Vishleshan for Regulatory Exams, 31 July 2025: Dealing With Three T’s

Want to get ready for the UPSC, RBI, SEBI, or NABARD exam? If yes, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss the three T’s. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of these current updates.

Dealing With Three T’s: Trump, Tariff, and the Trade Deal

Context: The announcement is clearly damaging for Indian exporters, along with the Indian government. For some time, it appeared that India was making progress on a trade deal with the US. To be fair, from India’s point of view, the way Mr Trump got other countries to agree on trade deals was problematic.

Link to the Article: Business Standard

The global trade landscape has been significantly impacted by the assertive trade policies of US President Donald Trump, leading to a paradigm shift from multilateralism to coercive bilateralism. In a recent development, President Trump announced that India will face a 25% tariff on its exports to America from August 1, marking a concerning turn after prolonged negotiations. This decision not only carries severe implications for Indian exporters and the broader economy but also signals a hardening of the US stance, directly linking trade to foreign policy positions, particularly India’s continued engagement with Russia.

Reasons Why Trump Wants to Impose Tariffs on Certain Countries

US President Donald Trump’s approach to imposing tariffs on various countries is primarily driven by an “America First” agenda and a perception of unfair global trade practices.

• Perception of “Unfair Trade Practices” and “High Tariffs”: Trump frequently claims that other countries, including India, maintain “high tariffs” on US goods while the US has “done relatively less business here. ” The administration believes that many trading partners are not adhering to “fair and reciprocal” trade deals, leading to an imbalance in trade relationships.
• Trade Imbalances (Deficits): A core motivation is to reduce the persistent trade deficits that the US runs with many countries. Tariffs are seen as a tool to make imports more expensive, thereby decreasing import volumes and encouraging domestic production and consumption.
• Protecting Domestic Industries and Jobs: Tariffs are intended to protect specific American industries (like steel, aluminium, and manufacturing) from foreign competition, thereby safeguarding and creating domestic jobs.
• Bringing Manufacturing Back to the US: A stated goal of the “America First” policy is to incentivise American companies to reshore their manufacturing operations from overseas.
• Leveraging US Market Access: The US utilises its vast consumer market as a powerful bargaining chip to compel other nations to accede to its demands in bilateral trade negotiations. This is characterised as “coercive bilateralism,” where countries are pressured to “lower your tariffs, or we will raise ours to match”.
• National Security Concerns: In certain instances, tariffs have been justified on national security grounds, even when applied to allies.
• High Debt-to-GDP Ratio (External Factor): Government revenues increase through tariffs, it can theoretically contribute to lowering the national debt or deficit. However, the direct impact is often limited, and the broader economic disruption caused by trade wars can sometimes exacerbate debt-to-GDP ratios if economic growth slows significantly.

Timeline of Events:

The article references a specific sequence of events concerning US tariff announcements and deadlines:

• April 2: US President Donald Trump announced a “broad set of bilateral tariffs” on imports. Initially, India faced a 26% tariff, China 34%, and the European Union 20%.
• Soon after the April 2 announcement, These tariffs were “suspended for 90 days” with a message that unless trading partners agreed to “fair and reciprocal” trade deals, punitive tariffs would take effect.
• July 9 (Original Deadline for Pause): This was the initial deadline for the pause in tariffs.
• Extended to August 1: The deadline was later “extended to August 1”.
• August 1 (New Deadline & India’s Tariff Imposition): US President Donald Trump announced on Wednesday (implicitly, in the week leading up to Aug 1) that “India would pay a 25 per cent tariff on exports to America from August 1”. This decision came after prolonged discussions failed to yield a mutually beneficial trade deal.
• “Penalty” Threat: Trump’s message also “mixed up the issue with India’s oil imports from Russia” and noted that India would have to pay a “penalty,” which could mean “additional tariffs over and above the 25 per cent announced”.

Analysis of the Article: Decoding the India-US Tariff Issue

The article discusses the failure of India-US trade negotiations, leading to the imposition of US tariffs on Indian exports, and explores the implications of this development within the broader context of Trump’s trade policy.

