Ongoing bilateral trade discussions between India and the US have become crucial for the South Asian nation, especially after being penalized with a reciprocal tariff of 26%.

Economists suggest that while India has managed to avoid the excessive rates applied to regional competitors like Vietnam and Bangladesh, the tariffs make a bilateral agreement essential for New Delhi, which is trying to mitigate the impact on approximately $80 billion worth of exports to the US.

With India’s gross domestic product growth expected to slow to 6.5% in the fiscal year ending March 2025, down from 8.2% in the previous fiscal year, the current tariff levels could inflict a further blow of 70 to 90 basis points, potentially resulting in an export revenue loss of around $30 billion.

“This is a very significant impact, and it’s not a pleasant one at all,” Dhiraj Nim, an India economist at ANZ bank, told Nikkei Asia.

India’s exports in sectors such as electronics, jewelry, and automobiles are among the most affected by the tariffs imposed by US President Donald Trump. For now, the Trump administration has exempted pharmaceutical exports from tariffs.

S C Ralhan, president of the Federation of Indian Export Organizations, stated to local media on Thursday that the relatively lower tariffs imposed on India’s exports could provide an advantage against Asian competitors like China and Vietnam, which have been hit harder.

With this glimmer of hope, Indian stock indices seemed to weather the tariff news better than their Asian counterparts, with the benchmark Nifty 50 and Sensex indices down by approximately 0.2% and 0.27%, respectively, by midday. The Indian rupee weakened to 85.78 against the dollar at the open but recovered to 85.64 by midday.

The Nifty Pharma index outperformed the broader market, rising over 2% by midday.

Economists suggest that the relatively milder tariffs announced against other major economies, coupled with hopes for a bilateral agreement, have supported sentiment in Indian markets.

“The [muted fall] suggests that the markets think that this 26% is unsustainable and this is somewhat of a ceiling tariff rate, and negotiations will bring it down,” Nim added.

A team of US officials visited India last week as part of trade talks aimed at increasing trade between the two countries to $500 billion by 2030. The Indian government stated on Thursday that discussions are ongoing “for an early conclusion of a mutually beneficial, multi-sectoral Bilateral Trade Agreement.”

Unlike China, Canada, and the European Union, India has adopted a more conciliatory stance in response to Trump’s warnings about Washington’s trade deficit (which stands at $45 billion in India’s case), and earlier this year, it reduced tariffs on large motorcycles, luxury cars, and bourbon to appease the US.

According to Bloomberg last week, India is now considering reducing tariffs on agricultural products such as pulses and soybeans, as well as on electric vehicle imports, according to Reuters, which is a major sticking point for Trump ally and Tesla CEO Elon Musk, whose electric vehicle manufacturer has yet to establish a presence in the world’s third-largest automobile market.

In a fact sheet accompanying the tariff announcements, the Trump administration targeted India’s “uniquely burdensome and/or duplicative testing and certification requirements,” stating that removing these barriers would increase US exports by at least $5.3 billion per year.

Sujan Hajra, chief economist at brokerage firm Anand Rathi, wrote in a note: “India’s merchandise trade surplus with the US is far lower than that of China ($320 billion), Mexico ($180 billion), Vietnam ($120 billion), or Germany and Ireland (each at $90 billion). This strengthens India’s position in negotiating a tariff reduction.”

However, economists caution that even with a bilateral trade agreement, India will not be immune to the impact of a potential global trade war that Trump’s “tariff man” declaration threatens to unleash.

“Slowing US growth and weaker global trade momentum will weigh on external demand [for India],” Morgan Stanley Research stated in a note.

“More importantly, we expect this impact to be more visible through the indirect channel of weaker corporate confidence, which will further delay the investment spending cycle [for the country],” it added.

According to economists, this situation may lead to further policy support in India. Morgan Stanley economists suggest that the Reserve Bank of India may shift its stance from neutral to accommodative at its next monetary policy announcement on Wednesday, while Nim from ANZ said that the possibility of a 50-basis-point cut in the benchmark policy rate has “risen significantly.”

Chinese President Xi Jinping, in a meeting with a group of executives including Rajesh Subramaniam from FedEx and Bill Winters from Standard Chartered, called on global business leaders to work together to protect supply chains.

Amid a deepening trade war with the US, the Chinese leader told the group of foreign business leaders, including Pascal Soriot from AstraZeneca and Miguel Ángel López Borrego from Thyssenkrupp, that they should resist behaviors that “turn back” history.

Speaking at the meeting held in Beijing on Friday, Xi said, “We hope everyone will have a broad and long-term perspective and not blindly follow actions that disrupt the security and stability of global industrial and supply chains, but instead add more positive energy and certainty to global development.”

The event at the Great Hall of the People marked the second consecutive year that Xi held a carefully arranged meeting with foreign CEOs in the Chinese capital. Last year’s event involved only US business leaders.

