Why the ‘Zero-for-Zero’ Tariff Strategy is Unlikely in the India-US Trade Pact

Why the ‘Zero-for-Zero’ Tariff Strategy is Unlikely in the India-US Trade Pact

Introduction

As India and the United States continue to strengthen their economic ties, the proposed bilateral trade agreement (BTA) has taken center stage in diplomatic and economic discourse. A recent point of debate has been whether the two countries can adopt a 'zero-for-zero' tariff strategy—a reciprocal trade mechanism where both countries agree to eliminate tariffs on a specific set of goods. While this strategy has worked in certain trade blocs, such as between the United States and the European Union, Indian officials have made it clear: such a framework is unlikely between India and the US.

This article explores why a zero-for-zero tariff strategy may not suit the India-US dynamic, what the ongoing trade negotiations look like, and what sectors stand to benefit most from a finalized agreement.

Understanding the ‘Zero-for-Zero’ Tariff Strategy

What is It?

The zero-for-zero tariff approach refers to an arrangement where both countries agree to eliminate tariffs completely on selected goods or sectors. For example, if the US drops import duties on Indian textiles, India would reciprocate by removing tariffs on a similar value of American goods—say, electric vehicles or wine.

Where Has It Worked?

This strategy has been successfully implemented between countries at similar levels of development, like the US and the EU. These economies not only have comparable GDP per capita but also similar trade expectations, regulatory frameworks, and industrial maturity.

Why Is It Being Proposed for India-US?

Some trade experts, including the Delhi-based Global Trade Research Initiative (GTRI), have recommended that India adopt this strategy to counteract recent US tariff hikes. The idea is to create goodwill and fair market access on both sides. However, Indian government officials argue that such a model oversimplifies the complexities of trade agreements between asymmetrical economies.

Why It’s Unlikely in the India-US Trade Context

1. Different Levels of Economic Development

India is still a developing economy with a large agrarian base and millions of jobs in labor-intensive manufacturing sectors. The US, on the other hand, is a highly developed, services-driven economy with a dominant technology and capital-intensive industrial base. According to Indian officials, trade agreements must reflect these differences.

“Trade agreements do not happen like this. It is a wrong thinking,” an official said, dismissing the idea of a direct reciprocity model like zero-for-zero.

 

2. Strategic Sector Protection

India has historically protected sectors like agriculture, textiles, and small-scale manufacturing to support employment and domestic industry. Completely removing tariffs in these areas without reciprocal benefits in equally sensitive US sectors could risk domestic economic disruption.

3. Asymmetric Trade Surplus

India enjoys a significant trade surplus with the US. In 2023–24, this surplus stood at $35.32 billion, up from $27.7 billion in 2022–23. The US is India’s largest trading partner and a major export destination. A zero-for-zero model may not favor India in the long run if it means giving up tariff protections that have helped maintain this surplus.

Current State of India-US Trade Talks

When Did Talks Begin?

India and the US initiated negotiations for a bilateral trade agreement in March 2024. Since then, both sides have held multiple rounds of discussions, with the latest four-day session concluding on March 29.

What’s the Target?

The goal is to finalize the first phase of the trade deal by September–October 2025, with the broader aim of increasing bilateral trade to $500 billion by 2030, up from about $191 billion currently.

What’s Being Negotiated?

The agreement will likely be a "package deal", encompassing:

• Tariff reductions

• Non-tariff barriers

• Services trade facilitation

• Investment promotion

• Sector-specific regulatory alignment

Key Sectors and Tariff Interests

US Interests

The US is pushing for tariff concessions in sectors where it holds competitive advantages:

• Industrial goods

• Electric vehicles

• Wine and spirits

• Petrochemical products

• Dairy and agricultural products (apples, nuts, alfalfa hay)

India’s Priorities

India is keen on protecting and expanding access for its labor-intensive sectors:

• Textiles and apparel

• Gems and jewellery

• Plastics and chemicals

• Leather products

• Horticulture

• Shrimp and other seafood

• Oilseeds

India’s Trade Balance with the US

Key Statistics (2023-24)

• Total Trade: $191 billion

• Exports to US: Significant contributors include:

  • Drug formulations & biologicals: $8.1B

  • Telecom instruments: $6.5B

  • Gems & semi-precious stones: $5.3B

  • Petroleum products: $4.1B

  • Cotton garments: $2.8B

  • Iron & steel products: $2.7B

• Imports from US:

  • Crude oil: $4.5B

  • Petroleum products: $3.6B

  • Coal & coke: $3.4B

  • Diamonds: $2.6B

  • Electric machinery: $1.4B

  • Aircraft parts: $1.3B

This trade surplus reinforces India’s strategic advantage but also brings pressure from US lawmakers seeking to balance the trade relationship.

The Role of Non-Tariff Barriers

Even as tariff discussions dominate headlines, non-tariff barriers (NTBs) are equally important in trade negotiations. These include:

• Sanitary and phytosanitary (SPS) standards

• Technical barriers to trade (TBT)

• Licensing requirements

• Regulatory compliance

India is likely to seek a more transparent and predictable framework from the US on these fronts, especially for agricultural and processed food exports.

Can Sector-Specific Talks Yield Better Outcomes?

Indian and American officials have agreed to hold sector-specific discussions over the coming weeks. This targeted approach allows for deeper engagement without requiring a blanket zero-for-zero strategy.

For example:

• In electric vehicles, India could allow more US imports in exchange for tech transfer or joint ventures.

• In textiles, India might seek increased access to US retail markets with relaxed rules of origin.

• In agriculture, India might ease import conditions for select US products if the US reciprocates on shrimp or mangoes.

This modular approach is more realistic and potentially more beneficial than a uniform zero-for-zero policy.

Strategic Implications for India

1. Boosting Exports

Sectors like pharmaceuticals, telecom, and engineering goods stand to benefit immensely from reduced US duties and streamlined regulations.

2. Attracting Investments

Easing market access for American companies could encourage FDI inflows into India’s manufacturing, clean energy, and digital infrastructure sectors.

3. Balancing China’s Influence

A robust trade pact with the US would not only strengthen economic ties but also serve as a geopolitical counterweight to China’s growing influence in global trade.

Challenges Ahead

1. US Domestic Politics

Upcoming elections and bipartisan concerns over job losses may limit the Biden administration’s flexibility in making concessions to India.

2. India’s Regulatory Landscape

India’s often complex bureaucracy and slow regulatory clearances may be seen as trade irritants by US companies.

3. WTO Commitments

India must also ensure that its trade commitments under the BTA align with World Trade Organization (WTO) rules and existing multilateral obligations.

What Lies Ahead?

India’s trade diplomacy has matured significantly in recent years. Whether it’s signing FTAs with the UAE and Australia or negotiating with the EU, India is learning to blend economic interests with strategic leverage.

A full-fledged BTA with the US, even without a zero-for-zero model, would mark a historic shift in India’s trade policy. It could transform sectors, create jobs, boost exports, and elevate India’s position in global supply chains.

As negotiations progress, expect an emphasis on incremental gains over sweeping reforms—realistic, strategic, and aligned with national interests.

Conclusion

While the idea of a ‘zero-for-zero’ tariff strategy between India and the US may sound idealistic, the ground realities of economic disparity, sectoral sensitivities, and strategic considerations make it an improbable route. Instead, both countries appear to be opting for a more practical, sector-by-sector, issue-by-issue negotiation format that respects each other’s strengths and limitations.

If executed well, the India-US bilateral trade agreement can unlock a new era of cooperation, with or without zero-for-zero.

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