1. Failure of India-US Trade Negotiations:

• Initial Optimism: For some time, it appeared India was “making progress on a trade deal with the US” as it “did not figure on the list of countries to which Mr Trump sent unilateral letters earlier this month”. Trump himself had “boasted that a big deal with India was coming”.
• India’s Proactive Stance: India was “one of the first countries to start negotiating with the US after its April announcement of the so-called reciprocal tariffs”.
• Negotiation Breakdown: However, “none of these seems to have worked,” resulting in the imposition of a 25% tariff on Indian exports to America from August 1. This signals that negotiations “have failed”.
• India’s Stance: India was reportedly “not willing to open up certain sectors, particularly agriculture”. This is due to India’s “developmental needs and livelihood concerns”.

2. Implications for Indian Exporters and Economy:

• Damaging Announcement: The announcement is “clearly damaging for Indian exporters, along with the Indian government”.
• Largest Trading Partner: The US is India’s largest trading partner, and India ran a goods trade surplus of over $40 billion in 2024-25, with exports worth over $86 billion.
• Loss of Competitiveness: Since “several other countries have got favourable deals, including developed economies and blocs such as the United Kingdom and European Union,” India “would struggle to export to the US market”.
• Impact on FDI and Diversification: The tariffs would “put a question mark on some of the recent investments in India by large multinationals in an attempt to diversify from China”. Vietnam, which secured a favourable deal, will become “more attractive”.
• Impact on Output and Employment: The imposed tariffs “will have an impact on output and employment” in India.
• Growth Outlook Adjustment: India’s growth outlook “needs to be appropriately adjusted” if this tariff remains in force. The article sarcastically notes that IMF’s recent upward revisions for India’s growth projection “don’t seem to have even a 24-hour shelf life” in the “Trumpian World”.

4. Linkage to Foreign Policy:

• Trump’s statement signals a “hardening of US stance, linking trade directly with foreign policy positions, particularly India’s continued engagement with Russia”. This suggests that India’s geopolitical alignment is influencing trade outcomes.

5. Which sectors will be severely hit if the newly announced tariff rates remain for long: Based on “India’s top export categories to the US” and the imposition of a 25% tariff:

• Smartphones, electronic products: With $14.4 billion in exports to the US in 2024 and a US share in total Indian exports of 35.8%, this sector will be severely impacted. The current weighted-average tariff of 0.4% will jump to 25%.
• Pharmaceuticals: Exports to US were $12.7 billion in 2024, accounting for 54.5% of India’s total exports in this category. While currently at 0.0% tariff, a 25% tariff would significantly raise costs for US consumers and importers, potentially affecting demand for Indian pharma.
• Diamonds, gold and products: Exports of $11.9 billion with 40% share in total exports. Current tariff of 2.1% will increase significantly.
• Machinery & mechanical appliances: Exports of $7.1 billion with 21.8% share. Current tariff of 1.3% will face a steep increase.
• Organic chemicals: Exports of $3.6 billion with 17.3% share. Current tariff of 4.0% will become much higher.
• Petroleum products: Exports of $3.2 billion with 4.3% share. Current tariff of 6.9% will be significantly augmented.
• Textiles: Exports of $3.1 billion with 51.3% share. Current tariff of 9.0% will dramatically increase costs.
• Iron or steel articles: Exports of $2.8 billion with 28.1% share. Current tariff of 1.7% will rise.
• Vehicles and parts: Exports of $2.8 billion with 12.7% share. Current tariff of 1.0% will increase.
• Fish and crustaceans: Exports of $2.0 billion with 32.6% share. Currently at 0.0% tariff, this sector will face a significant new cost.

Overall Impact: These sectors, which comprise India’s top exports to the US, will face a substantial competitive disadvantage due to the 25% tariff. This could lead to a decrease in export volumes, impacting profitability for Indian businesses, potentially leading to job losses, and forcing a re-evaluation of supply chains by both Indian exporters and US importers.

In conclusion, the imposition of a 25% tariff by the US on Indian exports, following failed trade negotiations, marks a severe blow to India’s trade prospects and signals a worrying trend of trade policies intertwined with geopolitical considerations. This move will significantly impact India’s top export sectors, necessitating a careful study of trade-offs and potentially a re-adjustment of India’s growth outlook.

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