US Latest Tariff Threats Point To Failure In Negotiations
India’s trade diplomacy faces a tariff storm as the U.S. slaps 25% duties on key exports, exposing cracks in strategy and risking pain for pharma, textiles, and jewellery sectors.
A fresh wave of U.S. tariffs on Indian goods is testing India’s trade diplomacy and pressuring key export sectors—from pharmaceuticals to textiles. While the broader economy may be insulated, sectoral pain and strategic missteps are becoming hard to ignore.
On Episode 644 of The Core Report, financial journalist Govindraj Ethiraj talks to Arvind Chari, Chief Investment Strategist at Q India UK as well as Ajay Srivastava, Founder at Global Trade Research Initiative.
SHOW NOTES
(00:00) Stories of the Day
(03:24) US latest tariff threats point to failure in negotiations
(07:15) Who will get most hurt by the higher tariffs
(27:25) India may be suspending oil purchases from Russia for now
(28:59) Air passenger growth slows in June, load factor falls
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
Good morning, it's Friday, the 1st of August, and this is Govindraj Ethiraj, broadcasting and streaming weekdays, usually from Mumbai, India's financial capital, but still in transit till the weekend.
Our top themes
- The latest US tariff threats, and we are calling it threats, point to a failure in negotiations.
- Who will get most hurt by these higher tariffs?
- India may be suspending oil purchases from Russia for now,
- And air passenger growth globally slows in June, load factor falls.
A Rollercoaster Ride
The stock markets swung back and forth and regained some of their losses on Thursday after concluding that we are facing yet another Trump bargaining move with the latest 25% tariff slab on Indian exports to the United States. The one line takeaway on this is exactly what economists have been saying since April, which is that India is not so export dependent to be hurt badly by these tariffs, but that does not mean there will be no damage.
The larger question, of course, is why has India failed quite badly in this round of trade and foreign affairs negotiations, including in anticipating Trump's moves? Clearly, the Indian side was assuming the deal was mostly in the bag till Trump's sudden tweet on Wednesday announcing a 25% tariff rate plus penalties for importing oil from Russia. There ought to be some accountability for this somewhere. Anyway, we're going to spend some time on this theme today, so do hold on.
The Sensex finally was down 296 points to close at 81,185. It did swing between about 81,803 and 80,695 on Thursday. The Nifty 50 was also down 86 points to 24,768.
The broader markets were down as well. The Nifty Small Cap 100 and the Nifty Mid Cap 100 were down about 1% approximately each. The Nifty FMCG Index, that's the Fast Moving Consumer Goods Index, was up thanks to stocks like Levers.
The rupee fell to an over five month low of about 87 rupees 74 paise and closed at 87 rupees 59 paise. That's 87.59, which was down about 0.2% on the day, according to Reuters.
So Where Are We On Us-India Trade?
First, let's revisit the numbers.
The United States does matter as a market for India. It is India's single largest destination for merchandise exports, so that's physical goods, since 2014 and has now touched a record of $87 billion as of last year, or 2.7% of India's GDP. Close to 20% of India's exports last year went to the United States.
And now let's see how the overall impact on the economy stacks up, since that's what everyone is trying to understand. So the weighted average US tariff, now this is for the world as a whole, has moderated to about 16.6% as of end July 2025, that's right now, from a peak of about 31% seen during mid-April 2025, according to a report from Quantico Economics on an economics research firm. Now, Quantico also says that the 25% tariff could potentially lower India's annualised exports by about $31 billion on a gross basis.
On the other hand, however, there could be gross gains of a similar magnitude on account of tariffs on other countries, which could result in some strategic increment in India's market share for some products. Now, the net impact from reciprocal tariffs on India's exports could be negligible, but there could be adverse sectoral impact in a few cases, just to come back to that point. However, from a macro point of view, says Quantico, the direct impact of tariffs will be therefore negligible, but the indirect spillover impact would be hard to escape.
Now, tariffs are of course paid by US consumers, and even if there are deals being worked out, which there are, it could be some split of load between the exporter from India, the importer from the US, and of course the final consumer. But there is no doubt that the consumer will pay higher prices. Madhvi Arora, Chief Economist at MK Global, says the tariffs would raise the effective US duty on Indian goods from an average of about 10.7% to about 22%, after factoring in higher duties on exempted sectors, such as copper, steel, and aluminium.
