India - USA PTA : A Possible Answer To Trump Tariffs

PM Modi and USA Prez. Donald Trump's meeting earlier in 2025

Recently, the whole world has been hit hard by Trump tariffs. The tariffs announced by the USA president, Donald Trump has send world economies into a spin. The tariffs have undoubtedly changed the dyanmics of relationship between USA and many countries. The biggest country, impacted by this is undoubtedly China, where a tit for tat sorts of trade tariff war has started between the USA and People's Republic of China. Trump's action of pausing tariffs for 90 days for all countries, except China, is also forcing many experts to rething their predictions, while many saying that these tariffs were bought in to undercut China's rise as a global economic power. Though, some experts argue otherwise, which is that Donald Trump would like to have trade deals with multiple trading blocs for promoting manufacturing in the USA again, while, it would take time to judge the impact of tariffs on individual economies.

The Chinese economy since, the time of the coronavirus pandemic, has seen a slowdown in their growth rates and even though, they were recovering from the past fiscal year or so, however, the USA tariffs can be a blow to their economy, given, exports to USA alone represents 2.9% of their GDP, as of 2023. Though, China has posted good numbers in the Q1 results, but it has not accounted for the economic shocks that the tariffs can potentially deliver to them, and, with an impending border standoff with India, it would be difficult for China to find buyers for its production base, which can significantly impact their economy. Though, we may see, EU or Russian exports of PRC increasing, but again the impact on tariffs on the Chinese economy is also too early to economically predict.

The one country, which is being discussed far too less in this crucial context is India, the world's fifth largest economy and most populous country of the world. Many have forgotten about India's trade policies over the past 5 years. India has launched exiting policies like, IMEC in alliance with G-20 announced in 2023, INSTC coridoor(between Russia, Iran and India), the expansion of BRICS, attempts to internationalize rupee by using bilateral trade as a mechanism, which can play a major role, in the current world context. The decisions like quickly concluding the EFTA with Liechenstein, Switzerland, the India-UAE FTA, renewed vigor in negotiations for a FTA with UK & EU etc. can actually, decrease Indian dependence on the USA with respect to its export markets. India's additonal tariffs are at 27%, with India's economic competitors like, PRC(145% and counting), Thailand (36%) etc. being slightly high.

The one factor that, most of economists have missed out is the point that India is a consumer led economy, with  exports yet to reach the peak point as of today. This makes, India's position with respect to hardcore economics different from many other Asian economies, which are export driven. For example - Vietnam, one of the country hit quite heavily by the inaugral trump tariffs have their exports contributing to almost 85% of their GDP, which is very high.

The Indian exports basket to the USA, deserves more scrutiny in such a case, as exports, do account for 22.45% of the Indian GDP today. The USA has a 18% contribution in the merchandise trade alone for India, which is again high as the, impending tariff-counter tariff cycle would affect the merchandise trade negatively. Product wise, the top -5 goods exported from India to the USA are of electrical machinery, pharmaceutical products, natural pearls, textile products, articles of iron and steel and apparel articles, all which have a positive trade balance between India and the USA. The interesting factor is that despite, multiple geopolitical tensions like Russia-Ukraine war, Israel-Hamas conflict during the past 5 years, the trade balance in these 5 product segments, has grown massively. While, India has survived from getting into a direct trade war, however, in the present scenario, where the signing of a India-USA trade deal seems difficult, given, USAs aggresive posturing may act as a spanner in this case.

India and USA in such a case, must sign a Preferential Trade Agreement which have seen a reduced impact on world trade in today's day and age. Preferential Trade agreement is often called as the first step of  trade integration. In a typical preferential trade agreement, a few goods are exempted from tariffs and free trade connotations is applied to only a select group of goods. This is in contrast to a  FTA or a customs union, which pushes for greater trade integration by covering a wider range of goods and identical policies on tax policies, custom policies etc. The latest news on Preferential trade agreements have been centered around a few PTAs between Iran and Uzbekistan, Iran- Indonesia to name a few. With increased globalization, surprisingly big ticket PTAs have gone down. As per, a research document released by WTO, almost 300 PTAs were in force in 2010 and surprisingly, only 16% of global merchandise trade happens via preferential trade agreement. The number of PTAs between 2 developing countries have seen a kinked rise from 1980 to 2010, while the number of PTAs between developing and developed countries, in addition, to between developing countries, have seen a slow increase. 

