Tariffs imposed by the US have become the topic du jour in global economic discussions. As the world’s largest economy tightens trade restrictions, concerns are mounting over the wider ramifications of trade uncertainties – including their effects on investor sentiment, input costs, supply chains and overall trade growth. India, deeply integrated into the global economy, is no exception. Policy shifts in the West, especially in the US, directly influence India’s export sector, investment flows and overall economic vision. Atmanirbhar Bharat is a splendid goal, but it has to take into account diplomatic aspects, cross-border policies of other nations that we deal with and the many pragmatic considerations that basically trump over ethical perspectives when it comes to maintaining the global order. Ethical perspectives could include cultural differences (we hire and tire as opposed to hire and fire), which often dictate the manner in which businesses are conducted across nations, transfer pricing, piracy issues including child labour and cultural imperialism. International trade is governed by principles of International Law but diplomacy and posturing seem to take precedence, often obfuscating any legal obligation that a nation state could have and should follow.
Navigating Trump 2.0: Looking at past precedence, Trump 1.0 (2017-20) created both challenges and opportunities for India. As US-China trade tensions escalated, India emerged as an alternative manufacturing and trade partner. The composition of India’s merchandise exports has steadily evolved, with a decline in traditional exports and a surge in high-value-added manufacturing. From 17 per cent in 2014 to 30 per cent in 2024, the share of high-value exports – especially in pharmaceuticals, electronics and IT services – has risen significantly. This shift highlights India’s growing competitiveness in global supply chains and its ability to seize new opportunities amid trade disruptions.
Now, three months into Trump 2.0, uncertainty looms large over the trade policies that the US and its key partners are pursuing. With a reciprocal tariff imposed by the US on all major economies, the ripple effects of a global trade slowdown and high inflationary pressures will be felt world over. Besides, India also faces an additional tariff of the magnitude of 27 per cent on all its exports to the US.
However, there is a silver lining – India’s proactive approach to trade negotiations and government-led tax incentives are expected to cushion the impact of trade uncertainty and position the country strategically in the evolving trade landscape.
Prime Minister Modi met President Trump in February and agreed on a bilateral trade agreement, aiming to finalise the first phase by Fall 2025. Recently, India and the US concluded the initial round of discussions. While India is likely to continue these conversations, despite the recent tariff pressures on its exports, India faces a dilemma of whether or not to adopt a more open, laissez faire economy to position itself as a resilient and attractive trade partner.
The laissez-faire debate: The push for lower tariffs and reduced government intervention from the US raises a fundamental question – should India fully embrace Adam Smith’s philosophy of laissez faire? Critics of unfettered free trade argue that market failures, income inequality and exploitation of weaker section of the population can be exacerbated in a free economic system. At the same time, protectionist policies through tariffs have not necessarily yielded India the desired economic advantages either.
Over the past decade, the share of manufacturing in India’s gross value added (GVA) has declined from 16.3 per cent to 13.8 per cent, prompting debates on whether prolonged protectionism has hindered India’s ability to achieve economies of scale and scope. While India’s ‘Make in India’ and Atmanirbhar Bharat initiatives have encouraged domestic manufacturing, sheltering industries indefinitely may not be the best path forward. The key challenge, therefore, is striking the right balance between protecting vulnerable industries and fostering global competitiveness.
Pursuing Adam Smith’s philosophy has its own challenge as countries vary significantly in their levels of competitive advantage. A useful analogy for this dilemma is that of a child learning to walk. A child surrounded by peers of the same age is motivated to rise quickly after a fall, competing in an environment where growth and development are evenly paced. However, if the same child is placed among older, stronger children, who dominate the playground and limit opportunities, the learning process could be slower, requiring more support.
While free trade and market competition are desirable goals, emerging nations like India may require strategic protections and policy support until they can compete on an equal footing with developed economies
Similarly, when industrialisation took roots in the 19th and 20th centuries, major economies such as the US and Western Europe were developing together, fostering fair competition. In contrast, emerging economies today face an uphill battle, competing with well-established industrial giants that have long benefited from technological advancements, capital accumulation and entrenched trade networks.
Thus, while free trade and market competition are desirable goals, emerging nations like India may require strategic protections and policy support until they can compete on an equal footing with developed economies. But one has to bear in mind that protectionism up to a certain extent or time is fine but, in the long run, harms the economy. Protectionism increases tension between different groups. It pits the consumers against producers, as producers want government protection from foreign competition and consumers want higher quality at a low price. This in itself brings domestic industries into a friction between market protection and consumer affordability/satisfaction.
A tough balancing act: India finds itself at a moral and economic crossroads – balancing the ideals of free trade with the ethical responsibility of safeguarding its most vulnerable sectors. Historically, the country has shielded its industrial and MSME sectors to nurture domestic growth. However, as global trade dynamics shift, the pressing question remains: when and how should India lower its trade barriers?
Another question is whether the developed world for all its talk about comity of nations ensures the well-being of the developing world or merely pays lip service to it and ultimately protects only its own self-interest at the cost of having a one-sided trade? Many foreign policy experts would perhaps feel that trade between the West and the East has hardly ever been fair and principles hardly ever rule the roost because they have been bent at will. The General Agreement on Tariff and Trade has seen many a dispute go to the World Trade Organization with several nuanced stances on environment – read Ozone layer depletion, excessive carbon footprints, water shortage etc – rarely has ever a developing state come out of the negotiation (be it even COP initiatives) happy!
Liberalisation promises greater efficiency, increased investments, and enhanced innovation, but at what cost? Not all industries stand on an equal footing. India’s agriculture sector, for instance, remains particularly exposed to the risks of unregulated free trade. Farmers, already grappling with unpredictable weather and price volatility, could find themselves competing against heavily subsidised producers from wealthier nations – an uneven playing field that contradicts the very principles of fair competition.
Herein lies the ethical dilemma: Should India prioritise economic efficiency over the livelihoods of millions? Should the pressure to liberalise or minimise government regulations alone dictate outcomes, or does the state have a duty to intervene where global policies create inherent disadvantages? While reducing trade barriers may drive efficiency, bring in competition and thereby, long-term growth, the transition must be managed with foresight and responsibility. Policymakers must determine not just which sectors to liberalise, but how to do so in a way that ensures economic inclusivity, equity, and resilience.
A pragmatic approach: While US tariffs and global trade uncertainties pose challenges for India, they also create opportunities to strengthen economic resilience and global trade standing. Balancing trade liberalisation with strategic protections, investing in domestic capabilities, and fostering diplomatic ties with key trade partners will be crucial in navigating this complex landscape.
India must focus on sector-specific strategies, ensuring that industries with strong export potential – such as technology, pharmaceuticals and renewable energy – are integrated into global value chains, while vulnerable sectors like agriculture receive the necessary safeguards.
Ultimately, India’s trade strategy in the face of US tariffs must be a blend of pragmatism and long-term vision – leveraging opportunities, where they exist, while shielding critical industries until they are globally competitive and at the same time hinge on principles of fairness to as many stakeholders as possible. The choices India, as a formidable global player, makes today will shape its economic trajectory for decades to come and, in some measure, give a sense of fair play between nations.