India-US trade: A test of sovereignty, diplomacy, economic direction

Heramba Nath

(herambanath2222@gmail.com

India stands at a critical juncture of its geopolitical and economic destiny, as the year 2025 unfolds under the shadow of escalating trade tensions with the United States-its strategic partner and largest trading partner in goods and services combined. The sudden announcement by the United States of a 25% tariff on a range of Indian exports, effective from August 1, has shaken both diplomatic circuits and domestic economic corridors. This move, reportedly triggered by India's sustained defence and energy engagement with Russia, has introduced a new chapter of confrontation in a relationship once touted as defining for the 21st century. The imposition of these tariffs is not merely a question of economic arithmetic-it strikes at the deeper question of how India balances strategic autonomy, sovereign policy priorities, long-standing partnerships, and global economic integration. As these tensions simmer, they also expose fundamental vulnerabilities and opportunities in India's trade structure, diplomatic posture, and the maturity of its institutional response to global pressure.

The first wave of impact from the 25% tariff is being felt across several key sectors of the Indian economy. Pharmaceuticals, auto components, engineering goods, textiles, and IT-enabled services are amongst the most vulnerable sectors. India exported nearly $80 billion worth of goods to the United States in 2024, with these sectors contributing a significant share. With increased duties, Indian products risk losing their cost-competitiveness in the U.S. market, which may lead to a decline in orders, layoffs in export-orientated units, and disruption in medium and small enterprise supply chains. The situation is particularly precarious for labour-intensive sectors such as textiles and leather, where even a marginal decline in export orders has ripple effects on rural livelihoods, especially in states like Tamil Nadu, Uttar Pradesh, and Gujarat. Moreover, India's tech services sector, though less immediately impacted by goods tariffs, fears secondary effects if retaliatory digital trade measures are introduced by the United States in coming months.

The strategic roots of this trade escalation lie in the triangular entanglement between India, the United States, and Russia. India's defence procurement from Russia remains significant, accounting for nearly 45% of its total military imports in 2023-2024. Moreover, the energy partnership between India and Russia has deepened considerably after the Ukraine crisis, with India emerging as one of the largest purchasers of Russian crude oil at discounted rates. While India has justified these engagements on the grounds of energy security and long-standing defence ties, the United States sees them as undermining the Western sanctions regime and strategic alignment within the Indo-Pacific. The result is a quiet but consequential attempt to discipline India through economic instruments. The 25% tariff is, in effect, a geopolitical signal disguised as trade policy. It seeks to challenge India's attempt to walk the tightrope between strategic autonomy and multi-alignment.

Yet, India's approach to this crisis will define its global posture for years to come. The government has thus far maintained a measured tone. Official statements have acknowledged the need for diplomatic engagement, reiterated India's commitment to open trade, and underlined the strategic importance of the Indo-U.S. partnership.

But behind this cautious messaging, a high-stakes negotiation is taking place, not just to seek tariff waivers or phased relaxation, but to reassert India's right to shape its foreign policy without being economically penalized. This moment demands both firmness and foresight. India cannot afford to appear as a pushover, nor can it afford a full-blown economic fallout with a partner as influential as the United States. The challenge lies in conveying that India's engagement with Russia is driven by sovereign necessity, not ideological alignment, while simultaneously reinforcing its commitment to democratic values and a rules-based global order.

There is also a deeper structural issue that this crisis has highlighted-the over-dependence of Indian exports on a few markets and limited product diversification. Despite years of effort, Indian exports remain concentrated in low value-added segments and in a narrow range of geographies. The United States and the European Union together account for nearly 40% of India's merchandise exports. This lack of diversification increases vulnerability to geopolitical risks and trade policy shifts. Moreover, Indian exporters often suffer from low productivity, regulatory burdens, weak logistics infrastructure, and lack of scale, which hampers their ability to absorb shocks such as sudden tariff hikes. The current situation must serve as a wake-up call for a renewed export strategy-one that not only looks at expanding into new markets like Latin America, Africa, and Southeast Asia, but also invests in high value-added sectors such as electronics, semiconductors, medical devices, and green technologies. India's ambition to become a global manufacturing hub under the 'Make in India' and 'Atmanirbhar Bharat' banners can only succeed if supported by agile trade diplomacy and structural reforms in its export ecosystem.

At the same time, India must continue to engage constructively with the United States on resolving the current impasse. The possibility of a broader trade deal remains alive, and both sides have expressed tentative willingness to explore calibrated concessions. Reports suggest that talks are underway to craft a phased roadmap, wherein India could gradually increase transparency in its energy imports, offer greater market access in specific sectors such as dairy and agriculture, and cooperate on supply chain resilience and digital trade. In return, the United States could consider reducing or suspending punitive tariffs, enhancing technology transfer, supporting India's clean energy transition, and opening its services sector to Indian professionals. For this to succeed, both nations must look beyond transactional calculations and embrace a long-term, values-based partnership. India must articulate its case not just in terms of national interest, but also as a contributor to global stability and democratic pluralism. The United States, on its part, must acknowledge that coercive trade actions can erode trust and push partners towards alternative alignments.

