A Modern-Day Mahabharata: Tariffs, Alliances, and the Struggle for Sovereignty

The war during the Mahabharata was fought between the Kauravas and Pandavas in Bharat. However, now it goes beyond the boundary and instruments of war, changing from deception to “tariff”. A similar kind of Mahabrat war has been observed in the current situation in the world, where America holds the weapon of tariffs to destroy the economy (India), especially exports to America. 

In August 2025, US President Donald Trump imposed a 50 per cent tariff on Indian imports as a response to India's continued purchase of crude oil from Russia. It has created chaos among the Indian exporters by looking into the risk of $86.5 billion in annual exports to the U.S. This tariff burden on India is more than on China (30%) and Vietnam (20%). The rise in tariffs has raised serious concerns among economists, policymakers and businesses across the globe and particularly in India about the future of Indo-U.S. economic relations. This policy bypasses all international trade theories in economics, which talk about equilibrium. 

Tariff Theory

In economics, tariffs are a form of indirect tax on imported goods to protect domestic industries by increasing the cost of imported goods. The theories in the literature argue that tariffs will make imported goods uncompetitive in the domestic market if the same product is available in the market at a lower price. However, if the domestic market faces a problem of inflation and domestic industries fail to fulfil the domestic demand, the imposition of a tariff will have an adverse impact on the respective domestic country.

The negative implications include rising consumer prices in the domestic country, a reduction in trade volume, deadweight loss due to the inefficient allocation of resources, and a fall in employment opportunities. In Trump’s case, the tariffs were not intended to shield US producers from unfair competition, but rather to penalise a foreign country (India) based on its policy choices. Considering the theories, the imposed tariff by America would not only affect India but also have an impact on the American economy.

The Indian perspective: 

As per the RBI report, India recorded exports of US$824.9 billion in service trade during the financial year 2024-25, at a growth of 76.11 per cent compared to 2014-15 (see figure 1)

Figure 1: India’s Total Export Value (in US $ Billion)

It is also observed from figure 2 that the USA is the largest destination for India’s products. In 2024-25, Indian exports to the U.S. were  $86.51 billion, which constituted nearly 20 per cent of the country's total exports (See figure 2).

Figure 2: Country-wise India’s exports and its share in 2024-25

This substantial market share highlights how important the United States is to export-oriented industries in India. Hence, any trade disruption can have a significant impact on export-driven industries, employment, foreign exchange earnings, and the overall trade balance, as one-fifth of India's total exports are dependent on U.S. demand. 

These sectors such as textiles, leather goods, marine products, and gems and jewellery, are largely micro, small, and medium enterprises (MSMEs), and are crucial in providing employment in rural and semi-urban regions (IBEF, 2025).  Hence, a sudden and steep tariff makes Indian goods significantly less competitive in the U.S. market thus causing an existential threat due to high logistics and regulatory compliance costs.  This in turn, makes American buyers prefer cheaper alternatives from countries like Bangladesh and Vietnam or shift to domestic suppliers within the U.S., leading to order cancellations and broken contracts for Indian exporters.

The consequences for India are multi-fold. Export earnings are expected to decline, triggering job losses in already fragile employment sectors and potentially widening the country’s current account deficit. These economic costs are particularly harsh given that India’s recent foreign policy decisions—such as diversifying its oil imports by purchasing discounted crude oil from Russia in the wake of the Ukraine war—were driven by strategic economic autonomy. The Indian government, through the Ministry of External Affairs, has rightly criticised the tariff as “unjustified, unfair, and unreasonable,” emphasising the mismatch between the policy’s political motivations and its economic consequences.

The USA Perspective:

In a historic shift, average US tariffs have jumped to 20.1%,  their highest level since the 1910s compared to just 2.4% at the start of 2025, according to the World Trade Organisation and the IMF. This massive increase reflects new barriers on imports from many countries: 25% higher duties on Canadian and Mexican goods, 30% on Chinese goods, and 10% on most others. Tariffs on Indian goods are even steeper, now reaching 50% for most products.

A Federal Reserve Bank of San Francisco (2025) study found that such tariff hikes have led to a decline in employment, especially in agriculture, and have reduced real income. A big reason is that foreign exporters rarely absorb these costs—recent research by the US Congressional Budget Office and the Peterson Institute finds over 90% of tariffs are ‘passed through’ into US import prices. In other words, when tariffs go up 50%, the cost of the imported product for US buyers typically rises by nearly the same amount.

Higher Costs Across the Board/ A “No Win situation”:

Tariffs act like an import tax. US companies must choose between accepting lower profit margins or raising retail prices. Either way, competitiveness suffers. While some domestic producers enjoy short-term protection, their gains are narrow and often offset by wider economic losses. Retaliatory tariffs from other countries also hurt US exporters, especially in agriculture and manufacturing. The limited fiscal revenue from tariffs pales in comparison to the resulting loss in household and business income.

Inflationary Pressures and the Fed Policy

Tariff-driven price hikes have contributed to inflation. The University of Michigan’s consumer survey reported one-year inflation expectations at 4.9% in March 2025, a 28‑month high. Anticipating future price rises, some consumers are frontloading purchases, which could boost spending this year, but at the cost of weaker demand in 2026 when purchasing power is squeezed.

This has forced the Federal Reserve to scale back its planned interest rate cuts. Even if the impact is partly temporary, the inflationary effect makes the Fed more cautious, slowing potential economic relief.
Policy recommendations

This development underscores the urgency for India to not only diversify its export markets further but also strengthen trade diplomacy and resilience mechanisms to cushion the economy against unilateral protectionist measures by major global partners. India needs to broaden its export markets to other major economies in Europe, Africa and South America in order to reduce its over-dependence on the US market. 

Indian exporters especially in the area of textiles, precious stones and jewelry can be assisted by the government in the form of subsidies, tax relief or any other form of assistance in order to absorb the external shocks which will be experienced in the times to come. 

India should continue safeguarding its strategic autonomy, be it the dealings in energy or defence at a global level. The urgent focus needs to be on defending national interest, protecting jobs and maintaining stability in the wake of external shocks.