In a landmark shift that has sent ripples through global markets, the United States and India have formalised a new bilateral trade agreement as of February 2, 2026. With the US slashing tariffs on Indian goods from 50 to 18 %, this deal marks the end of a bruising “tariff war”, providing a much needed relief for both economies and signaling a strategic realignment between the world’s two largest democracies.
For the US, the deal means a crucial intervention for its automobile, telecom, specialized pharma and agriculture sector which were at the risk of losing their advantage to EU competitors following the conclusion of the Indo-EU FTA. For India, it is a breather for the textile and marine products sector as well as a strengthening of sliding rupee.
The ‘standoff’ history
The begining of Donald Trump second presidency in early 2025 fiscal year saw a sharp decline in trade volumes following the announcement of a punitive tariff regime in response to India’s continued import of cheap Russian crude – seen by Washington as financing Russia’s invasion of Ukraine. India retaliated in late October by announcing a 30% import tariff (10% basic duty + 20% agricultural cess) on select pulses from the USA, including yellow peas and lentils. This duty reduced US exports which dropped from roughly $80 million in 2024 to $4.19 million in 2025, largely affecting farmers in the US states of North Dakota and Montana – the so called ‘Red States’, strongholds of President Trumps Republican party.
Unwilling to back down, in early January of this year, the Trump administration slapped an added added 25% punitive tariff on countries doing India for its continued trade with Iran following the brutal repression of civil protests in that country. As a result India found itself in the unenviable spot of the country with the highest import tariffs in the US. In response, on January 23, India refused to support the US sponsored special session on Iran, effectively signalling to Washington that its cooperation on Iran—and its gradual distancing from Russian oil—carried a price: the rollback of the 50% punitive tariffs.
Impact of the India-European Union Free Trade Agreement (FTA)
Enter the ‘ mother of all deals’.
With the 27th January signing of the India-EU FTA eliminating duties on European goods, the US faced a “competitive disadvantage” in sectors where it previously held a dominant market share.
| Sector | Current US Export Value (Est. 2025) | “Red State” Manufacturing Hubs and versus potential EU competitors |
| Industrial Machinery & Nuclear Reactors | $2.88 Billion | Ohio, South Carolina, Indiana. (Westinghouse) EU: Electricite de France (Jaitapur project) |
| High tech medical imaging Devices & Optical Instruments (HS – 9018, 9022) | $1.89 Billion (15 % YoY growth) | Florida, Minnesota (Purple), Texas EU: Siemens, Healthineers, Philips |
| Agricultural Inputs (Almonds/Pulse) | $1.11 Billion | California (Blue), but largely Georgia, Kansas |
| Aircraft | $ 8 Billion ( Boeing – Air India orders) | US: Boeing, Lockheed Martin EU: Airbus, Eurofighter; Dassault ( Tata-Airbus FAL in Gujarat already operational in 2026) |
| High-end cars | $450 Million | Strategic: US “Red State” manufacturers (BMW SC, Mercedes AL) faced 60-100% duty while EU rivals (Volkswagen, BMW, Mercedes AG) would soon pay just 0-15%. |
The EU Advantage: European giants (like Siemens, Schneider, and BASF) would have entered the Indian market at 0% duty while US firms were still paying 10–18%. Analysts at the GTRI estimated that without the Feb 2026 deal, the US stood to lose nearly 25% of its market share in these sectors to European rivals within 24 months. Even in a highly automated US manufacturing sector, this would result in -as some economic models predict – the potential loss of 180,000 to 220,000 direct jobs over the course of 3 years.
While much focus is on the competition faced by US exports to India, its dependency on Indian imports in critical sectors such as generic antibiotics and semiconductors is worth noting. Inspite of its aggressive posturing during the early January Iran situation, The Trump administration exempted these categories from punitive tariffs, to protect supply chains, and more importantly its domestic healthcare sector where Indian made antibiotics account for 40% of the market value.
The Indian ‘Reconciliation’
India’s willingness to renegotiate its ties with its largest trading partner is more than a pragmatic necessity. With Indian exports rising 15.88% year-on-year to $85.5 bn – according to Govt. Of India data, it represents an opportunity too great to be missed. For the marine products sector it comes as an even earlier relief than the Indo-EU FTA. For textiles, the reduction of tariffs provides a 17% advantage over competitor China. Most importantly though, the deal mitigates the risk posed to between 100,000 and 300,000 jobs in India’s labour intensive textiles and gems and jewellery sectors over a 5 year period.
Marine Products: Indian shrimp and frozen food exporters, who were facing a crushing 58% combined duty (including anti-dumping and punitive taxes), now see a path back to profitability.
Textiles: The 18% tariff cap provides an immediate competitive edge over regional rivals like Vietnam (20%), Bangladesh (20%) and China (35%), potentially reviving a sector that saw a 50% decline in turnover during the standoff.