In general, the number of PTAs have increased between countries from 1980 to 2010, which was considered as a time marked by multiple global shifts like the 1991 war between Iran and Kuwait, China's induction into WTO, India's economic liberalization, the fall of USSR etc. which were big shifts in geoeconomics. 

Given, this backdrop, in the last few years, news and maybe the pitching of PTAs have undergone a shift, with countries focusing more on MoUs, FTAs which can be considered as a form of PTA. The news of PTAs have often flown under the radar, with countries increasing prefering FTAs or absolute protectionism. This era of the world with Trump tariffs at play, may see the revival of PTA between the countries. India and USA, have currently, set an ambitious plan of having a net trade of almost 500 billion $ by 2030, which has seen India make a surprise move of also ending duties on petroleum and ethane. 

However, India and USA must move quickly towards signing a PTA by exempting certain goods from trade tariffs. The possible goods can be the top 10 goods in terms of trade balance - mineral products, pharma products, pearls, petroleum, textile products, IT products, electronic machinery, petroleum which have a high degree of trade dependence between the 2 countries, as seen from the data of past 10 years. Signing, a PTA with the USA is also crucial for protecting, Indian interests as India's second largest trading partner is the USA. Furthermore, signing a PTA with the USA, would be in continuation with the various succesful policies between the countries like the India-USA nuclear trade deal and the increasing bilateral trade, which can significantly influence the perception of the countries between themselves. Also, India can focus massively on its labor intensive industries which can see a big success in the PTA as the highest trading goods right now, between the country come from labor intensive industries like mineral products. 

Furthermore, the PTA between India and USA, can also act as a good starting point in case the countries are interested in signing a FTA in the coming times. To add on, signing a PTA in these target areas of highest trade balance and some ambitious areas like sports goods etc. can help keep India-USA on path of having a success in the mutual bilateral trade of 500 billion$ on line.  In case, after 90 days, the posture of the White house remains the same, the PTA must be advanced during these 3 months itself. 

Additionally, the PTA can provide a blueprint to India, if it intends to sign FTAs with other countries like Brazil, ASEAN nations, Japan etc. which are crucial trading partners for India. Some examples of most succesful PTAs over the years have been of USMCA and AfCFTA, though, there are countries in the same PTAs who have argued that these PTAs were not necesarily good for the country. An important factor , that may act as a potential bottleneck for India signing a PTA with the USA, is also its experience with RCEP, from which India withdrew in 2018 on the charge of hurting its national interests.

However, India needs to significantly invest on factors that act as a bedrock for international trade, in order to make sure that India's trade competitiveness remains high in such a polarized geopolitical world. The first step can be to maybe possibly restart the concept of SEZs as promoted by the author in an old article, here also preferential treatment can be given be to states like MP, Odisha, Andhra Pradesh and to sectors like renewable energy which have a high growth potential in the country. The other long pending reform is to revive the Indian Trade Service(ITS) which has been understaffed and underutilised for a long time as per this article. In addition to these, India must also invest heavily in manufacturing sector and focus more on the China+1 policy, in addition to making sure that, enough investment in done in technologically heavy sectors like generative AI something, which was pointed out even by the current commerce and trade minister, Sh. Piyush Goyal recently which resulted in a big debate in the country. Additionally, India must invest in skilling its youth enough and improving the literacy rate in the country, as it is said that the reason why China's economic reforms of 1978 were succesful was due to having a 78% literacy rate. These factors can possibly act as a big bedrock if India, intends to make exports a major part of its economy.

All in all, the tariffs by the current USA dispensation can give a chance for India and USA to revive the concept of Preferential Trade Agreements and maybe, create a long lasting impact about world sees the power of good and cordial bilateral relations.