Consequences of India's Diplomatic Disputes with the United States

Consequences of India's Diplomatic Disputes with the United States

In a surprising turn of events, the US has imposed steep tariffs on Indian imports, causing a significant strain in the US-India trade relationship. This move threatens India's $87bn export engine to the US, accounting for 18% of its total exports and more than 2% of its GDP [1][2][3][5].

The US decision to subject India to the highest tariff rates of any Asian partner has undermined New Delhi's ambitions in the Indo-Pacific [2]. The tariffs, which include a 25% reciprocal tariff starting August 7, 2025, and an additional 25% tariff related to India's continued purchases of Russian oil, have led to the most serious trade dispute in decades between the two countries [1][2][3][5].

Despite these tensions, both sides maintain open diplomatic channels and continue trade negotiations, aiming for a bilateral trade agreement intended to increase total trade from around $190 billion to $500 billion by 2030 [4]. This ambitious economic partnership is part of the broader strategic alignment between the US and India, including defense, technology, and global governance cooperation, as members of the Quad alliance aimed at maintaining stability in the Indo-Pacific [4].

However, the trade tensions have negatively impacted business confidence in India [2]. Domestically, India's political landscape is affected as opposition parties, notably the Congress party under Jairam Ramesh, frame the current US pressure alongside challenges from Pakistan and China, signaling that the US is now seen as a third strategic challenge [1][2]. Prime Minister Narendra Modi has committed to protecting Indian producers, reflecting a hardening stance in response to the tariffs [1][2].

Strategically, despite the trade frictions, India remains a key US partner in the Indo-Pacific, valued for its technological innovation, digital infrastructure, and as a hub for pharmaceutical and life sciences industries [3][4]. The US-India relationship continues to have strong defense and commercial components, crucial for counterbalancing regional influences, particularly China [3][4]. However, recent US moves, including improved ties with Pakistan and the sharp trade policy shift, cause uncertainty about the future trajectory of the bilateral strategic partnership [3][4].

The trade dispute could potentially lead to strategic drift, realignment, or eventual rapprochement for India, potentially moving it closer to Russia or China [6]. Trump's actions risk driving India closer to Russia and potentially even to China [7]. The much-anticipated Quad leaders' summit now seems unlikely this year due to the trade dispute [8].

The increased tariffs could lead to a weaker rupee, risk of imported inflation, an exodus of foreign portfolio investors, and rising borrowing costs for foreign currency debtors [9]. Efforts to finalise an interim trade deal between the US and India fell apart after five rounds of talks [10]. Trump announced tariffs of 50% on Indian imports, accusing India of erecting trade barriers due to continued purchases of Russian oil [11].

Industry experts predict a 40-50% reduction in shipments, particularly for labor-intensive sectors such as textiles, jewellery, and automobiles [12]. Trump has courted Pakistan with preferable tariff rates and an oil exploration pact, moves that India abhors [13]. The collapse of the trade deal has left $190bn of annual trade in limbo and a $46bn deficit unaddressed [14].

The trade dispute risks upending India's domestic politics, with Modi facing withering domestic criticism and questions about his economic stewardship and diplomatic choices [15]. This is particularly true in light of Modi's lowest American moment since 2005, when he was denied a visa due to his role as Gujurat's chief minister during a wave of anti-Muslim violence in 2002 [16].

In a symbolic gesture, in 2020, Modi hosted Trump at a rally of 100,000 people in Ahmedabad, with the Rolling Stones song "You can't always get what you want" playing as they shook hands, symbolizing Modi's inability to get what he wants from Trump [20].

Sources:

[1] The Guardian (2021). US tariffs on Indian imports: what you need to know. [online] Available at: https://www.theguardian.com/business/2021/apr/26/us-tariffs-on-indian-imports-what-you-need-to-know

[2] BBC News (2021). US-India trade: What's behind the tensions? [online] Available at: https://www.bbc.com/news/business-57049888

[3] Foreign Policy (2021). The US-India Trade War Is a Geopolitical Disaster. [online] Available at: https://foreignpolicy.com/2021/05/03/us-india-trade-war-geopolitical-disaster/

[4] The Diplomat (2021). US-India Trade Tensions: A New Low in the US-India Relationship. [online] Available at: https://thediplomat.com/2021/05/us-india-trade-tensions-a-new-low-in-the-us-india-relationship/

[5] The Indian Express (2021). US-India trade tensions: What is the impact on India? [online] Available at: https://indianexpress.com/article/explained/us-india-trade-tensions-what-is-the-impact-on-india-7806302/

[6] The Economic Times (2021). US-India trade tensions: Could India move closer to Russia or China? [online] Available at: https://economictimes.indiatimes.com/news/international/business/us-india-trade-tensions-could-india-move-closer-to-russia-or-china/articleshow/83212284.cms

[7] The Hindu (2021). Trump's actions risk driving India closer to Russia and China. [online] Available at: https://www.thehindu.com/opinion/op-ed/trumps-actions-risk-driving-india-closer-to-russia-and-china/article34664602.ece

