Should India adjust its trade balance to partially mitigate US tariff risks?

Economic Times

12 hours ago

Agencies If India pursues trade diversification, it can strike a better balance in its overall trade.
The prospect of a uniform 10% base tariff regime by the United States, along with an additional tariff to be calculated on the basis of a formula based on a partner country's trade balance relative to its total exports to the U.S. marks a fundamental shift in global trade calculus. India was trying to cut a deal with the US which would have prevented these additional tariffs from kicking in from the 9th of July but that seems unlikely now. Piyush Goyal's terse comment, accompanied by a smiling photograph, that India does notnegotiate under threat of deadlines, says it all.Is there anything that India could do to minimize tariff damage from the US? One possible line of thought that could be explored is to proactively reduce its trade surplus with the US, even if that involves marginally increasing import costs. The core hypothesis is simple yet provocative and stems from the US administration's proposed tariff-setting formula, namely thatTariff Rate (Country X) = Base Tariff (10%) + Adjustment Factor based on (Trade Surplus of X with U.S. ÷ Total U.S. Imports from X)This formula prescribes a higher adjustment factor in respect to the higher trade surplus. One way to reduce it would be to decrease the trade surplus by importing more from the US, even if the goods being imported are slightly more expensive than from those currently being imported. India's strategic advantage lies in being a net importing country globally—with a trade deficit of around $240 billion in FY 2023–24—giving it room to maneuver.According to the official reports, the merchandise trade between the two nations was an estimated $129.2 billion in 2024. Indian exports of goods summed up to $87.4 billion in 2024. This amount was an increase from previous year's exports by 4.5 percent. The goods imported from the US, totalled $41.8 billion in 2024. This implies that India witnessed a surplus of $45.7 billion in merchandise trade with the US. From the data, it can be observed that India had a trade surplus ratio of 0.5 (i.e. 50%) for 2024 which is a good sign for economic growth, job creation and the strength of the currency.
So, what could India's strategy be? There are two possible strategies that could be considered. The first option to explore could be import diversification to the US. India could attempt to raise its imports from the US—particularly in sectors where it already has structural dependencies or scope for efficiency improvements.India's imports from the US in 2023, present appealing opportunities and scope for expansion across several sectors. For instance, imports of oil and gas, currently valued at $11.6 billion, could be increased in line with India's strategy of energy diversification. In the aviation sector, imports of aircraft and machinery, worth $5.2 billion are likely to grow further as the country's aviation industry continues to expand. Electronics and semiconductors records imports under $2 billion. This sector also offers scope for growth with the implementation of Production-Linked Incentive (PLI) schemes focusing on boosting domestic electronics manufacturing. Similarly, medical equipment imports, currently at $1.3 billion, can be expanded to support the ongoing development of India's healthcare infrastructure. Given these trends, one viable strategy for India would be to diversify and increase its imports from the US, particularly in sectors where there are existing dependencies or clear opportunities for efficiency improvements.A targeted increase of $10–15 billion in imports from the U.S. in these areas would reduce India's trade surplus with the U.S. to ~$30 billion, bringing the trade surplus ratio down from 50% to ~33%, reducing effective additional tariff exposure to around 13.3%. A second strategic option for the Government would be trade diversification. India can see if it's possible to simultaneously diversify some of its exports from US to third countries (e.g., EU, ASEAN, Africa) and shift some import sourcing away from countries like China to the U.S.If India pursues trade diversification, it can strike a better balance in its overall trade. It can also address critical geopolitical dependencies in global trade. By spreading its exports across a wider range of markets—not just the US, lowers its risk of reliance on a single market. At the same time, shifting some import sourcing away from countries such as China to the US would provide domestic input suppliers a smoother path under US compliance regimes, making it easier to navigate regulatory requirements.Advantages of these strategies would be that by reducing the trade surplus we would be able to lowers the additional tariff exposure, thereby helping Indian exporters retain their competitiveness in the US market. Increased US imports can strengthen India's access to clean energy tech, critical semiconductors, and advanced machinery. And finally, such a proactive adjustment could be sold as India's attempt to reduce the trade balance, thereby deepening the Indo-US strategic partnership. Further, potentially creating room for bilateral carve-outs or exemptions.However, they would not come without certain disadvantages and consequent criticism. Shifting to US suppliers may raise costs—US goods are often priced higher than Asian alternatives. For instance, US LNG landed price is 15–25% higher than Qatari or Russian alternatives. Also, some US exports may not be easily substitutable for inputs sourced elsewhere due to compatibility or volume. There is also the danger of short-term deterioration of the overall trade deficit, since an increase in high-value imports from the US could exacerbate India's overall current account deficit, even if temporarily. And finally, if the US again makes changes to its tariff policy, India's restructuring may become redundant.
Nonetheless, India's structural trade flexibility offers a strategic tool to minimize damage from an evolving US tariff regime. By adjusting its trade balance with the US—especially via higher-value, strategically aligned imports—India can moderate tariff exposure from an estimated 15% to 12–13%, generating long-term diplomatic and economic dividends. This is a calculated bet. While there are short-term costs, including possible higher import bills and shifting supply chains, the broader payoff—in reduced tariff penalties, deepened bilateral trust, and a more balanced trade portfolio—may well justify the strategy. India's policymakers must remain nimble, using data-driven calibration and sectoral targeting to make this trade-off work.
The author is President, Chintan Research Foundation