India-US Trade: Tariff Volatility Triggers Export Risk

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AuthorIshaan Verma|Published at:
India-US Trade: Tariff Volatility Triggers Export Risk
Overview

Persistent volatility in US trade policy, amplified by a Supreme Court ruling and delayed trade negotiations, casts a shadow over India's export sector. While initial tariff reductions offered a reprieve, the subsequent policy oscillations and stalled interim trade deal signal deeper strategic risks. Sectors like footwear, leather, and seafood face intensified competition due to unpredictable landed costs, while broader economic sentiment is impacted by the potential for continued policy unpredictability and its effect on currency stability. The Federation of Indian Export Organisations (FIEO) notes that while recent trade pact frameworks offer opportunities, the fundamental issue of policy consistency remains a concern for maintaining India's export momentum and attracting crucial long-term investment.

The Seamless Link

The recent Supreme Court ruling against President Trump's broad tariff authority, while initially seen as a reprieve, has underscored a persistent theme: the unpredictability of US trade policy. This volatility, coupled with the deferral of critical India-US trade talks, creates a complex and uncertain environment for Indian exporters, particularly those in labor-intensive sectors with long production cycles.

The Tariff Whiplash and Stalled Trade Deal

The US Supreme Court's decision on February 20, 2026, to invalidate tariffs imposed under the International Emergency Economic Powers Act (IEEPA) created immediate policy flux. While this ruling vacated billions in prior tariffs, President Trump swiftly moved to implement new levies, initially a 10% global tariff for 150 days, which was then quickly revised to 15%. This rapid sequence of announcements has fostered significant disquiet among India's trading community. The Federation of Indian Export Organisations (FIEO) highlighted this uncertainty, noting that while a 10% tariff was welcomed, the potential for further adjustments creates apprehension. Compounding this, the scheduled trade negotiator talks between India and the US, aimed at finalizing an interim trade pact, have been postponed as both nations reassess the implications of these tariff developments and legal challenges. This deferral signifies a pause in efforts to solidify a more stable trade framework, potentially delaying market access improvements and impacting investor confidence. The bilateral trade valued at approximately USD 186 billion in 2024-25 remains a cornerstone of the economic relationship, yet the path forward is clouded by policy oscillations.

Strategic Vulnerability: India's Export Sectors Under Pressure

The core challenge for Indian exporters lies in the erosion of predictability, a critical factor for sectors characterized by long product development cycles and tight margins. The footwear and leather industries, for instance, rely on stable landed costs to maintain competitiveness and supplier relationships with US brands. Similarly, the seafood sector, which saw a significant portion of its exports ($2.68 billion in FY25) directed to the US, faces heightened price competition. Indian shrimp exports are currently less competitive against Ecuador, Vietnam, and Indonesia due to tariff pressures, even as India secured US approval for seafood shipments, bypassing rivals like China and Mexico. Sectors like textiles, apparel, and gems and jewelry, which are heavily reliant on US demand and employ millions, are also vulnerable. These labor-intensive industries face increased risk of losing market share to competitors in countries like Vietnam and Bangladesh, where tariffs may be lower or trade relations more stable. The shifting tariff landscape means that India's value proposition, built on a skilled workforce and scalable production, faces headwinds from policy unpredictability rather than inherent competitive disadvantages.

The Diminishing Leverage of Unpredictability

The Supreme Court's ruling has curtailed the executive's ability to impose sweeping tariffs under specific emergency powers, potentially reducing the administration's leverage derived from sheer unpredictability. However, President Trump has signaled intent to utilize other legal provisions, such as Section 122 of the Trade Act of 1974, to maintain tariff measures, albeit with potential time limitations. This suggests that while the absolute power to implement tariffs may be more constrained, the strategic use of trade policy as a negotiating tool persists. For India, this translates to a continued need for vigilance and strategic trade diplomacy. The Indian Rupee's trajectory is closely tied to these developments; forecasts suggest potential weakening towards 90 INR per USD by March 2026 due to ongoing tariff risks and broader macroeconomic pressures. A wider current account deficit, projected to reach 1.5% of GDP, also adds to currency vulnerability, with forecasts ranging from 86-91 INR per USD depending on trade deal progress and portfolio inflows.

⚠️ THE FORENSIC BEAR CASE (The Hedge Fund View)

The primary risk for India's export economy remains the inherent unpredictability of US trade policy. Despite the Supreme Court's intervention, the potential for further legal challenges and the invocation of alternative tariff authorities by the US administration means that policy volatility is unlikely to disappear entirely. This instability directly undermines India's long-term competitiveness, particularly in labor-intensive sectors like textiles, leather, and seafood, where competitors in countries with more stable trade relationships may gain a decisive edge. The postponement of the interim trade deal negotiations underscores a deeper challenge in solidifying market access and strategic alignment, potentially delaying crucial investment inflows. Furthermore, persistent currency weakness for the Indian Rupee, predicted to hover around 90-91 against the USD through 2026, could exacerbate the current account deficit and strain macroeconomic stability, especially if net FDI flows remain soft. The Federation of Indian Export Organisations (FIEO) has consistently highlighted challenges related to export credit and liquidity, which could be amplified by prolonged trade tensions and reduced investor sentiment.

The Path Forward: Navigating Policy Shifts

Moving forward, India's strategy must balance immediate trade negotiations with long-term structural reforms. The Federation of Indian Export Organisations (FIEO) acknowledges the potential benefits of concluded free trade agreements with the EU and US, which could offer improved market access. However, the focus remains on achieving greater clarity and stability in trade relations. Analysts suggest that while concluded deals are likely to hold, the leverage for negotiating future market access has shifted, potentially giving India more room to define its boundaries. The export sector's resilience, demonstrated by a 6.15% growth in April-January 2025-26, suggests underlying strength, but continued diversification into emerging markets remains crucial to mitigate over-reliance on any single trading partner. The ultimate goal will be to transition from a reactive stance against policy shifts to a proactive approach focused on enhancing domestic competitiveness and securing predictable trade frameworks.

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