Understanding the Shift in U.S.–India Trade Relations

Aditi Srivastava
Dec 1, 2025
6 min read

Background: The evolution of U.S.– India trade relations

Trade and economic relations between United States and India have significantly expanded over the past three decades, reflecting broader geopolitical, economic, and strategic shifts. Starting from modest trade volumes in the 1990s, the relationship accelerated as India liberalized its economy and embraced globalization; meanwhile, India’s information technology, pharmaceuticals, textiles, and manufacturing sectors matured, creating exportable surpluses.

By the early 2020s, the U.S. had become one of India’s largest trading partners. As of 2024–25, the total bilateral trade in goods and services reportedly reached around US$ 132.2 billion. The U.S. exports to India include items such as petroleum-gases and manufactured goods (including aerospace/defence equipment, chemicals, etc.), while the U.S. imports from India reflecting Indian exports include pharmaceuticals, textiles/apparel, IT-related goods/services, gems, jewellery, and other manufactured articles.

Historically, while trade steadily grew, tensions occasionally flared over issues like tariffs, market access (especially agriculture and dairy), intellectual property rights, and foreign direct investment (FDI) restrictions. The U.S. often flagged barriers faced by its firms in India, while India, balancing domestic socioeconomic priorities maintained protective measures in certain sensitive sectors.

As trade deepened, both sides recognized its potential not only for economic gains but also for strengthening broader strategic ties, including in defence, technology, supply-chain resilience, and geopolitical cooperation.

The 2025 Trade Dispute: Tariffs and Deepening Tensions

Although trade volumes have been high, 2025 marked a sharp turning point in U.S.– India trade relations. The crux of the disruption lies in a series of tariff hikes introduced by the U.S., reflecting concern over what Washington sees as an unsustainable trade imbalance.

In April 2025, the U.S. under Donald J. Trump’s administration imposed a 25% “reciprocal” tariff on Indian imports, targeting countries that impose high duties on U.S. goods. Later, when India continued purchasing Russian energy, an issue that became geopolitically sensitive in light of the Ukraine war, the U.S. increased the penalty to 50%. The additional 25% “penalty” was explicitly linked to India’s continued purchase of Russian crude oil.

The result has been a sharp disruption: between May and October 2025, Indian exports to the U.S. reportedly fell by 28.5%, dropping from US$ 8.83 billion to US$ 6.31 billion over that five-month span. The steep tariff burden made many Indian goods among the most heavily taxed of any U.S. trading partner. Sectors such as textiles, garments, gems and jewellery, leather, marine products, and certain manufacturing goods previously strong export areas came under severe pressure.

For India, the tariffs triggered alarm: many exporters faced the risk of losing competitiveness vis-à-vis players from Southeast Asia or other low-cost manufacturing countries. There have also been concerns about potential downstream effects: slowed production, export order cancellations, pressure on sectors dependent on exports, financial stress for small and medium enterprises (SMEs), and macroeconomic and currency-related effects (e.g., pressure on rupee, impact on inflation, etc.).

Diplomatically, the situation created strain. What was once considered a constructive, expanding trade relationship entered a fraught period. The 2025 trade crisis underscores how geopolitical considerations (energy purchases, global alignments, supply-chain diversification) are increasingly shaping trade policy and not just economics.

Recent Policy Moves and Ongoing Negotiations

In parallel to tariff hikes, both countries have engaged in negotiations to stabilise and reset their trade relationship.

In February 2025, during a bilateral summit, leaders from both sides agreed to begin discussions on a comprehensive trade pact. The goal: to address tariff disputes, market access, and other structural issues.
Over 2025, multiple rounds of negotiations have been held, seeking to conclude the first “tranche” of a bilateral trade agreement by November 2025. As of September 2025, trade and commerce officials indicated that progress was real and that a deal looked feasible.
According to Indian officials (e.g., Piyush Goyal, Minister of Commerce and Industry), while geopolitical issues especially global alignments, energy security, and supply chains have complicated negotiations, they remain committed.

The draft agreement reportedly envisages reducing or rationalising tariffs, improving market access (possibly in agriculture, dairy, and industrial sectors), facilitating greater investment flows, and creating institutional frameworks for digital trade and services.

Underlying Dynamics: Beyond Tariffs, Strategy, Economics, and Geopolitics

To fully appreciate U.S.– India trade relations today, one must understand several underlying dynamics that transcend mere trade numbers.

