India avoids steeper tariff, but exporters still have reasons to worry; here’s why  

Janvi Sonaiya  

India has managed to avoid a higher US tariff, with most of its exports to the United States now facing a 10% Section 301 duty; the move comes after India tightened its rules to prohibit imports of goods made using forced labour. 

The 10% tariff is a relatively positive outcome for India, considering the US Trade Representative’s earlier proposal had put the country in the 12.5% bracket. The lower rate also means India will not be at as much of a disadvantage compared with major competitors such as China and Vietnam, which remain in the higher tariff category. 

India has been placed in the same 10% tariff group as 16 other economies, including Pakistan, Sri Lanka and Bangladesh. The inclusion of Bangladesh is particularly important because it competes directly with India in textiles and garments, one of India’s major export sectors in the US market. 

The lower tariff rate follows India’s July 13 decision to amend its Foreign Trade Policy and ban imports of products made wholly or partly through forced or compulsory labour. The US had earlier criticised India for not having an effective ban in place. 

US Trade Representative Jamieson Greer said the move was aimed at addressing forced labour as both a human rights issue and a trade concern. According to the US, countries that have introduced or committed to introducing restrictions on forced-labour imports qualify for the lower tariff bracket. 

The 10% rate is a welcome short-term relief for India, but it is not something the government can afford to celebrate too early. The tariff is still an additional burden on Indian exporters, and the final impact will depend heavily on the outcome of the ongoing India-US trade negotiations. 

India exports goods worth more than $90 billion annually to the United States, making it the country’s largest export market. Key exports include electrical and electronic equipment, including telecom instruments and technology hardware worth over $25 billion, pharmaceutical products and drug formulations valued at around $9.5 billion, and gems and jewellery, including pearls, diamonds and precious metals, worth nearly $6.8 billion.  

Other major export categories include machinery and mechanical equipment, as well as textiles and apparel such as readymade garments and made-up textile articles. Overall, India’s annual merchandise exports to the US have reached approximately $92.57 billion, while the country maintains a merchandise trade surplus of more than $35 billion to $45 billion with the United States. Despite recent sector-specific tariff adjustments, trade in goods and services between the two countries remains strong. 

There is also another major concern. The US is conducting a separate investigation into excess industrial capacity, which includes India but excludes competitors such as Bangladesh, Pakistan and Sri Lanka. If that investigation eventually leads to additional tariffs on Indian goods while its competitors remain unaffected, the advantage India gained from the current 10% rate could quickly disappear. 

For now, however, India appears to have secured a better position than expected. The reduction from the proposed 12.5% tariff to 10% shows that New Delhi’s policy changes and negotiations with Washington had an impact. The bigger challenge will be ensuring that this temporary advantage translates into a more stable and favourable trade relationship. 

The latest tariff structure means Indian exports to the US will broadly fall into three categories. Steel, aluminium, copper, auto components and certain related products, which account for roughly 8% of India’s exports, remain subject to higher duties of 25% or 50% under Section 232, in addition to applicable Most-Favoured-Nation duties. 

Around 70% of India’s exports including engineering goods, textiles, garments, chemicals, machinery, plastics, leather products, gems and jewellery, furniture and other manufactured goods;  will now face the 10% Section 301 tariff on top of the existing MFN duty. A smaller group of exempted products will continue to face only the applicable MFN tariff. 

Overall, the latest decision is a small but important win for India. It avoids the immediate pain of a 12.5% tariff and keeps India closer to its regional competitors. But the real test will come with the conclusion of the India-US bilateral trade agreement and the separate excess-capacity investigation. Until those issues are settled, India’s exporters will continue to face uncertainty in one of their most important overseas markets.