Trade Tariff and Legal Consequences on the Indian Market

The 2025 US tariff increase on Indian goods: its consistency with WTO rules, India’s trade remedy options, and what Indian businesses should review in their contracts.

Background: US Tariff Reforms 2025

On August 6, 2025, the United States administration announced an increase in tariffs on Indian goods by 25%, raising the total tariff rate to 50%. This move has raised serious concerns about its potential impact on India’s economy, trade balance, and financial markets.

At present, India enjoys a trade surplus with the United States, one of its largest markets. However, this escalation in tariffs poses the risk of turning that surplus into a trade deficit. According to SBI Research, “As $45 billion of export will be impacted due to 50 per cent tariffs, at worst scenario, India’s trade surplus will convert to trade deficit. However, we believe trade negotiations will restore confidence and improve export to US”.

The impact goes beyond trade figures. A sharp reduction in exports would affect key sectors such as textiles, pharmaceuticals, IT services, and engineering goods, which form the core of India’s exports to the U.S. Lower export earnings could put pressure on the rupee, reduce corporate profitability, and trigger volatility in the stock market, particularly in industries heavily dependent on U.S. demand.

In addition, a sustained trade imbalance could worsen India’s current account deficit (CAD), place pressure on foreign exchange reserves, and dampen investor sentiment.

WTO Legal Framework

Many experts are worried that the new U.S. tariff system may breach the Most-Favoured Nation (MFN) principle under Article I¹ of the GATT. The MFN rule requires that all WTO members be treated equally in terms of trade benefits.

Article I of the GATT lays down the principle of Most-Favoured Nation (MFN) treatment. This rule means that if one country gives a benefit, concession, privilege, or exemption to a product coming from or going to another country, it must immediately and unconditionally extend the same benefit to all other WTO members for the same type of product.

The main purpose of the MFN principle is to prevent discrimination among “like products” (that is, goods that are essentially the same) coming from different countries. By prohibiting such discrimination, the MFN rule acts as an incentive for all WTO members to participate in trade on equal terms. Importantly, this principle applies both in law (de jure) and in practice (de facto), meaning that even if discrimination is not written in the law, it cannot be allowed in practice either.

The MFN principle has both political and economic dimensions:

• Political dimension: It reduces the chances of aggression or hostility in international trade relations, supports the growth of multilateralism, and serves as a safeguard against unfair discrimination between nations.
• Economic dimension: It ensures that the benefits of trade concessions or bargains are not limited to just two countries but are automatically extended to all WTO members. This way, even third countries gain from bilateral trade deals. It also guarantees that the most efficient producers—no matter which country they are from—get equal access to world markets, making trade more competitive and fairer.

However, the United States is imposing higher tariffs on goods from many countries of Europe, Asia and South American countries. This selective treatment suggests that not all WTO members are receiving equal trade conditions, which could be seen as a violation of WTO rules.

The U.S. might try to defend its position under Article XXI² of the GATT, which allows countries to restrict trade if it is necessary to protect national security interests. But this argument becomes weaker because the tariffs are applied across a wide range of products that are not directly related to national security.

Additionally, the U.S. cannot justify its action under Article XXIV, which permits exceptions for regional trade agreements (like the EU or NAFTA/USMCA), because these tariff changes are unilateral measures taken by a single country and not part of any regional agreement.

In short, while the U.S. argues that the tariffs are necessary, the way they are applied—targeting specific countries and covering many unrelated sectors—makes it difficult to justify them under WTO rules.

India’s Retaliatory Measures

Under the Customs Tariff Act, 1975, the Indian government has the authority to take action against unfair trade practices by other countries. If foreign trade policies harm India’s trade or industry, India can respond by raising tariffs or imposing special duties. Section 8A³ of the Act empowers the Central Government to increase the import duty on any article where it is satisfied that circumstances exist which render such an increase necessary.

Sections 9 and 9A⁴ of the Act give the government the power to deal with situations like dumping (when foreign goods are sold in India at very low prices to harm local producers) or unfair subsidies given by foreign governments to their exporters. In such cases, India can impose anti-dumping duties or countervailing duties to protect its domestic industries and ensure fair competition.

In simple terms, these legal provisions act like a shield for Indian businesses, making sure that foreign companies cannot harm Indian producers by using unfair pricing or subsidies.

Retaliating against U.S. trade actions is not as straightforward as it may look. This is because many key sectors in India, such as telecommunications, defence, and advanced technology, depend heavily on American equipment, software, and know-how. If India were to raise tariffs on goods coming from the U.S., it could end up hurting Indian companies that rely on these imports to function and grow.

That is why India’s response must carefully balance both strategic objectives (protecting its industries and sending a strong signal to the U.S.) and legal requirements under international trade rules.

