The United States’ new 12.5% “forced-labour” tariff will not give India an edge over China, the principal target of the punitive trade measure, nor will it put New Delhi at any disadvantage vis-à-vis its key competitors such as Vietnam, Bangladesh, Malaysia, or Thailand. This is because the tariff rate is the same for all of these countries, including China, with marginal relief for Indonesia, which is to be levied a 10% duty.
The new impost will, however, inflate compliance costs for India’s textile and readymade garment (RMG) exporters in their single largest market. The additional expenses could erode their operating margins by 8-10%. This is a big hit given the prevailing tight margins of 5-8%. Premium products, where the exporters enjoy some bargaining power among the otherwise aggressively price-sensitive buyers, may be insulated from the blow to an extent.
The immediate fallout from the tariff, imposed under Section 301 of the US Tariff Act, also includes a short-term freeze on US retail giants’ apparel sourcing upgrade plans from India and a 3-5% increase in domestic units’ production costs due to the additional compliance requirements.
“The cost of certifications, audits, testing, documentation, digital tracking systems, and supplier verification can add anywhere from 1% to 5% of an export order’s value, with relatively higher costs for smaller exporters who lack dedicated compliance systems,” Trade Think Tank GTRI Founder Ajay Srivastava said. For readymade garments, the incremental cost may range from a few cents to over one dollar per piece, depending on whether exporters use basic certification schemes, blockchain-based tracking, or advanced fibre-verification technologies such as DNA tagging, he added.
Industry sources said most US buyers, barring those sourcing highly specialised products, are unlikely to accept price increases, forcing Indian manufacturers to absorb much of the additional cost through discounts.
The present level of forced labour compliance in the Indian industry and trade may not be enough to convince US buyers, who carry the burden of proof under Section 301. “Currently, an estimated 25-30% of Indian apparel export consignments carry formal, documented fibre traceability certifications. These are, however, predominantly driven by mandate requirements from high-end global fashion labels and large retail giants, rather than domestic baselines,” Federation of Indian Export Organisations Director-General Ajay Sahai said.
Synthetic Trap
What is the level of Chinese import content in India’s textile and RM exports? For 100% cotton apparel, the exposure is negligible, with India being a net exporter of cotton inputs. As a Tirupur-based knitwear exporter puts it, India relies on overseas markets, including the US only for limited quantities of specialised cotton such as contamination-free and extra-long staple varieties.
However, China is indeed a major sourcing centre for synthetic and blended apparel inputs, especially speciality synthetic yarns, performance fabrics and niche trims and embellishments. Chinese inputs are 12-15% in such products. It would seem that nearly a quarter of India’s apparent exports are composed of Chinese materials given that we imported $3.8 billion worth of cotton, assorted yarns, fabrics, and other items from the neighbour in FY26, against our total apparel exports of $15.8 billion. But a significant part of these imports from China are used for domestic consumption, especially for home textiles, technical textiles etc.
“India has not been able to sufficiently diversify and upgrade manmade fibre varieties. This has been a bottleneck and the key reason for high reliance on China in this segment,” Confederation of Indian Textile Industry Secretary-General Chandrima Chatterjee said. Conventionally, the MMF segment in India has suffered from excessive capacity concentration and import substitution policies.
After a 2022 US federal law prohibited the import of goods with any traces of forced labour in China, particularly from its autonomous Xinjiang Uyghur region, US retail giants like Walmart, Target, Gap and JCPenney reinforced their China+1 sourcing strategies. Consequently, Walmart and Target reportedly increased their RMG sourcing plans from India by several billion dollars. Much larger shares of the additional orders from the US retailers still went to Vietnam and Bangladesh, thanks to their more robust manufacturing ecosystems and stronger integration with global apparel supply chains.
Industry sources say in a few categories like cotton-rich home textiles and basic apparel pairs, a modest 4-6% incremental sourcing diversion to India was still evident between 2022 and 2025. However, this was not large enough to boost the fortunes of India’s RMG exporters.
At $15.8 billion, India’s total garment shipments to the world in FY26 were less than $16 billion in FY25, and only marginally higher than $15.4 billion registered in FY20. And the share of the US in India’s slow-growing textile and clothing (T&C) exports remained stuck around 25-26% through recent years, with a larger 30-32% share in the RM segment. To be sure, India’s T&C exports of $36.2 billion in FY28 were lower than $37 billion in FY25, with the US share being $9.4 billion and $10.7 billion respectively. RM exports to the US actually fell from $5.3 billion in FY22 to $4.8 billion in FY26.
Traceability Challenges
According to Sahai, the blanket 12.5% tariff under Section 301 has caused US retail giants to adopt a “wait-and-watch stance. He said short-term order expansion plans have apparently been frozen. India’s higher vulnerability under US forced labour adudits rests in the synthetic segment, where exporers will require to meticulosuly document that Chinese-oirgin internediates do not have supply-chain linkes to sanctioned regions, he said.
High-value consumer-facing dowsntream segments are the most eposed to the Section 301 onsyalught. RMG and home textiles like sheets, towels, made-ups are exposed to higher risk, as these are shipped directly to the US retail networks.
Cotton segment must be relatively insulated from the US levy, but can Indian exporters trace cotton back to the farm level to prove it? According to industry sources, full farm-to-retail traceability is operational only in the supply chains of organic cotton thanks to programmes like Better Cotton Initiative. However, for conventional, mass-market cotton, given the fragmented nature of Indian farming and its multi-layered mandi systems, 100% farm-level tracing is a logistical challenge.
Large, integrated textile mills and Tier-I exporters have fast-tracked the implementation of DNA tagging and blockchain tracking to safeguard their continued access to the Western markets. These include Global Organic Textile Standard, the norms for recycled claims, and blockchain-aided ledger tracking and isotopic/DNA tagging of cotton to rule out Xinjiang origin.
Prabhu Dhamodharan, convenor at the Coimbatore-based Indian Texpreneurs Federation said compliance-linked trade measures are emerging as a significant concern than headline tariff rates.
“India should seek maximum relief through the bilateral trade deal (being negotiated with the US), which could provide a meaningful competitive advantage. But at the very least, we must ensure tariff treatment remains aligned with competing countries,” he said.
Manoj Sethia, Managing Director of Surat-based Ginza Industries said synthetic textile companies continue to source inputs from China and Europe. “Nylon and polyester filament yarns are mostly imported from China. Currently, there is no system whereby it can be found if forced labour has been used in their production,” he says.
The relative importance of the US RM markets for Indian exporters is evident from the following: In its total RM exports in FY26, 55.6% of carpets, 43.9% made-ups and home furnishings, 34.8% of laminated industrial textiles, 30.9% of knitted apparel and 30.2% of non-knitted apparel were shipped to the US.