Section 301: A test of competitiveness

The immediate debate has understandably focused on the additional customs burden. However, the more relevant question is whether this fundamentally alters India’s competitive position in the US market. The tariff, effective July 24, has been introduced on the ground that India has not fully aligned its import regime with US expectations on goods produced through forced labour.

This is neither an embargo nor a product-specific restriction directed against Indian manufacturers. It should also not be interpreted as an allegation that Indian exports are produced using forced labour. It is essentially a country-specific trade action and part of a broader trend in which advanced economies are linking market access with the domestic policy and regulatory choices of their trading partners.

Labour standards may be the present focus, but carbon emissions, sustainability, traceability, and human-rights due diligence are likely to play an equally important role in future trade policy. Competitiveness will therefore depend not only on production efficiency but also on the ability to meet increasingly demanding regulatory and social standards.

At first glance, an additional 10% tariff appears substantial. Yet international competitiveness is rarely determined by absolute tariff alone. Buyers assess the relative tariff burden across competing suppliers along with production cost, quality, reliability, freight, contractual relationships, and delivery schedules.

If competing countries face the same duty, sourcing patterns may not change significantly. Conversely, even a small tariff differential can influence orders in highly price-sensitive sectors.

Several of India’s principal competitors, including Bangladesh, Pakistan, Sri Lanka, Cambodia, Indonesia, Malaysia, Mexico, Canada, and the UK, are also subject to the additional 10% tariff. In many labour-intensive sectors, India’s relative position hence remains broadly unchanged.

A second group of major manufacturing economies, including China, Vietnam, Thailand, Türkiye, Brazil, South Africa, the Philippines, and Saudi Arabia, faces a higher tariff of 12.5%. This gives India a relative advantage of 2.5 percentage points. In price-sensitive products, such a differential can influence sourcing decisions, particularly when supported by India’s expanding manufacturing capabilities and reputation as a dependable supplier.

The comparison with certain developed economies is more complex. The EU, Japan, South Korea, Taiwan, and Switzerland benefit from a capped-duty arrangement under which the cumulative customs incidence is limited depending on the existing most-favoured nation (MFN) tariff. In products already subject to high MFN duties, suppliers from these economies may face a lower overall burden than Indian exporters.

A significant feature of the US measure is its extensive list of exemptions. The exclusions recognise that disruption of critical supply chains could raise costs for American manufacturers and consumers.

Pharmaceuticals, pharma ingredients, several agricultural products, semiconductor-manufacturing equipment, certain wood products, and other strategically important goods have been kept outside the additional tariff. Products already covered under Section 232 tariffs, including specified categories of steel, aluminium, and auto components, also generally remain outside its scope.

This provides protection to important Indian export sectors. Pharmaceuticals, where India has a strong global position, remain largely insulated, while several engineering products already covered by Section 232 are unaffected. The greater pressure is likely to fall on labour-intensive and consumer-oriented products competing primarily on price.

Textiles and apparel illustrate the mixed impact. India competes with Bangladesh, Cambodia, Pakistan, Sri Lanka, and Vietnam. Since most of these countries face either the same or a higher tariff, India’s relative position remains reasonably favourable.

India enjoys a modest tariff advantage over Vietnam. But that alone will not guarantee additional orders. Productivity, lead times, design capabilities, scale, and integration with global retail supply chains will ultimately determine whether India can acquire greater market share.

Engineering, electronics, gems and jewellery, and processed food will also experience differentiated outcomes. Some engineering products are exempt. India may nevertheless gain a relative advantage over China and certain East Asian suppliers in select categories.

In electronics, India’s long-term attractiveness as an alternative manufacturing base will depend more on infrastructure, policy stability, skilled manpower, scale, and depth of the component ecosystem than on one tariff measure.

Gems and jewellery may face greater price sensitivity, but design, craftsmanship, branding, and long-standing buyer relationships can offset moderate differences in landed cost, particularly in higher-value segments. For processed food and marine products, quality, food-safety compliance, traceability, and supply reliability will remain crucial.

The tariff must also be viewed against the broader restructuring of global supply chains. The pandemic, geopolitical conflicts, and strategic rivalry among major powers have shifted corporate priorities from maximum efficiency to greater resilience.

MNCs increasingly seek multiple production locations to avoid excessive dependence on any one geography. Their objective is no longer simply to minimise costs but also to secure continuity of supply during periods of geopolitical or logistical disruption.

India enters this changing environment with several structural strengths: a large manufacturing workforce, a substantial domestic market, a diversified industrial base, improving logistics, an expanding network of trade agreements, and increasing integration into global value chains.

India is also being viewed as a stable and trusted economic partner. These advantages are unlikely to be negated by a 10% tariff. This does not mean that the tariff is inconsequential. It will raise landed costs and lead to tougher commercial buyer-supplier negotiations. Labour-intensive sectors with thin margins may face pressure, and some exporters may have to share part of the additional cost with customers. However, exchange-rate movements, freight, logistics efficiency, productivity, quality, technology, policy predictability, and delivery reliability often exert a greater medium-term influence than tariffs alone.

India’s response should not be confined to individual tariff actions. The larger priority must be to accelerate structural reforms that strengthen manufacturing competitiveness. Investment in logistics, technology adoption, research, skilling, standards infrastructure, and sustainability will deliver benefits far beyond the immediate US measure.

India must deepen domestic value addition and reduce excessive dependence on imported components in strategic sectors. At the same time, India’s expanding network of trade agreements can support market diversification — an important source of economic resilience — and reduce dependence on any single destination.

The larger lesson is that future competitiveness will be defined by more than labour costs. Countries will compete on trusted supply chains, responsible manufacturing, tech capability, sustainability, policy stability, and institutional credibility.

The author is the Director General and CEO of the Federation of Indian Export Organisations (FIEO).

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.