Introduction
In August, U.S. President Donald Trump imposed a 50% tariff on Indian imports, causing immediate short-term problems for India but potentially more long-term damage to the United States. By weakening a key strategic partner, fueling inflation, and accelerating the dollar’s decline, Trump risks undermining U.S. economic influence and the Indo-Pacific strategy embraced by both Republican and Democratic presidents as a counterbalance to China.
Indian Response and Short-term Economic Impact
It’s understandable that Indians reacted to the tariff with anger and concern, partly due to its severity and feeling singled out. Trump added a 25% penalty for purchasing discounted Russian oil, allegedly funding Russia’s war in Ukraine—a path avoided by China and the European Union despite their energy dependence on Russia.
India’s economy will suffer in the short term. The U.S. is India’s largest trade partner, accounting for 20% of exports and over 2% of its GDP. Even with exemptions for pharmaceuticals and electronics, about two-thirds of exported goods now face a 50% tariff. Textiles, shrimp, diamonds, and auto parts—labor-intensive sectors concentrated in small towns—are expected to be hit hard. Job losses will make it even more challenging for young Indians to find productive employment.
Long-term Economic Impact on the U.S.
Analysts estimate that Trump’s tariffs will reduce India’s GDP growth by 30 to 80 basis points. This comes at a time when India has been a global bright spot, growing at an average annual rate above 6% for decades despite weak trade. The U.S. has been crucial in this story, as a market for goods and services and a source of investment and technology. Simultaneously, U.S. companies have become reliant on India’s competitive supplier base.
Ultimately, the tariff increase on Indian products vital to U.S. supply chains—from leather to precision engineering—will raise costs and prices for American producers and consumers. Given that Trump’s return to the White House was partly fueled by voter anger over inflation during Joe Biden’s presidency, this policy is likely counterproductive. Tariff-induced price pressures could erode Trump’s political capital.
Geopolitical Risks
Trump’s anger over the U.S.-India trade deficit ignores broader benefits. Including investment income, defense sales, royalties, and educational services, the balance favors the U.S. Indian students—the largest group of foreign students in the U.S.—contribute billions annually to the American economy.
Similarly, U.S. tech companies rely on India’s steady influx of talent, while India has become a hub for multinational corporations’ global capability centers, driving corporate profits by offering low-cost support in IT, design, accounting, customer service, and other functions.
Most importantly, losing access to India’s growing middle class, a rapidly expanding consumer market projected to reach over 800 million by 2030, will be costly for the U.S. long-term.
Furthermore, distancing from India with high tariffs carries significant geopolitical risks. For two decades, U.S. administrations have promoted India as a strategic counterweight to China through initiatives like the Quad, increased intelligence sharing, and promoting India’s role in supply chain diversification.
These advances, achieved with great effort, are now at risk. At the recent Shanghai Cooperation Organization summit, Indian Prime Minister Narendra Modi met with Russian President Vladimir Putin (planned to visit New Delhi later this year) and Chinese President Xi Jinping, demonstrating India’s commitment to multi-alignment. India moving closer to China is the opposite of what the U.S. sought with its Indo-Pacific strategy. As former U.S. Ambassador to the UN Nikki Haley warned, “To counter China, the U.S. needs a friend in India.”
Consequences for the Global Financial System
Trump’s hardline policies, including tariffs, have intensified efforts to develop alternative payment systems and agreements that bypass the dollar and enable local currency trade. Even partial progress in this area could have profound implications.
The dollar’s status as the world’s reserve currency grants the U.S. the ability to borrow cheaply and sanction freely. By weaponizing tariffs and alienating emerging powers, the U.S. risks accelerating de-dollarization and weakening its control over global trade and capital flows.
India’s Response and the Path Forward
For India, Trump’s tariffs require diversifying export markets and strengthening domestic industry. Necessary reforms may be painful, but they will help India achieve greater self-sufficiency, deepen Asian trade ties, and expand European and African partnerships.
However, it will be much harder for the U.S. to regain India’s trust. Unlike smaller economies that can be pressured into concessions without geopolitical consequences, India has a population of 1.46 billion and aspires to be a major power in a multipolar world. It’s unlikely that punitive Trump tariffs will be forgotten quickly.
Nor will Americans forget them. While Trump’s tariffs on India may offer short-term political benefits, they undermine long-term U.S. interests by distancing from a rising trade partner, fostering dollar alternatives, altering supply chains, and threatening access to a critical market.
India will adapt and emerge stronger, but it’s likely that the U.S. will realize it has squandered a fundamental partnership for advancing its economic and geopolitical interests.
About the Author
Duvvuri Subbarao was Governor of the Reserve Bank of India (2008-13).
Copyright
Project Syndicate, 1995 – 2025
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