Trade Relations Under Strain
By August 2025, economic ties between the United States and India—two of the world’s largest economies—have reached a tense crossroads. The US administration under President Donald Trump has announced a major increase in duties on Indian imports, doubling tariffs from 25% to 50%. This sharp hike is aimed at penalizing India for continuing to buy Russian crude oil, despite ongoing global tensions over the Ukraine conflict. With these new rates, India now faces the highest average tariffs of any US trade partner, overtaking even countries like China and Vietnam.
The move comes after months of unsuccessful negotiations. Talks collapsed mainly over Washington’s demand for greater access to India’s agriculture and dairy markets—an area India refuses to compromise on due to domestic political sensitivities. What was once an ambitious goal to push bilateral trade toward $500 billion is now overshadowed by retaliatory threats, stalled deals, and hardening rhetoric from both capitals.
What’s Driving This Dispute?
- The US Position: American officials point to a widening trade gap—over $45 billion in 2024—and accuse India of maintaining restrictive trade practices. Washington is also displeased with India’s energy cooperation with Russia, viewing it as contrary to Western sanctions.
- India’s Standpoint: New Delhi argues that its energy imports and protective tariffs are central to national security and economic resilience. It insists that core sectors like agriculture and dairy cannot be opened to foreign competition without harming domestic livelihoods.
Economic Impact: Who Gets Hurt?
- Export Pressures: Around $87 billion in goods—covering textiles, gems, engineering goods, and more—are at risk of becoming uncompetitive in the US market.
- Slower Growth: Economic projections warn tariffs of this scale could shave 0.3–0.5% off India’s GDP growth, with small and medium-sized exporters hit the hardest.
- Job Risks: Labor-intensive industries dependent on US orders could see significant layoffs.
Effect on India:
- Export Pressures: Around $87 billion in goods—covering textiles, gems, engineering goods, and more—are at risk of becoming uncompetitive in the US market.
- Slower Growth: Economic projections warn tariffs of this scale could shave 0.3–0.5% off India’s GDP growth, with small and medium-sized exporters hit the hardest.
- Job Risks: Labor-intensive industries dependent on US orders could see significant layoffs.
Effect on the US:
- Higher Consumer Prices: Import-heavy sectors such as apparel, machinery, and chemicals may face rising input costs, potentially fuelling inflation.
- Possible Retaliation: India could respond with counter-tariffs or by curbing purchases of US defense equipment, hurting American manufacturers.
The Wider Global Fallout
This dispute is not confined to India and the US—it has ripple effects across the global economy.
- Supply Chain Disruptions: With nearly $190 billion in annual US–India trade, shifting tariffs will force companies to reconfigure sourcing, production, and logistics networks.
- Threat to Global Growth: Emerging economies connected to these trade flows may face slower growth if investment and market demand decline.
- Erosion of Trade Rules: Bypassing the WTO’s dispute mechanisms undermines trust in the global trading system and could encourage unilateral tariff wars elsewhere.
Strategic and Diplomatic Consequences
Beyond economics, the rift could complicate cooperation in defense and security matters. Both nations are key members of the Quad alliance, but worsening trade relations could weaken joint strategies in the Indo-Pacific. India may also seek to deepen commercial ties with the EU, Southeast Asia, and other partners to offset losses in the US market.
Are We Already in a Trade War?
Given the scale of the tariff hikes, the breakdown in talks, and the looming deadline for additional measures, many analysts believe the situation is sliding toward a full-blown trade war. Unless the two countries can reopen negotiations and reach a compromise, bilateral trade could shrink sharply—taking a bite out of global commerce in the process.
The Urgent Need for Diplomacy
Both economies have much to gain from cooperation and much to lose from prolonged confrontation. Quick, pragmatic dialogue—possibly through a phased agreement—could defuse tensions before the higher duties become permanent. The stakes extend far beyond US–India relations, as the outcome will influence global trade stability at a time when the world economy can least afford more shocks.
