OTR : Tariff Shifts Redraw South Asia's Trade Landscape

The US has activated tariffs on nearly 70 countries, ranging from 10 to 50 percent — the highest average US tariff rate since 1933, according to analysis by the Yale Budget Lab. The lab projects these tariffs will cost the average US household the equivalent of US$2,400 (NZ$4,100) annually.

So how are these new tariffs affecting South Asian nations, their industries, and the wider geopolitical landscape?

India: From ‘Great Friend’ to Strategic Friction

Indian Prime Minister Narendra Modi was among the first world leaders to visit Washington after US President Donald Trump began his second term. Trump hailed Modi as his “great friend,” with the two leaders setting an ambitious target of doubling trade to US$500 billion by 2030.

Less than six months later, relations appear to have soured.

Indian Prime Minister Narendra Modi with US President Donald J. Trump at a rally in Houston in 2019. (Image sourced/flickr)

Trump has imposed 50 percent tariffs on Indian imports, with the threat of an additional 10 percent still looming due to India’s membership in the BRICS grouping — which includes China, Russia and South Africa.

On July 31, Trump announced a 25 percent tariff, which came into force on August 7. He then added another 25 percent on August 6 as a penalty for India’s purchase of Russian oil. The doubled tariff rate takes effect from August 27.

“Well, we are negotiating right now and it's also BRICS. BRICS, which is basically a group of countries that are anti the United States and India is a member of that if you can believe it...It is an attack on the dollar and we are not going to let anybody attack the dollar. So it's partially BRICS and it's partially trade,” Trump said last month.

India exported nearly US$87 billion worth of goods to the US in 2024, making America its largest export market. Sectors such as textiles, footwear, shrimp, gems and jewellery are now under threat.

An Al Jazeera report noted that Washington’s earlier warmth towards India stemmed from its role as a balancing force against Beijing’s growing influence in the Asia-Pacific. Under Obama, the US famously described India as its “best partner.” Today, relations look slightly different.

Tensions have been fuelled by US comments on India’s “internal matters”—including Trump’s repeated claim that the US brokered a ceasefire between India and Pakistan. Washington has also pushed for access to India’s agriculture and dairy sectors to reduce its US$45 billion trade deficit. For New Delhi, however, those sectors remain politically untouchable, as they account for more than 45 percent of India’s employment.

India called the tariffs “unfortunate, unfair, unjustified and unreasonable.” Foreign Ministry spokesperson Randhir Jaiswal said New Delhi would take “all actions necessary to protect its interests".

On Indian Independence Day, Modi avoided mentioning the tariffs directly but referenced them in his speech:

“Farmers, fishermen, cattle rearers are our top priorities. Modi will stand like a wall against any policy that threatens their interests. India will never compromise when it comes to protecting the interests of our farmers.”

The tariffs could, however, push India closer to Russia and China. Former US National Security Adviser John Bolton warned that penalising India for buying Russian oil — while not applying the same to China — risks driving New Delhi deeper into the Beijing-Moscow orbit.

On August 21, External Affairs Minister S Jaishankar addressed a joint press interaction with Russian Foreign Minister Sergei Lavrov in Moscow following their talks. He said that India is perplexed behind the logic of the additional 25% tariff : “We are not the biggest purchasers of Russian Oil, that is China… the Americans said for the last few years that we should do everything to stabilise the world energy markets, including buying oil from Russia. Incidentally We are also buying oil from USA, the amount of which in increasing every year.”

For now, the world’s eyes are on trade talks set to resume in late August. Whether India will quietly scale back oil purchases from Russia or stand firm remains to be seen. Either way, Modi faces one of the biggest foreign policy tests of his tenure.

Bangladesh and Pakistan: Playing the Tariff Game Smartly

Bangladesh, the world’s second-largest garment exporter, managed to negotiate its tariffs down to 20% from an initially proposed 37%. Its lead negotiator, National Security Adviser Khalilur Rahman, said the deal balanced support for US agriculture with the protection of Bangladesh’s US$40 billion apparel sector.