The meeting took place at the end of a busy week for Chinese policymakers, who are striving to strengthen relations with the international business community amid rising tensions with the administration of US President Donald Trump.

China’s leading annual CEO conference, the China Development Forum, was held earlier this week in Beijing, followed by the Boao Forum for Asia on the tropical resort island of Hainan.

Beijing is trying to present itself as a bastion of stability in global trade, in contrast to the US, where Trump has launched successive waves of tariffs on many products, from aluminum to automobiles.

Trump pledged on April 2 to impose broad and reciprocal taxes on US trade partners.

Following US President Donald Trump’s announcement that he would impose a 25% tariff on imported cars and auto parts, Japan’s Prime Minister sounded the alarm on Thursday.

Prime Minister Shigeru Ishiba told lawmakers during a parliamentary session, “We need to consider appropriate responses,” adding, “All options will be on the table.”

This move, seen as undermining a bilateral agreement made between Trump and then-Prime Minister Shinzo Abe in September 2019, came as a surprise to Japan. This limited trade deal had opened Japan’s market to more American agricultural products. The agreement states that the two countries “will refrain from taking measures contrary to the spirit of these agreements.”

Japanese automakers reacted cautiously to the announcement. Toyota, Subaru, Mazda, and Honda issued brief statements saying they were assessing the potential impact.

Imported cars and trucks are currently subject to tariffs of 2.5% and 25%, respectively. When the new tariffs take effect on April 3, these rates will rise to 27.5% and 50%. The 25% tariff will also apply to automotive parts like engines and transmissions, taking effect no later than May 3.

Japan’s Chief Cabinet Secretary Yoshimasa Hayashi said the government intends to negotiate exemptions. Economists say it is unclear how exemptions might be secured, but there are several options.

According to economists, options Japan might consider include voluntary export restraints, a commitment to increase imports of items like natural gas, grain, and meat, and replacing Russian natural gas with gas from the US. In 2023, 8.9% of Japan’s natural gas imports came from Russia, while 7.2% came from the US.

“Japan will likely be looking at all these options,” said Koichi Fujishiro, a senior economist at the Dai-ichi Life Research Institute.

South Korea in a similar situation

South Korea is also expected to seek exemptions. Analysts said that South Korean automaker Hyundai Motor Group’s announcement earlier this week of a $21 billion US investment would help its negotiating position.

Esther Yim, a senior analyst at Samsung Securities, said, “The US has, in principle, applied a 25% tariff on all imported cars,” adding, “Washington can then negotiate with each country, and I think investment can be used as leverage.”

South Korea’s Ministry of Industry pledged an emergency response by April to help the country’s automakers, who are expected to face “significant challenges” when the tariffs take effect.

Over the years, global automakers have shifted to local production to avoid trade friction. According to the Mitsubishi Research Institute, 60% of Japanese cars sold in the US are produced in the US. This figure drops to 40% for Korean cars. For European brands, the rate is as high as 70%.

Although Ishiba insists all options are on the table, few analysts expect Japan to resort to retaliatory measures, at least at this point. “Japan would gain very little by retaliating against US tariffs,” Fujishiro said.

At a summit with Trump in February, Ishiba pointed out that Japan is the largest investor in the US and a significant job creator, promising to work towards increasing Japan’s investment balance from $783.3 billion in 2023 to $1 trillion.

Cars, Japan’s largest export item to the US, are worth 6 trillion yen ($40 billion) and will account for 28% of Japan’s total exports in 2024. This amount is equivalent to 1% of Japan’s nominal gross domestic product.

Takahide Kiuchi from the Nomura Research Institute estimates that a 25% tariff would reduce Japan’s car exports to the US by 15% to 20% and lower Japan’s GDP by 0.2%.

If Japanese automakers try to respond by shifting production to the US, this would reduce domestic employment and hollow out the country’s economy in the long run.

Masanori Katayama, chairman of the Japan Automobile Manufacturers Association, said at a press conference last week, “Car exports from Japan are necessary to supplement the domestic production of Japanese automakers and to provide a lineup of attractive cars… to meet the diverse needs of American customers through car dealerships in every US state.”

Katayama said that when the US implements the tariff, “a significant production adjustment is expected. The Japanese auto industry consists not only of automakers but also parts suppliers and employs 5.5 million people.”

Katayama insisted that the industry and the Japanese government must come together to take action and keep domestic supply chains intact.

The tariffs are also expected to harm American automakers because they too source parts and manufacture globally to keep costs down and make their cars competitive in the market.

Nomura analyst Anindya Das said General Motors could fall into an operating loss on an annual basis due to its reliance on factories in Mexico. He added that Toyota could also see a 30% drop in operating profit.

Jennifer Safavian, president and CEO of Autos Drive America, an industry group representing international automakers operating in the US, including Toyota, Honda, Nissan, and others, said, “Tariffs imposed today will make it more expensive to produce and sell cars in the US, ultimately leading to higher prices, fewer choices for consumers, and fewer manufacturing jobs in the US.”