One way India can respond is by using trade remedy measures such as anti-dumping duties (to counter goods sold below cost price) or countervailing duties (to offset unfair subsidies given by foreign governments). These steps are allowed under World Trade Organization (WTO) rules, but they must be carried out properly. India cannot just impose them suddenly; the law requires a transparent investigation, giving all parties a chance to present their views, and proving that Indian companies have actually suffered an economic injury because of unfair trade practices.

In India, this process is handled by the Directorate General of Trade Remedies (DGTR). The DGTR must ensure that any decision is consistent with the WTO Anti-Dumping Agreement (Agreement on the Implementation of Article VI⁵ of the GATT, 1994). This helps India make sure that its actions are not only fair but also defensible at the international level if challenged.

Impact

Indian companies that have business ties with the U.S., whether through partnerships, sales contracts, distribution networks, or credit arrangements, are likely to face new and urgent legal challenges because of the recent tariff changes. These tariffs can disrupt the foundation of existing trade agreements. For example, contracts that were negotiated based on earlier tariff rates may suddenly become unprofitable or difficult to fulfil. Higher tariffs can increase the cost of imports or reduce the competitiveness of exports, forcing companies to renegotiate contracts, restructure supply chains, or even face disputes with business partners.

In simple terms, tariff reforms don’t just raise prices; they can also shake up the legal and financial arrangements that companies depend on for smooth international trade. Indian businesses will now need to review their agreements carefully and may have to seek legal remedies or renegotiate terms to protect their interests.

At an early stage, companies need to carefully review the force majeure and change in law clauses in their contracts to check whether the recent tariff changes might apply to them. These clauses are important because they provide protection when new laws, regulations, or unexpected events make it impossible or very difficult to carry out what was originally agreed in the contract.

In simple terms, companies cannot use these clauses as an excuse just because their deal has become less convenient or less profitable. They can only rely on them if the legal changes make it truly impossible to perform the contract as promised.

Increase in Regulatory Compliance

The tariff measures do not engage a single body of law. A business exporting to or importing from the United States may need to consider, at the same time, WTO rules and dispute settlement, Indian customs and trade remedy law, the Foreign Exchange Management Act, 1999 (“FEMA”) for cross-border payments, and the terms of its commercial contracts.

Examining each of these in isolation risks inconsistent decisions. A renegotiated supply contract, for example, may need to reflect revised customs valuation, changed payment terms under FEMA, and a revised allocation of tariff risk between the parties. Businesses should therefore review their exposure across these areas together, so that commercial, regulatory and contractual decisions are aligned.

Recommendations

1. Free Trade Agreements

The Indian government should focus on signing more Free Trade Agreements (FTAs) with countries across different regions. This will give Indian companies access to diverse markets and reduce their dependence on just a few trading partners. As a result, India will be in a stronger position and less likely to give in to tariff-related pressure from any single country. In today’s multipolar world, tariffs are often driven by political motives rather than purely economic reasons. Many countries use trade barriers as a tool to protect their own interests or to gain leverage in global politics. By building multiple trade partnerships, India can safeguard its businesses from these political risks and create alternative markets for its exports.

2. Regulatory Compliance

In the coming years, signing contracts between countries will become more complicated. Negotiations between companies will take longer and involve more difficult terms, as both sides try to protect themselves from trade and tariff risks. Another major challenge will be the transfer of money in cross-border transactions. International payments could be delayed or disrupted because of regulatory compliance requirements, such as foreign exchange rules, anti-money laundering checks, and restrictions under trade or sanction laws.

3. Government Support

The government should take steps to protect vulnerable industries such as agriculture and the dairy sector, which are currently facing heavy tariff barriers in global markets. Since India is one of the largest exporters of agricultural and dairy products, these sectors are critical not only for the economy but also for the livelihoods of millions of farmers and workers.

To safeguard these industries, the government can provide export subsidies, which will make Indian products more competitive in international markets. In addition, legal and policy support for MSMEs (Micro, Small, and Medium Enterprises) is equally important. MSMEs often lack the resources and expertise to deal with complex trade rules or negotiate contracts on equal footing with larger foreign companies. With proper guidance and institutional backing, they will be better equipped to negotiate fair contracts, comply with international regulations, and expand their market reach.

Footnotes

1. WTO, General Agreement on Tariffs and Trade (GATT 1947), https://www.wto.org/english/docs_e/legal_e/gatt47_e.htm ↩

2. WTO, “Article XXI – Security Exceptions”, https://www.wto.org/english/res_e/booksp_e/gatt_ai_e/art21_e.pdf ↩

3. Section 8A, Customs Tariff Act, 1975 (power of the Central Government to increase import duties). ↩

4. Sections 9 (countervailing duty on subsidised articles) and 9A (anti-dumping duty on dumped articles), Customs Tariff Act, 1975. ↩

5. WTO, “Article VI – Anti-Dumping and Countervailing Duties”- https://www.wto.org/english/res_e/booksp_e/gatt_ai_e/art6_e.pdf ↩