Understanding the India-US Cotton-Linked Textile Trade Arrangement: Mechanics and Market Implications

The proposed India-US trade agreement, expected to be finalized in March, introduces a conditional tariff structure for textile exports that warrants careful examination. Commerce Minister Piyush Goyal has confirmed that Indian textile manufacturers using American cotton in production will access the US market with significantly reduced duties—reciprocal tariffs dropping to 18%, with effective rates estimated at approximately 3% when combined with existing MFN (Most Favoured Nation) provisions.

This arrangement follows a similar structure to the recent US-Bangladesh trade agreement, which reduced reciprocal tariffs to 19% and granted duty-free access for select textiles contingent on Bangladeshi manufacturers sourcing American cotton and man-made fibers. The parallel framework raises questions about emerging patterns in US trade policy and the conditions under which developing economies can access American consumer markets.

The Mechanics of the Conditional Access

Under the proposed structure, Indian manufacturers importing US cotton for processing will face zero duty on those imports. The reciprocal tariff reduction to 18%—combined with the continued application of MFN tariffs—creates the estimated 3% effective rate. This differs from unconditional market access in that benefits are explicitly tied to supply chain integration with American raw material producers.

The arrangement preserves most of India’s agricultural sector from liberalization, with 90-95% of farm products excluded from the agreement. This reflects ongoing sensitivities in India’s domestic political economy, where agricultural policy remains contentious and farmer welfare is a significant electoral consideration.

Market Context and Competitive Dynamics

Indian exporters had expressed concern following the US-Bangladesh agreement, which appeared to offer Bangladeshi manufacturers preferential terms in the American market. Bangladesh’s garment sector accounts for over 80% of that country’s export earnings and employs approximately four million workers, making textile access to the US market economically critical.

The India-US arrangement attempts to address this competitive asymmetry while acknowledging fundamental differences in the two economies. Goyal noted that US cotton production remains smaller than India’s domestic output, suggesting the arrangement is designed to supplement rather than replace Indian cotton in manufacturing.

Trade Policy Implications

This model of conditional market access represents a specific approach to trade liberalization—one that prioritizes supply chain integration over traditional tariff elimination. From the US perspective, it creates guaranteed demand for American agricultural products while maintaining some domestic production advantages. From India’s perspective, it offers enhanced market access without requiring comprehensive agricultural liberalization.

The structure also raises questions about trade policy effectiveness. Does conditioning market access on specific input sourcing create sustainable competitive advantages, or does it introduce supply chain rigidities that may prove problematic during commodity price fluctuations or supply disruptions?

Broader Negotiation Context

Goyal indicated that India is simultaneously pursuing trade negotiations with the European Union and United Kingdom, suggesting New Delhi is exploring multiple pathways to expand export markets. The extent to which this cotton-linkage model becomes a template for other negotiations—or remains specific to the US relationship—will likely depend on how the arrangement performs once implemented.

The agricultural exclusions also signal India’s negotiating boundaries. While willing to integrate with partner supply chains in manufacturing sectors, India appears less willing to liberalize agricultural trade, reflecting domestic political realities and food security considerations.

Implementation Questions

Several practical questions remain about implementation: How will compliance be verified? What happens to manufacturers who use blended cotton sources? How will fluctuations in US cotton prices affect the competitiveness of this arrangement? These operational details will significantly influence whether the agreement delivers the market access benefits both sides anticipate.

The March timeline suggests negotiations are well advanced, though the actual text and final terms have not been publicly released. As with any trade agreement, the difference between announced intentions and implemented realities often emerges in implementation details and dispute resolution mechanisms.