Remember, all of this was close to zero in April. Now, this rate, she says, is already higher than what most Asian economies face, except for China. Now, which are the big sectors? So the big sectors are the five, which is engineering goods, about 19 billion, electronics, about 14 billion, drugs and pharmaceuticals, about 10.5 in all billion, that is, gems and jewellery, about 9.9, or close to 10 billion, and textiles, about 10 billion.
So drugs and pharmaceuticals, gems and jewellery, and textiles are roughly the same size. Engineering goods, followed by electronics, are larger. And these are Indian exports to the United States.
The mint-quoted government estimates say that about 75% of India's merchandising exports to the US could be impacted by these proposed tariffs. Incidentally, before we go on to other impacts, companies like Apple have already cut side deals in the United States, so iPhone exports from India might not be affected, at least for now, because the Trump administration in April exempted smartphones, computers, and other electronics from reciprocal tariffs. This, of course, helps Apple and companies like Nvidia, whose chips are made outside.
India accounts for about 20% of global iPhone production and has already crossed China to become the top supplier of the device to the US market, according to a Bloomberg report. The US Commerce Department is currently probing sectors deemed vital to national security there, like semiconductors, under what is known as Section 232 in the Trade Expansion Act. Till these are complete, there will be no tariffs or duties on smartphone exports to the US.
That, of course, includes iPhones made in India.
Who Will Tariffs Hurt The Most?
Now let's go back to the numbers once again. Two-way trade between India and the United States stood at an estimated $129 billion in 2024.
In the scheme of things, this is smaller than other trade partners like China or the EU. US President Trump's 25% tariff on Indian exports starts literally today and is expected to hurt everyone from apparel makers and generic drugs to jewellery and even auto components. Former Agricultural Secretary to the Government of India, Siraj Hussain, told me that India's agriculture exports to the US are about $6 billion and the 25% tariff will hit all our exports, including the export of fish and processed seafood, which is valued at about $2.6 billion and fish farmers in Andhra Pradesh, for example, would be hit by this.
India's key competitors in spaces like apparel are now at lower rates, including Vietnam, which is at about 20%, Indonesia, 19%, and Japan and South Korea in general. They're not competitors, specifically in these categories are at 15%. There could be livelihood impact, particularly in labour-intensive sectors like gems and jewellery, which exports around, as we said, $10 billion to the United States.
Companies like Sun Pharma, Dr. Reddy's and Cipla get about 30% of their revenues from the United States and India exports anywhere between $8 and $10 billion of drugs. Now, Indian drug makers are still hoping for lower rates on these items because as industry representatives have told the core report earlier, higher tariffs will directly impact America's health system. Four of every 10 prescriptions written in the United States in 2022 were supplied by Indian companies according to data from IQVIA quoted by Bloomberg, adding that medicines imported from India saved the US healthcare system nearly $220 billion in 2022 and about $1.3 trillion in the decade through 2022.
That's 2012 to 2022, so it's a significant amount. But the latest developments must also call, as we've said, for some soul-searching on trade strategy. I reached out to frequent core report guest, Ajay Srivastava, former trade negotiator and founder of the Global Trade Research Institute, or GTRI, and I began by asking him what had gone wrong in these negotiations.
INTERVIEW TRANSCRIPT
Ajay Srivastava: So, two things are possible. In fact, neither the US nor the Indian side have put any official version so far or in the past. So, we can only guess based on the information available.
First, my hypothesis is that we have agreed to open the industrial products, which account for 95% of US exports to India, but the US is not happy. They want the balance 5% and most of it is a red line for us. Now, suppose Trump had done a deal with India last month, would he have gotten the European Union or Japan to open their agriculture sector?
No. They would have said the US spared India, so please spare us. Agriculture is very sensitive for Europe, for Japan.
So, it could be a strategy that okay, delay the India deal and get everybody else to sign on to the agriculture industry, everything, extract maximum. And then India is very important, we are not going to ignore it. We'll get the India deal and we know that India cannot agree on agriculture.
It's beyond negotiators, beyond politicians. Everybody knows this. The US is intelligent enough to know this.
So, they delay this so that first they get everybody else for agriculture online. So, this could be one point, but this is just a hypothesis. Second, I don't know why people are shocked.
Mr. Lutnick has said 3-4 times, he said there will be no extensions beyond 1st of August. Countries which did not have a deal by 1st of August, tariffs will be imposed. We did not have a deal.
The only thing is that they announced it two days back. The surprise element was of course this penalty and we don't know what that beast means, selecting oil alone or something else or what products, what sector, we don't know. So, it was not a shock and knowing Trump, they have not terminated the negotiations.
