Trade Challenges and Opportunities for India: FTAs and Tariff Issues

In the current context of external sector stress, due to factors such as the blockade of the Strait of Hormuz and the imposition of Trump tariffs, India must leverage its free-trade agreements (FTAs) for market diversification. This includes the agreements signed with the United Kingdom and the European Union, as well as advancing trade negotiations with the United States.

Trade Deal with the United States

• Negotiation Challenges: The interim trade agreement's foundation, a 25% reciprocal tariff, was invalidated by the US Supreme Court, complicating negotiations.
• Legal Issues: Current tariffs under Section 122 of the US Trade Act are facing legal scrutiny due to the absence of a "balance-of-payments" crisis.
• Section 301 Investigations: The US has commenced investigations into "unfair trade practices," including India's "industrial excess capacity" and "forced labour." These could lead to severe remedial actions.
• Tariff Flexibility: Tariffs under Section 301 do not have limitations, and actions can extend indefinitely without congressional approval.
• Section 232 Tariffs: Increased tariffs on steel and aluminium now include derivatives, with new investigations on semiconductors and pharmaceuticals.

FTAs with the UK and EU

• Carbon Border Adjustment Mechanism (CBAM): The UK will implement CBAM on six commodities from January 1, 2027, while the EU's CBAM is already in effect.
• Impact on MSMEs: MSMEs need support to meet carbon emission verification demands, as large producers can afford global verifiers.
• EU's Extended CBAM List: The EU Parliament is considering expanding CBAM coverage to 180 items, affecting products across the value chain, including steel and aluminium derivatives.
• Textiles and Apparel Sector: The EU's Digital Product Passport (DPP) will be implemented in July 2027, requiring comprehensive data on product origins, carbon footprint, and more.

Strategic Trade Policy Priorities

• Maximize trade gains from FTAs with the UK and EU.
• Minimize trade losses due to unfair tariffs by the US.
• Enhance infrastructure and support for sectors affected by new regulations like CBAM and DPP.

Overall, India's trade policy should focus on enabling exporters to capitalize on FTA benefits while mitigating risks from uncertain US trade policies to optimize international trade gains.