Indian exporters seek relaxed rules of origin in India-US trade agreement to capitalise on US-China tariff war.
Eyeing gains from the tariff war between US and China, Indian exporters of certain products, such as garments, machinery and engineering goods, have made a case for relaxed rules of origin (ROO) in the proposed India-US bilateral trade agreement (BTA). They want rules that will allow them to add value with ease to items part-manufactured in Beijing and then export to the American market, sources have said.
The Commerce Department, however, has asked the Indian industry to be cautious for now and abide by existing non-preferential rules of origin in the US. This includes either fulfilling wholly obtained criteria (where the entire product is manufactured in the source country) or meeting the ‘substantial transformation’ test.
The substantial transformation test seeks to establish that enough manufacturing has taken place in the source country to bring about substantial transformation in the inputs bought from a third country.
“It is important to ensure that Indian exports are not identified by US authorities as transshipments from China or any other country subject to higher import tariffs than India. Otherwise penalties might apply,” Commerce Department officials said.
In a recent meeting with representatives from industry bodies such as CII, FICCI, PHDCCI, ICEA and ASSOCHAM chaired by Commerce Special Secretary Rajesh Agarwal, the government acknowledged specific suggestions made by the participants on the need for codification and quantification of value addition norms to keep ‘substantial transformation’ criteria objective in the US.
Some exporters, however, want the government to insist on relaxed substantial transformation criteria (including low value addition norms) for certain sectors as part of the BTA being negotiated, so that they do not miss out on the opportunity offered by the US-China tariff war.
“We need to take advantage of whatever opportunities we have. If base manufacturing is done in China and the balance manufacturing is done in India with some amount of value addition, it can really boost Indian exports of some items to the US. But for that we need to establish clear rules of origin in the BTA being negotiated that will allow such exports with basic minimal value addition,” an exporter of engineering products told businessline.
With China’s total goods exports to the US in calendar year 2024 estimated at around $438 billion, there is big opportunity for India to capture at least a small part of the market that Beijing is forced to relinquish because of high tariffs on Chinese products.
India and the US need to agree on the ROO soon, before the actual negotiations begin for the BTA, so that the industry knows what is allowed and prepares accordingly, a garment exporter noted. “For instance, garment manufacturers in India will benefit if they import fabric from China and do the tailoring in India before exporting the final product to the US. But they can’t do it till it is clearly established that the ROO allows that. They need to know as early as possible to create capacities accordingly as the window for the tariff advantage is uncertain,” the garment exporter said.
10 per cent baseline duty
The US has imposed a 10 per cent baseline duty on goods imported from most countries, including India, and has kept the rest of the reciprocal duty announced separately on each country in suspension for a 90-day period, till July 8. The average import tariffs on Chinese products is much higher at 124 per cent.
India is negotiating a BTA with the US and hopes to not only avoid the balance reciprocal tariffs after the 90-day pause period is over but also get the baseline tariffs reversed.
“We need to act fast and try and get some of China’s business. Otherwise, we might lose most of it to competing countries such as Vietnam,” the exporter said.
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Published on May 4, 2025