As Trump’s fresh threats loom, India still has a slight tariff edge over China but loses advantage with Vietnam

Despite fresh tariff escalation threats and the prospect of higher duties under the new regime announced by US President Donald Trump that could take effect from August 7, India continues to have a relative advantage on a key metric being tracked by policymakers in New Delhi – the tariff differential with China.

As on August 1, China had the highest effective tariff rate (ETR) of the US’s major trading partners, with India with a comparative advantage of around 20 percentage points. While tariffs on China remain at 34 per cent, the total ETR inclusive of the tariff rate at the end of 2024 came to around 42 per cent, according to Fitch Ratings’ updated ETR Monitor that reflects the July 27 and July 31 announcements of new reciprocal tariff rates for most trading partners of the US. While India is slightly over 21 per cent, according to the latest data, the overall effective tariff rate for the US across all its trading partners is now 17 per cent — about 8 percentage points lower than Fitch’s ETR Monitor of April 3, 2025, when higher reciprocal tariffs were originally announced, but around 3 percentage points higher than the estimate at the end of June 2025. The ETR represents total duties as a percentage of total imports and changes, with shifts in import share by country of origin and product mix.

With Vietnam, though, India now has lost a slight advantage in ETR terms after additional tariffs kicked in, as against an advantage up to end-2024. This is despite Trump’s rhetoric against transhipped goods and his administration’s efforts to neutralise China’s supply bases in ASEAN. And going forward, given Trump’s frustration with India on not agreeing to his terms for a deal, this disadvantage is likely to fester. That is likely to be the case till Delhi gets a deal of some kind with Washington DC, but the situation could, however, change for the worse going forward, with Trump warning Monday that he would raise the tariff on India “substantially” for buying Russian oil.

Amid all the upheaval thrown up by America’s tariff action, the assumptions that the Indian policymaker had implicitly factored in include that Washington DC will maintain a differential of 10-20 per cent in tariffs between China and countries such as India; and that a trade deal with the US needs to be clinched precisely for ensuring the gap in tariffs between India and China is maintained, even with a limited early-harvest type of deal. New Delhi did back out at the last minute from signing the Regional Comprehensive Economic Partnership (a trade deal among Asia-Pacific countries including China) given the sensitivities of agri livelihoods.

A higher-than-anticipated US tariff rate, especially on a comparative basis, could dent India’s growth prospects, economists said. Though Trump did not specify the rate of penalty for India on account of Russian oil and defence imports, earlier statements made by Trump indicate that it could be to the tune of 100 per cent. This way, India stands to potentially lose the US tariff advantage vis-a-vis China at least till the time a deal is struck, even if Beijing, too, faces the same penalty for importing from Russia.

China is the largest buyer of Russian oil, at about 2 million barrels per day, followed by India (just under 2 million a day) and Turkey. China had agreed to cut tariffs on US goods to 10 per cent from 125 per cent in May, while the US had agreed to lower tariffs on Chinese goods to 30 per cent from 145 per cent. But with respect to Russian oil, Trump has been singling out India, while being largely silent on China.

Given how talks between Indian and US negotiators have proceeded so far, an interim deal still seems distant and is unlikely to be clinched before September, with October a possible outer deadline. Indications are a sixth round of talks between the two negotiating teams will take discussions forward on August 25. India’s government has asked it various ministries to come up with potential giveaways to sweeten the deal for the upcoming negotiations. Once the official level discussions wrap up, there is a sense that a final call on the deal could come down to a conversation between the two leaders, Prime Minister Narendra Modi and Trump. For India, the best-case scenario would be to get a deal of some sort now, and then build on that in the future negotiations that could run into 2026, experts said.