The broader geopolitical context must also be taken into account. The Indo-Pacific region is undergoing a strategic recalibration, with China's assertiveness, the Ukraine war, and emerging multilateral groupings like BRICS+ and the Global South discourse reshaping power equations. India aspires to play a central role in this reordering-not as a camp follower, but as a leader with its own voice and vision. This aspiration requires strategic autonomy, economic strength, and diplomatic agility. The trade tensions with the United States offer an opportunity to demonstrate these attributes. Instead of reacting defensively, India should project confidence, propose alternative frameworks for economic cooperation, and invite like-minded partners to create a resilient, inclusive, and equitable trade order. At the same time, it must also introspect on domestic vulnerabilities-whether in logistics, compliance standards, or innovation capacity-and address them through targeted policy interventions. Only then can India weather external shocks and emerge as a true pole in the multipolar world.

A critical dimension of this issue is the domestic political and social response within India. Trade policy has traditionally been the domain of technocrats and ministries, but in a hyper-connected world, such economic decisions have real impacts on workers, farmers, small businesses, and urban consumers. A rise in tariffs will likely translate into higher input costs, reduced margins, and inflationary pressures in certain segments. It is important that the government communicates effectively with the public, industry bodies, and state governments, building a consensus-driven approach to handling the crisis. Moreover, parliamentary scrutiny and public accountability should not be seen as obstacles but as strengths of a robust democracy. Trade decisions must be informed by data, stakeholder consultations, and impact assessments. India's civil society, academia, and media must play a role in fostering an informed debate on how to preserve sovereignty while pursuing global integration. The time has come to move beyond the simplistic binaries of protectionism versus globalisation and instead embrace a nuanced path rooted in national interest, social justice, and global responsibility.

India must also use this occasion to recalibrate its global alliances. While the United States remains indispensable in terms of defence cooperation, technology access, and diaspora linkages, India must accelerate its engagements with other regional and global powers. Europe offers a natural partner with whom India can deepen trade, green technology, and security cooperation. The India-EU Free Trade Agreement must be expedited with political will and mutual compromise. Similarly, India's Act East policy needs renewed energy, with greater integration into ASEAN supply chains and regulatory harmonization. Africa presents untapped opportunities in pharmaceuticals, fintech, and agro-processing, while Latin America offers both energy and agricultural complementarities. By adopting a more diversified foreign economic policy, India can enhance its bargaining power and reduce exposure to any single external shock. In the long term, economic diplomacy must become as central to India's foreign policy toolkit as strategic posturing or military partnerships. Trade ambassadors, investment envoys, and economic statecraft must become more professionalized, coordinated, and accountable.

Another dimension often overlooked in such trade confrontations is the role of multilateral institutions. The World Trade Organization, once hailed as the guardian of global trade rules, has seen its credibility eroded by unilateral actions, stalled negotiations, and weakened dispute settlement mechanisms. India must use its growing influence in global platforms such as the G20, BRICS, and the United Nations to push for a reinvigoration of rules-based multilateralism. It must advocate for fair, inclusive, and developmental trade norms that accommodate the aspirations of emerging economies. At the same time, India should also explore regional trade blocs such as RCEP (which it opted out of earlier) and consider re-evaluating its position based on evolving geopolitical interests. Plurilateral arrangements focused on climate, digital trade, or supply chains can also provide flexible platforms for cooperation. In all these forums, India's message must be clear-that economic coercion undermines trust and that strategic partnerships must be based on mutual respect, not pressure tactics.

The moment we are witnessing is not merely a bilateral trade scuffle. It is a litmus test for India's emergence as a mature power capable of negotiating complex global realities without compromising on core national values. The challenge is immense, but so is the opportunity. If India can navigate this crisis with wisdom, dignity, and strategic depth, it will not only secure its economic interests but also earn greater respect as a responsible, confident, and independent voice in global affairs. It must remember that sovereignty is not asserted through defiance alone, but through strategic patience, institutional strength, and the ability to turn adversity into advantage. The coming months will reveal whether India's response to this crisis will be reactionary or visionary-whether it will settle for short-term relief or seize the moment to craft a long-term strategy of economic resilience, diplomatic maturity, and national self-assurance.

Achievements are not earned through proficiency

alone. They are in fact rewards of our efficiency

— Swami Chinmayananda