Carrot-and-stick game: What fresh US tariffs mean for India in trade deal talks

This would then serve Washington the same purpose as reciprocal tariffs did, which is to coerce countries into accepting uncomfortable US demands that have gone well beyond trade and have sought to forcefully align with American trade goals. For a developing country like India, these demands have resulted in a breakdown of negotiations several times.

The pressure of upcoming steep tariffs resembles past negotiation tactics that aimed at extracting market access commitments across sectors — including agriculture — right before negotiations were set to take place. Negotiations had broken down over access to agricultural products, where India offers support to its farmers.

While signing a deal could mean giving up more control of its sovereign trade policies to the US, an absence of the deal could accelerate the weakening of the domestic currency and flight of foreign capital that had begun since late last year. The war in the Gulf region and higher oil prices have further weakened India’s macroeconomic conditions. More tariffs could add to India’s fiscal worries.

Coercion after trade deal

Until just days before the trade talks with the US resumed, the considered view in New Delhi’s policy circles was that the status quo was the best outcome for India — with penal tariffs gone and the average tariffs of 18% broadly in line with peers and better off vis-a-vis China. “This is the best case scenario: tariffs being rationalised and without a trade deal in place. A trade deal brings with it multiple extraneous pressures. For us, the status quo is a good outcome,” a top official told The Indian Express.

That situation has changed, with a US trade team in Delhi and some of the extraneous pressures suddenly kicking in. The proposed tariffs, set to come in by next month, would exert pressure on the Indian negotiators. India is already experiencing an exodus of foreign investments and a fast-depreciating currency. A hiccup in trade talks could make matters worse, but a successful deal will give more control to the US on sovereign matters such as the purchase of oil and its digital trade policy.

Senior government officials have said that an agreement with the US might leave India in a difficult position, particularly in its relationship, as the US has been nudging countries to wean away from their dependence on China. Indian imports across sectors have crossed $112 billion. Restrictive measures on China at the US’s behest could also create security-related challenges for India.

Poison pill in trade deal

The Switzerland-based think-tank Global Trade Alert (GTA), in a report last year, pointed out that the US has incorporated restrictive third-country provisions — informally referred to as “poison pills” — in three trade instruments: the 2018 US-Mexico-Canada Agreement (USMCA), the 2025 US-Malaysia Agreement on Reciprocal Trade (ART), and the 2025 US-Cambodia ART.

The GTA report said that while there were provisions in the USMCA that could trigger a collapse of Mexico and Canada’s agreement with the US if they sign a deal with “non-market economies”, in the case of Malaysia and Cambodia, the trigger is even broader — applying to any deal the US believes “jeopardises essential U.S. interests” or poses a “material threat to economic or national security”.

For India, however, any such provision could become challenging for its industrial growth and infrastructure development. For instance, due to tensions with China, India was unable to procure tunnel boring machines from China owing to a lack of customs clearances.

The machines finally managed to reach India last month after tensions with China eased.

Agriculture and oil

Entering into a deal could also mean allowing the US to control trade-related decisions, which is especially difficult for a developing country like India. For instance, when the US revoked oil-related additional 25% tariffs on India, it said the tariffs could go back up if India resumes purchase of Russian oil.

Rolling back the additional tariffs, US President Donald Trump, in the Executive Order (EO), said: “India has committed to stop directly or indirectly importing Russian Federation oil”, and has indicated that India will purchase United States energy products from the US. But the EO said that US officials “shall monitor whether India resumes directly or indirectly importing Russian Federation oil”, which could trigger “reimposition” of the punitive 25% tariffs on India.

Demands relating to agricultural products have also been one of the biggest pressure points. The India-US joint statement said that India will eliminate or reduce tariffs on all US industrial goods and a wide range of US food and agricultural products, including dried distillers’ grains, red sorghum for animal feed, tree nuts, fresh and processed fruit, soybean oil, wine and spirits, and additional products.

Indicating signs of disagreement, the US later revised a fact sheet softening its claims about the gains it had secured from New Delhi and entirely dropping a section on digital services taxes. The fact sheet’s earlier version said India had “committed to” buying more American products and purchasing “over $500 billion of U.S. energy, information and communication technology, coal, and other products”. The updated fact sheet and the joint statement tempered the wording from “committed” to “intends”.