1. Strategic and Geopolitical Context

The U.S.– India economic relationship does not exist in a vacuum. As global geopolitics shift with Russia–Ukraine, supply-chain realignments, competition with China, and energy security concerns, trade policy becomes a tool of broader strategy. The 2025 tariff hikes underline how Washington is leveraging trade policy to influence India’s geopolitical and energy decisions. From India’s perspective, balancing strategic autonomy (its own national interests, energy needs, and foreign policy direction) with the opportunities of trade and investment becomes a complex diplomatic exercise. Thus, negotiations are not merely about lowering tariffs, but also about aligning broader policy goals: supply-chain resilience (diversifying away from China), collaboration in defense/technology, and an evolving global order.

2. Economic Imperatives: Exports, Market Access, and Competitiveness

From India’s side, a sustained export market in the U.S. for textiles, apparel, gems/jewellery, leather, manufacturing is vital for employment, foreign exchange, and growth, especially for SMEs and labour-intensive sectors. The steep tariffs threaten this base. At the same time, Indian growth ambitions require imports as well of machinery, capital goods, technology, and energy. The U.S. remains a major supplier of certain high-value inputs and investments. A stable trade framework could thus benefit both sides: India gains access to critical capital goods and investment; the U.S. retains a large market for goods, services, and investments.

3. Investment, Services, and Beyond Goods Trade

While much of the 2025 crisis focuses on goods trade and tariffs, services and investment remain critical components of the India–U.S. economic relationship. Historically, a considerable portion of India’s exports to the U.S. has been in services especially IT and business services while U.S. companies have invested in India across manufacturing, energy, infrastructure, and technology. A future trade agreement between the two countries may well have provisions dealing with investment protections, regulatory harmonization, digital trade frameworks and data governance, areas that could shape long-term economic ties beyond traditional manufacturing and merchandise trade. Indeed, reports suggest negotiations are considering cross-border data flows and services trade frameworks.

Opportunities and Challenges

If both sides manage to finalize the first tranche of a bilateral trade agreement by November 2025 (as currently targeted), the implications could be significant. Some potential outcomes and risks:

Reduced tariffs, improved market access: For many Indian export sectors including textiles, apparel, gems & jewellery, leather goods, manufacturing, a tariff rollback or easing could restore competitiveness and revive export orders, particularly after the slump triggered by the 2025 tariff barrage.
Expanded services & investment cooperation: Including frameworks for cross-border data flows, digital services, regulatory harmonization, and investment protections can deepen trade beyond goods especially critical in sectors like IT, digital services, manufacturing, defence, clean energy, etc.
Supply-chain diversification & strategic resilience: Given global supply-chain disruptions and geopolitical competition, stronger India– U.S. trade ties could provide a path for both countries to reduce dependence on China or other volatile markets.
Leveraging economic growth and demand: India’s rising consumer demand, infrastructure investments, and growing middle class create demand for high-end manufactured goods, capital equipment, energy, technology much of which the U.S. is capable of supplying.

At the same time, there are risks and obstacles:

Domestic political/social resistance: Liberalization especially in sensitive sectors such as agriculture, dairy, certain manufacturing may face resistance from domestic stakeholders, as has been the case in past trade discussions.
Uneven gains and sectoral dislocation: Export-oriented sectors may benefit, but industries that compete with imports (e.g., small-scale manufacturing, traditional industries) might suffer. Labour intensive sectors may face displacement or downward pressure.
Geopolitical uncertainty: Because geopolitics underpins much of the tension (e.g., energy ties, Russia/Ukraine war, supply-chain alliances), shifting global alignments could quickly destabilize any agreement.
Implementation & enforcement challenges: Even with a trade agreement, implementing mutual commitments, e.g., on tariffs, regulatory alignment, investment norms, and digital trade safeguards will require careful legal, administrative, and institutional work.

Conclusion

The trade relationship between the United States and India, once steadily growing over decades now faces a critical juncture. The steep tariffs introduced by the U.S. in 2025, tied to both trade-imbalance concerns and geopolitical issues, have jolted the system, exposing vulnerabilities in reliance on a single large market, and highlighting how trade policy is now deeply intertwined with global strategy and national prerogatives.

Yet, the ongoing negotiations and the effort to finalize a bilateral trade agreement by 2025 offer an opportunity to recalibrate. For India, it is a chance to protect its export interests, revive sectors hit by tariffs, and secure favourable access to US markets and investments while preserving domestic policy space. For the U.S., the deal offers access to a vast and growing market, supply-chain diversification, strategic partnership, and a counter-balance to competing global players.

If carefully negotiated, with legal safeguards, phased liberalization, regulatory alignment, and institutional mechanisms, a renewed U.S.–India trade framework could deliver lasting economic and strategic gains. But achieving this requires political will, legal clarity, and a willingness from both sides to view trade not as a zero-sum game, but as a foundation for mutually beneficial long-term partnership.

Sources