About 80% of Bangladesh’s exports come from garments, employing over 4 million workers. Although the effective tariff will be closer to 36% after accounting for existing duties, most of its core export categories—such as formal shirts, trousers, and sweaters—will face below-average tariffs, keeping them competitive in the US market.

Meanwhile, Pakistan emerged as one of the few winners in this round of tariff talks. Facing an initial 29% tariff, Islamabad secured a final rate of just 19%. The move coincided with warming ties between the two nations, including a surprising oil development deal announced by Trump on his social media platform.

Trump’s message read: “We have just concluded a deal with the country of Pakistan, whereby Pakistan and the United States will work together on developing their massive oil reserves. We are in the process of choosing the oil company that will lead this partnership. Who knows, maybe they’ll be selling oil to India some day!”

According to some experts, Trump is using all the methods to pressurise India to buckle under the pressure and agree to his terms to strike a deal that works in the favour of the USA.

With textiles accounting for nearly 60% of Pakistan’s exports—most of which go to the US—Islamabad now finds itself in an advantageous position compared to regional competitors.

Sri Lanka: Small Victory in a Difficult Fight

Sri Lanka, recovering from its 2022 economic collapse, initially faced a 44% tariff under the new US rules. Thanks to weeks of negotiations, Colombo succeeded in lowering the rate to 20%—still steep, but more manageable.

Even with the reduced 20% tariff (down from a proposed 44%), Sri Lanka’s exports are expected to take a significant hit. Image sources/amc

The US is Sri Lanka’s largest single export market, accounting for over US$3.15 billion in 2024—more than a quarter of its global exports. The apparel industry, employing 350,000 workers and producing goods for major brands like Nike and Victoria’s Secret, is especially exposed.

Even with the reduced 20% tariff (down from a proposed 44%), Sri Lanka’s exports are expected to take a significant hit. A recent study by Dr Asanka Wijesinghe from the Institute of Policy Studies found that apparel exports could decline by 12.1%, and rubber exports by as much as 42%.

While the government celebrated the reduced rate as a diplomatic win, critics say the full terms of the US-Sri Lanka agreement have not been made public. Trump’s executive order referenced Sri Lanka’s "alignment with US economic and national security priorities,” raising concerns over sovereignty and long-term independence.

The IMF has warned that US tariffs could reduce Sri Lanka’s GDP by up to 1.5% from baseline projections, and cause a spike in unemployment—particularly in sectors already reeling from economic shocks.

Nepal: Lower Rates, Bigger Questions

Nepal has been slapped with a baseline 10% tariff—relatively low compared to its neighbours. With total trade with the US amounting to around Rs36.79 billion last year, its main exports include carpets, pashmina, dog chews, and handicrafts.

The 2015 Nepal Trade Preference Program (NTPP) granted duty-free access to 77 products, but it remains unclear if the 10% tariff will apply to those items or whether the NTPP will be renewed beyond 2025.

Economists believe the tariff impact will be limited, but there are concerns about transshipment—where other nations use Nepal as a backdoor to access US markets. Such practices could invite scrutiny from US trade authorities, potentially putting legitimate Nepali exports at risk.

What next?

The US tariff war has destabilised South Asia’s key export industries, placing millions of jobs at risk in textiles, garments, and agriculture. For India, the tariffs also threaten to redraw its geopolitical alignments.

The tariff war has exposed fractures in longstanding alliances while pushing some nations toward alternative blocs and partnerships.

India’s next moves will be closely watched, especially as Modi prepares to attend the Shanghai Cooperation Organization summit (SCO Summit) and host Putin in Delhi. For Sri Lanka and Bangladesh, the challenge lies in shielding export-dependent industries while staying on Washington’s good side.

Whether South Asian governments stand firm, compromise, or retaliate will shape not only their trade futures but also the balance of power in the wider Indo-Pacific.

Asia Media Centre