They are ongoing. So, it could be a mere tactic of Mr. Trump to pressurise the Indian side to seed more red lines. That's it.
Govindraj Ethiraj: Okay, but in India's approach now to these discussions and negotiations in the last many months, do you feel that this is consistent with how India should be approaching certain discussions? Are there any lessons to learn now? Because I mean, while this is a new world, it's also not so new because we've been seeing since April and I think to your point that what we are now have gone back to is really the April 2nd tariff level which is of 26 or 25 percent and yeah, essentially what is it that we should learn from this?
Ajay Srivastava: No, no, there is no learning. There is no learning. India is very clear what it can seed to America.
For example, all the industrial products which account for most of their exports, we agreed to eliminate tariffs on those. Now, if they are focussing on agriculture, agriculture is a big no-no. Most of the agriculture and most of the dairy is a big no-no.
So, deal happens, deal doesn't happen. Agriculture and dairy, core agriculture is not going to happen. I think everybody understands that.
So, there is no learning for this and I think India should remain very cool. India should be very flexible with the US as long as we are talking about industrial products. But for agriculture, we know there are red lines and we should stick to it and we should remain cool.
You know, it's some tantrums, we should not even look at those things. We should be knowing what we are doing.
Govindraj Ethiraj: Now, if you were to look at some of the more specific areas, obviously, if the 25 percent tariffs kick in which they have as of 1st of August, there are a lot of export-orientated sectors that could get hurt. For example, gems and jewellery, industrial parts including auto components, drugs and pharmaceuticals and so on. So, what happens when it comes to these kinds of areas?
I mean, on the other side, that is.
Ajay Srivastava: So, we can divide the sectors into three parts. The first group will remain sectors on which no tariff will be imposed. These are most of the electronic items.
For example, a smartphone which we exported more than 11 billion dollars to the US. Second is pharmaceuticals. There is zero duty right now on it.
He is talking about 200 percent, 400 percent, but today it's zero duty. It will go without the tariff. And then petroleum products.
We export about 5 billion dollars worth of petroleum products. There will be no duty on energy products like these. These account for about 35 to 40 percent of India's exports.
Then there are certain products on which you have a deal or you don't have a deal. You have to pay a tariff. These are steel, aluminium on which you have to pay 50 percent tariffs.
Now, the third part, the tricky part is the remaining products. I mean, about 40 percent of our exports, for example, textiles and garments. Now, for example, if we talk about one particular gen shirt, the current tariff in the US is 12 percent.
And if he's charging 25 percent over and over that, it will be 37 percent. But China is 30 percent plus 12 percent, 42 percent. So we are better compared to China.
Similarly, with Bangladesh, 34 percent, we are better compared to Bangladesh. But Vietnam will pay no tariff. They already have an FTA with the US.
So if they are 20 percent, we are worse compared to Vietnam. But Vietnam may buy most of them from China for which Trump will be charging 40 percent, not 20 percent. So things are tricky.
We cannot study the sector. We have to study the product and the major competitor of the US. So even with a 25 percent tariff and Trump tariff, things are not very, very bad, as people are saying that the heavens are going to fall.
Govindraj Ethiraj: No, no, no, no. OK, so if you were to look forward again, I mean, I come back to my theme for today's discussion, which is trade negotiation strategy. So we know that things are uncertain.
So let's say even if we were to have a formal deal signed at 25 percent or 15 percent, whatever that is, there is no guarantee that this is not going to change and it may not even, you know, something may happen just 10 days down the line. So what is it that or how is it that India should be preparing for this new world again as trade negotiators?
Ajay Srivastava: Nobody can prepare for an ever-changing scenario. So we have to be able to respond. And for that, it's necessary for us to know what are all the flexibilities which we can extend to the US.
Remaining red lines are there, we have to be very cool about our red lines. We can be flexible wherever we can. But if you feel certain red lines are there, whatever pressure is there, even if somebody is going to bomb you, you know, they are your red lines are not going to release them.
So that makes our task very cool. And you rightly said after the deal, he may impose tariffs on BRICS because we are a member of BRICS, because we are buying oil from Russia. Not only this, he can manufacture many pretexts, hundreds of pretexts.
For example, in Brazil, when they imposed a 50% tariff, one of the allegations was that Brazil makes a lot of requests to X for taking down anti-Brazilian content. Now X says and they receive max requests from mighty India about taking down the content. So of course, he may charge us.
We should remain cool and wherever flexibility is there, we should say yes. Wherever we feel it's not balanced, we should quietly refuse and we should be willing to take necessary steps for that. We are an independent economy, we are not a storage of U.S. Right.