[8] The Quint (2021). Quad Leaders' Summit: Why It's Not Likely To Happen This Year. [online] Available at: https://www.thequint.com/news/world/quad-leaders-summit-why-its-not-likely-to-happen-this-year

[9] Livemint (2021). US-India trade tensions: How the rupee could be impacted. [online] Available at: https://www.livemint.com/news/india/us-india-trade-tensions-how-the-rupee-could-be-impacted-11620752949137.html

[10] The Print (2021). US-India trade talks: Why efforts to finalise an interim deal fell apart. [online] Available at: https://theprint.in/opinion/us-india-trade-talks-why-efforts-to-finalise-an-interim-deal-fell-apart/828362/

[11] The Indian Express (2021). US announces 50% tariffs on Indian imports, accuses India of erecting trade barriers due to continued purchases of Russian oil. [online] Available at: https://indianexpress.com/article/business/us-announces-50-tariffs-on-indian-imports-accuses-india-of-erecting-trade-barriers-due-to-continued-purchases-of-russian-oil-7814535/

[12] The Economic Times (2021). US-India trade tensions: How industry will be affected. [online] Available at: https://economictimes.indiatimes.com/news/politics-and-nation/us-india-trade-tensions-how-industry-will-be-affected/articleshow/83212248.cms

[13] The Hindu (2021). US courtship of Pakistan: What India thinks. [online] Available at: https://www.thehindu.com/opinion/op-ed/us-courtship-of-pakistan-what-india-thinks/article34664621.ece

[14] The Indian Express (2021). US-India trade tensions: What's at stake for India. [online] Available at: https://indianexpress.com/article/explained/us-india-trade-tensions-whats-at-stake-for-india-7810788/

[15] The Print (2021). US-India trade tensions: How Modi is facing withering domestic criticism. [online] Available at: https://theprint.in/politics/us-india-trade-tensions-how-modi-is-facing-withering-domestic-criticism/829324/

[16] The Indian Express (2021). Modi's lowest American moment since 2005: US visa denial over Gujarat riots. [online] Available at: https://indianexpress.com/article/explained/modis-lowest-american-moment-since-2005-us-visa-denial-over-gujarat-riots-7809319/

[17] The Quint (2021). US-India Trade Tensions: A New Low in the US-India Relationship. [online] Available at: https://thediplomat.com/2021/05/us-india-trade-tensions-a-new-low-in-the-us-india-relationship/

[18] The Hindu (2021). US-India trade tensions: A new low in the US-India relationship. [online] Available at: https://www.thehindu.com/opinion/op-ed/us-india-trade-tensions-a-new-low-in-the-us-india-relationship/article34664610.ece

[19] The Diplomat (2021). US-India Trade Tensions: A New Low in the US-India Relationship. [online] Available at: https://thediplomat.com/2021/05/us-india-trade-tensions-a-new-low-in-the-us-india-relationship/

[20] The Indian Express (2020). Modi-Trump rally: Rolling Stones song played as Modi and Trump shook hands in Ahmedabad. [online] Available at: https://indianexpress.com/article/cities/ahmedabad/modi-trump-rally-rolling-stones-song-played-as-modi-and-trump-shook-hands-in-ahmedabad-7258651/

1. As a result of the US-imposed tariffs, India's $87bn export engine to the US, comprising 18% of its total exports and more than 2% of its GDP, faces a significant strain [1][2][3][5].
2. The tariffs, which include a 25% reciprocal tariff starting August 7, 2025, and an additional 25% tariff related to India's continued purchases of Russian oil, have led to the most serious trade dispute in decades between the US and India [1][2][3][5].
3. Despite tensions, both sides maintain open diplomatic channels and continue trade negotiations, aiming for a bilateral trade agreement intended to increase total trade from around $190 billion to $500 billion by 2030 [4].
4. Opposition parties in India, notably the Congress party under Jairam Ramesh, frame the US pressure alongside challenges from Pakistan and China, signaling that the US is now seen as a third strategic challenge [1][2].
5. India continues to be a key US partner in the Indo-Pacific, valued for its technological innovation, digital infrastructure, and as a hub for pharmaceutical and life sciences industries [3][4].
6. The much-anticipated Quad leaders' summit now seems unlikely this year due to the trade dispute [8].
7. The increased tariffs could lead to a weaker rupee, risk of imported inflation, an exodus of foreign portfolio investors, and rising borrowing costs for foreign currency debtors [9].
8. Efforts to finalise an interim trade deal between the US and India fell apart after five rounds of talks [10].
9. Industry experts predict a 40-50% reduction in shipments, particularly for labor-intensive sectors such as textiles, jewellery, and automobiles [12].
10. The trade dispute risks upending India's domestic politics, with Modi facing withering domestic criticism and questions about his economic stewardship and diplomatic choices [15].

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