On July 30, 2025, US President Donald Trump announced that that starting August 1, Indian goods would be hit with a 25% tariff citing India’s high tariff and non-monetary trade barriers. He also announced additional penalty on Indian exports to US for India’s continued purchase of defence equipment and oil.
However, he framed it as a punishment on India, saying: “INDIA WILL THEREFORE BE PAYING A TARIFF OF 25%.” At face value, this sounds like a financial penalty that India will pay to the United States. But that’s not how tariffs work, and the statement oversimplifies the mechanics of tariffs and their economic implications. And understanding who actually pays the tariff, and how Indian exporters might still be impacted, requires a closer look at the mechanics of global trade.
In practice, a tariff is a tax imposed by a country on imported goods. When the US government slaps a 25% tariff on Indian imports, the money doesn’t come out of India’s treasury or the pockets of Indian exporters. Instead, the cost is paid by American importers, typically wholesalers, distributors, or manufacturers based in the US. These companies will be required to pay the 25% duty when Indian goods land at a US port. It is the import duty or the border tax collected by US Customs and Border Protection.
For example, if an Indian company exports $100,000 worth of textiles to a US retailer, the retailer would pay an additional $25,000 in tariffs to the US government upon import. The importer may handle this additional cost in various ways. They can absorb the cost and reduce their profit margins it that is possible, or they can pass the cost onto American consumers through higher prices. The importer can also seek to negotiate lower prices with Indian exporters to offset the tariff.
The choice depends on market dynamics, including demand for the product and the availability of alternatives.
Therefore, India does not pay the higher tariff, it is the importer and the end consumer that pays the Trump’s higher tariff. Therefore, while Trump is boasting about higher tariff collections, the money is coming from American consumers, not countries from where the goods were imported.
However, this doesn’t mean Indian businesses will remain unaffected. Higher price of the product due to higher tariff makes the product unattractive for the American importers and the end consumers. It the importer absorbs the full 25% markup, it cuts into its revenues, and if they raise prices for consumers, the sale may go down due to higher prices, as the customers will look for cheaper alternatives.
As a result, the American importer will look for alternative suppliers who don’t face the same tariff. This will lead to a decline in export volumes for Indian businesses. To maintain the export volume, Indian exporters might lower their prices to absorb some of the tariff burden.
This is where Indian exporters feel the squeeze, not because they are writing a check to the US government, but because their products become less competitive in the American market. Similarly, if the exporter agrees to reduce the export price to keep the price in US same as before after adding the tariff, this will cut into the revenue of the exporter.
This is how tariffs impact an exporting country indirectly. There’s no direct penalty or payment from India itself, as Trump’s claim suggest, but still the disruption to trade can be substantial.
The extent of the tariff’s impact on India depends heavily on whether the US buyers can source similar products from other countries without similar tariffs. Trump has threatened higher tariff on every country in the world, forcing them to enter into trade deals with US to avoid the higher duty. At present, US has signed such deals with some countries. Moreover, Trump has imposed different tariff rate for different countries, even on countries that have signed trade deals with the US.
For example, textile is a major product exported from India to US. Two other leading sources for textile are Bangladesh and Vietnam. Trump has announced 35% tariff on Bangladesh and 20% on Vietnam. Therefore, Bangladesh will not be a profitable alternative to Indian imports even with 25% tariff, but Vietnam will be.
Interesting to note that, 20% tariff on Vietnam was imposed after a trade deal with the country.
Even if there are sources will lower tariff, it may not be possible to shift from India to that country entirely due to various issues. For example, Apple makes its iPhones in China, India and Vietnam, which are sold worldwide including India. Tariff on China is at present 35%, higher than India’s announced 25%. Apple has already started to increase iPhones made in India for the US market due to the higher tariff on China, and even with 25%, it will be lower than China’s 35%. Although it is lower in Vietnam, the capacity there won’t be enough to shift production from India.
Moreover, finding alternative sources isn’t always straightforward, and it depends on whether American buyers can actually find those alternatives. If Indian goods are unique in quality, scale, or regulatory compliance, American companies may continue to source from India despite the added cost.
For example, India is a major supplier of generic pharmaceuticals, a sector where quality and regulatory compliance are critical. Switching to new suppliers involves costs, such as re-establishing supply chains or meeting US Food and Drug Administration standards. For specialised goods, India may retain its market position despite tariffs. However, for standardised products, the US may be able to turn to other nations, which will hit Indian exporters.
To conclude, while higher tariff will impact Indian exports to the US, Donald Trump’s claim that “India will be paying a tariff of 25%” misrepresents how tariffs work. Similarly, the penalty that he announced for buying Russian weapons and oil will also be paid by importers and end consumers, not the Indian govt.
The tariff plus penalty will be paid by American importers, who may handle it differently. Ultimately, it will impact India’s exports to the US for most products, but there will be no direct payment from India to US.