Govindraj Ethiraj: So last question. So if you look at what we've given, you said that for industrial products, we've already brought down tariffs considerably. So would you say in these areas, that's industrial products and other areas where we brought down tariffs for U.S. exports into India, we would be now at a sort of globally competitive level in terms of tariffs and relative tariffs?
Ajay Srivastava: No, no. I'm saying India should agree to eliminate tariffs or industrial products which account for 95% of their exports to India. So all their theories of India's high tariffs, trade deficits should be solved with this.
We are making tariffs zero on 95% of your exports. Why are you sticking to only 5%?
Govindraj Ethiraj: What I'm saying is when we are making it zero, that means we're as competitive as anyone else in the world can be. That's really my question. I'm saying to myself, this is a larger question, not too much about tariffs.
The most competitive market India should become for the U.S. products. Got it. Mr. Sivasra, thank you so much for joining me. Thanks. Thanks very much.
Ajay Srivastava: Thank you.
While the stock markets appear more sanguine at this point about a possible deal and some moderation in the tariff rate, this does come at a time when there are consistent foreign investor outflows and a general haziness about where Indian markets are right now and, more importantly, are going. I spoke with Arvind Chari, chief investment strategist, Q India UK, an affiliate of Quantum Advisors in India, who has argued that a deal with the United States was a way out for us to clean out our trade policy and engage with the developed world to gain access to their markets for our exporters by allowing some import. A 25% rate, he says, leaves us higher than Vietnam, Indonesia, and other competitor economies from Asia and the European Union, as we just pointed out.
I began by asking him what or how he felt things could have gone differently, including from a market perspective.
INTERVIEW TRANSCRIPT
Arvind Chari: So it's been incredibly difficult to do a bilateral trade with the US. In fact, the US has never signed up to any bilateral trades. And India must have tried it many times and we've not been able to do it.
So that is the context and here was Trump and you could sense that, oh, maybe now you can actually cut a bilateral trade. And why that is important is if you look broadly in the last 20 years, we've missed out on what is called the global value chain, right? India has Indian manufacturers and Indian corporates, that Indian state has not been able to participate in this global value chain that has gone about.
And the benefits of that we can see in Eastern Europe, of course, in China and in Vietnam and other Asian economies. So that is another point that with this could we have done something which could have ensured that India gets into the value chain. And like, you know, Apple is one of our success stories where we've made in India and we've got Apple into and India is now part of a global supply chain of Apple, which is significantly value-added.
So that was the one aspect and could we have done it for more countries with our own policies? But could we have done more if we got it into the US? And it is even more important to set the context, right?
If you look at nominal goods exports, 10 years back, it was about 270 odd billion dollars. Today, it's about 430, 440 billion dollars. That's a 4% dagger growth in nominal terms.
That's a really shockingly low number adjusted for commodity price and adjusted for everything that you want to adjust with. It's a really low number that just shows you that Indian goods exports have not been any meaningful growth and have not been able to capture. And think about the period in which we are talking about this COVID ensured that every government, especially developed world governments, spent a lot of money and all of them have high fiscal deficits, which have led to high trade deficits, which would have been met by goods from various countries.
And India has not been able to participate in that. That is the context in which we are having this discussion. And this is where we are thinking about Trump and tariffs.
Right.
Govindraj Ethiraj: And you're also saying that we should be thinking about what a good deal would have done for us rather than the harm that the bad deal is doing to us.
Arvind Chari: When Trump became the president in November, I wrote an op-ed where I listed four points, which I thought were India's leverage or India's position. And everybody had the view that India is relatively better off in a Trump world. And the four were these, like one, that India does not have a high trade surplus with the US, which China had and Mexico had.
So we were different from that. So India has $45 billion of trade surplus with the US in goods, which is manageable. India does not have any commodity in which the US wants dominance, like oil and gas, like US shale and others.
And there America first and MAGA would ensure that they will have prominence in global trade and supply. Third, India does not have any high-end technology in which the US wants dominance. Think about AI, think about chips.
India does not have all those things. So India does not fear a retaliation by Trump or retaliation by the US for that. And the fourth is military dependence.
India is not militarily dependent on the US for its strategic objectives. Maybe NATO is one example that NATO is dependent on the US. And there are several other countries which fall into that.
So if you put these four into perspective, this is why people thought that, you know, that India is relatively better off in this thing. And hence, India should actually aim for the lowest tariff. Now, of course, the Liberation Day mathematics of trade balance divided by total trade was completely off the charts.