In addition, the sectors tabulated below show the highest growth potential, following the reduction of tariffs.
| Sector | HS Code (Approx) | YoY Growth (Pre-Tariff) | Trade Volume (FY25) | Potential / Competitive Outlook | Key Competitors |
| Electronics (Smartphones) | 8517 | 51.2% | ~$10.0B | Massive: India is now the 3rd largest exporter. PLI schemes are driving Apple/Samsung hubs. | Vietnam, China |
| Gems & Jewellery | 7102-7113 | 14% | ~$10.2B | High: India dominates diamond polishing. Duty cuts make “Made in India” jewels cheaper in the US. | UAE, Hong Kong |
| Engineering Goods | 8401-8487 | 9.5% | ~$6.5B | Strategic: IC engines and industrial boilers. US infrastructure bills are fueling demand. | Germany, Japan |
| Specialty Chemicals | 3824 | 12% | ~$4.5B | Emerging: India is the alternative to China for US agrochem and dye manufacturers. | China, South Korea |
| Auto Components | 8708 | 18% | ~$5.2B | Critical: US supply chains for “Red State” car plants (SC/AL) depend on Indian parts. | Mexico, Vietnam |
Services
Trade discussions conventionally prioritize physical goods, quite often neglecting the mention of services – a rapidly growing sector in an interconnected, digital world. According to the US trade representative (USTR) data, while a marginal trade balance exists, services (led by IT, BPM) imports from in 2024, rose by 15% over the previous year to 41.8 billion. That percentage growth, (which forms almost the total of Indias export growth to US) and the last figure which accounts for 47% of India’s forex earnings from the US that year, indicate the huge potential this sector holds. For context India’s services export sector, propelled by initiatives such as Services exports from India scheme, grew at a remarkable rate of 13% to reach a volume of $387 bn in fy 2024-25- accounting for nearly 47% of exports.
As a trade-off that seems like a win-win for both sides, the US administration has agreed to a contingency waiver of its ‘ buy American’ executive order which instructed US government bodies to prioritize US software and firms over Indian ones, in return for an Indian commitment to buy US hardware in the aircraft and nuclear reactor segments. This deal puts Indian firms such as TCL and infosys on more steady footing and accelerates the 2023 iCET (Initiative on Critical and Emerging Technology).
Other committments on India’s part
According to an unnamed Indian official quoted by Reuters, the government has also agreed to long term comittments to buy U.S. products in sectors like specialized pharmaceuticals, telecom and crude oil. While this will be phased in over the years, tariffs on US cars will be lowered immediately as part of the first phase of the deal.
India: The Largest Market for US Military Aircraft
The US is aggressively positioning India as its primary military export market.
The F-35 Prospect: For the first time, the Trump administration has signaled a willingness to discuss F-35 Lightning II sales to India, a major shift from previous years.
Commercial vs. Military: While the $500 billion trade goal includes massive commercial orders (Air India/IndiGo buying Boeing 737 MAX), the “strategic backbone” of the 2026 deal is defense co-production.
The GE Engine Deal: The co-production of GE F414 engines in India for the Tejas Mk2 fighter is the “crown jewel” of this relationship. Washington views these sales as the ultimate tool to permanently detach the Indian military from its 70-year dependence on Russian hardware (S-400s and Sukhois).
Protected sectors
For key sectors involving traditional farmers and manufacturers, India has refused to yield to US pressure or intends to use Tariff Rate Quotas (TRQs) to protect domestic manufacturers and farmers in certain key sectors.
| Sector | HS Code (Approx) | YoY Growth (%) | Trade Volume (US to India) | Competitive Outlook / Quota Status | Possible Competitors |
| Dairy (Milk, Cheese, Whey) | 0401-0406 | 12.5 | ~$150M | Strictly Protected: No zero-duty. Limited TRQs for whey permeate only. | EU (Danone), NZ (Fonterra) |
| Cotton (Long Staple) | 5201 | 15 | ~$400M | High Potential: India has offered TRQs for high-quality US cotton used in high-end textiles. | Brazil, Egypt, Australia |
| Pulses (Lentils/Chickpeas) | 0713 | -5%* | ~$310M | Sensitive: Quotas apply to prevent “dumping” that would hurt Indian pulse farmers. | Canada, Australia, EU |
| Tree Nuts (Almonds/Walnuts) | 0802 | 11 | ~$1.1B | Moderately Sensitive: Tariff reductions are phased. US dominates, but EU (Spain) is eyeing the market. | EU (Spain), Iran, Chile |
| Soybean Oil / Ethanol | 1507/ 2207 | 20 | ~$650M | Emerging: India allows non-GM soy/ethanol through specific industrial quotas. | Brazil, Indonesia (Palm) |
*Growth was negative in 2025 due to retaliatory tariffs; now expected to rebound under new quotas.
Hurdles, risks and the future
Despite the optimism, significant hurdles remain. The implementation of “zero-tariff” commitments in sensitive sectors like dairy and food grains could trigger massive domestic protests in India.
- Geopolitical Risks: The deal is heavily dependent on the personal rapport between leaders; any shift in the Ukraine-Russia conflict or US domestic politics could see these tariffs “weaponised” again.
- The Positive Flipside: On the financial front, the removal of uncertainty has led to a stronger Rupee against the Dollar, stabilizing the currency and encouraging a return of Foreign Institutional Investment (FII) into Indian manufacturing. As an early sign of brighter things, the deal saw the rupee climb by more than a percentage point to 90.40 against the dollar
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