content pages, GK and current affairs videos, and much more. To study more topics for UPSC, download the Testbook App now.