But even in that India had India still inside somewhere in the upper part of it, 26%. But since he was ready to do deals and Trump is always ready to trade and deals, our expectation going into the Trump negotiation would have been to get 10%, which is what the UK has got, right? The UK is a friendly country to the US.
Of course, it is militarily joined, but could India have also got a 10% tariff from the US? And that is important, right? If India would have been in somewhere in that zone, I'm not saying even that was possible, but I would assume the trade negotiators from India would have entered with that objective that let's get as low as the trade and get a good trade deal with the US so that we can then start going in and becoming a manufacturing or a partner with some of the large US corporations who are partners with the rest of the world, right?
So that was the way to think about it.
Govindraj Ethiraj: Got it. So given all of this, how are you seeing markets? And let me fine tune that question a little bit.
We are seeing a lot of foreign portfolio outflows in recent weeks now. Is that a blip or does that reflect something else? Is it linked to tariffs and this whole tariff issue or is it linked to something else?
How are you seeing this?
Arvind Chari: I think the bigger question would be to see FDI because trade will lead to investment. So if you look at 2003 to 2011-12 when we had the first large, very big phase of investment, it was initially led by exports. So Indian companies started exporting and that created a capacity creation and you could see FDI flows from global manufacturers, global MNCs coming into India and setting up shop.
So a trade and investment treaty would first have an impact on FDI. And there, although the gross and net are two different examples, but even if you look at the gross flows of $80 billion and if you remove reinvestment flows, India's fresh FDI from corporations or from private equity funds has gone up from something like $30-$35 billion to about $40-$45 billion annual run rate. Even that is not very, very high.
So India has not been able to attract investments from global corporations to be able to do this. So 25% plus penalty trade should definitely have an impact on some of the FDI proposals which would have come India's way and not really from the US. India is doing a trade with the EU, with the UK.
And the other thing which is important is in the last five, seven years, India has increased import duties and India has something called quality control orders which has a big impact on what you can import and how you can trade. And this was a way to dismantle all of that. India gave the opportunity to India to keep politics and economics aside and have a good trade deal.
We will still do it with the UK and we'll still do it with the EU. But maybe with the US, we don't know the intricacies of the deal. So we don't know, you know, whether they asked for agri access or whether they asked for fighter planes. We don't know that.
And hence, maybe India would have walked out and said, okay, we'll deal with the 25%. But the impact of that would be on A, global value chain and B, attracting global corporations to invest. On the portfolio flows, I don't think it is completely linked to the trade angle.
In fact, if you look at the market reaction, both in the rupee, dollar and equities, it is following the old valuation cycle. Maybe some sectors, pharmaceuticals and fortunately, the global IT services, the India IT services play has been away because that is one area where India has actually been in the global value chain. India is the global value chain for IT services and that has not been touched as of now.
But apart from that, we should look at FDI and trade and make India an Apple kind of place with this trade deals with the US or EU with the UK and see how much of that they're able to attract. And that will define what we do and how we grow. Because our growth also has been, as I kept on saying, it's at six, six and a half percent.
It is double the world GDP, but it is not enough for you to grow at a much higher pace. And trade and exports and investments are a very integral part of that.
Govindraj Ethiraj: Ashutosh Right. Just to sum that part up, you're saying that broadly, what we're seeing in terms of foreign portfolio investments into India, and I'm talking about equities right now, is not really linked to tariffs. And secondly, will flow with, let's say, earnings or other domestic factors rather than anything else.
Arvind Chari: Correct, absolutely. It will be more driven by valuations, earnings, India's relative as compared to global markets. Because as we have spoken before, a large allocation of global portfolio flows into India comes from global and emerging markets funds and not as much as India dedicated.
So if they find some other country more attractive and they can allocate, they will make that. There could be some aspects of, if the fallout is really bad and India gets some sanctions and all, because of whatever is going on, then it could be a different thing. But we now have a penalty, so we have to figure out what that oil penalty is.
And I saw news today that Indian oil refiners have stopped buying Russian crude immediately. So we'll have to see how that plays out on a micro story basis or specific companies. But broadly, watch for trade and FDI and those kinds of aspects for when we do a bilateral trade treaty with the US.
Govindraj Ethiraj: Right. Arvind, it's been a pleasure speaking to you. Thank you for joining us from the West Coast, as opposed to your usual domicile in London. So thank you very much and see you soon.
Arvind Chari: Thank you so much. Thanks, Govind.
