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Deal with the US should not change India’s long-term trade strategy — diversification

It does not offer any protection against the unpredictable nature of the Trump administration. For instance, the US announced a trade deal with the EU in July 2025. However, the US recently threatened eight European allies with additional tariffs of 10 per cent from February and 25 per cent from June over Greenland

the continued uncertainty in US trade policy means India should treat this moment as a narrow window to deepen competitiveness and diversify export destinations. (AP Photo)

5 min readFeb 4, 2026 03:23 PM IST First published on: Feb 4, 2026 at 03:23 PM IST

Written by Anisree Suresh

It’s a busy week in New Delhi with the conclusion of an FTA with the EU, a budget presentation and now, after almost a year of back and forth, the announcement of the India-US trade deal. While many of the details of the deal remain unknown, Trump has announced that tariffs against India would drop from 50 per cent to 18 per cent. Unlike the usual Free Trade Agreements (FTAs), this deal offers some uncertainty alongside its benefits. The deal has provided exporters a bit of relief from the risk of exiting from the US market under a 50 per cent tariff regime. However, the continued uncertainty in US trade policy means India should treat this moment as a narrow window to deepen competitiveness and diversify export destinations.

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Tariffs at 18 per cent mean that India is slightly better placed than its competitors, such as Vietnam, Cambodia, Malaysia, Pakistan and the Philippines, with most of these countries facing tariffs of 19 to 20 per cent. However, for the past few months, since the US imposed a 50 per cent punitive tariff against India, India had a 19.5 per cent relative tariff disadvantage compared to its peers, indicating that it was relatively more heavily taxed. Sixty-six per cent of India’s total exports to the US were subject to the 50 per cent tariff rate, and 4 per cent of exports (mainly auto components) were subject to a 25 per cent tariff rate. The sectors most impacted by the 50 per cent tariff rate were textiles, gems and jewellery, and marine products, each of which relies on the US for over 30 per cent of its exports.

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On the domestic front, since New Delhi has started its rounds of negotiations with the US, India has actively taken steps to address many of its tariff and non-tariff barriers. For example, in 2025, India revoked 22 Quality Control Orders (QCOs) on chemicals and polymers, key inputs for multiple industries, including textiles. This was a reversal of the trend from 2016 to 2025 where there was an eightfold increase in the expansion of QCOs from 2016 to 2025 covering nearly 700 products. These QCOs, intended to protect consumers and domestic manufacturers, had often led to higher costs for consumers and fewer export and growth opportunities, creating the exact opposite effect of what they were supposed to do.

Adding to that, the Shanti Bill, which allows private players, including US entities, to operate Small Modular Reactors (SMRs), may have been a convincing factor for the US to drop its tariffs against India. In India’s 2026 budget presentation, the Finance Minister announced some tariff concessions on the intermediary inputs for the exports of sectors heavily affected by the US tariffs, showcasing that India is making an attempt to improve its export competitiveness.

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The challenging part of the deal is that, like most of the US’s trade policies, nobody knows anything. Questions remain, especially regarding India’s import of Russian oil and our agriculture and dairy sectors. While India could go back to importing Venezuelan crude oil now that Trump has revoked the 25 per cent tariff threat on nations conducting oil trade with Caracas, it is unlikely to shift completely away from Russian oil sources in the immediate future. Within agriculture, there is a possibility that India might have agreed to import some quantities of soybean, given that US agriculture is under acute strain due to reduced demand from China, and farm bankruptcies are 36 per cent higher in 2025.

The deal does not offer any protection against the unpredictable nature of the Trump administration. For instance, the US announced a trade deal with the EU in July 2025. However, the US recently threatened eight European allies with additional tariffs of 10 per cent from February and 25 per cent from June over Greenland. Hence, India cannot treat this deal the same as other FTAs, as it is limited in scope and subject to reversal. India should see it as a small window of opportunity to enhance the competitiveness of Indian exports and diversify its export markets. Delhi’s long-term strategy must be to diversify away from the US market toward a much more predictable market environment.

The writer is a geoeconomics analyst at the Takshashila Institution. Views are personal