U.S. Reciprocal Tariffs and South Asia's Economic Stability: An Analysis of Policy Risks and Responses
Arafatur Rahaman argues that the policy represents an inflection point, rendering it a necessity for South Asian states to reconsider their export-import strategy, trade diplomacy and economic resilience.
The United States (U.S.) recently imposed reciprocal tariffs targeting multiple countries; those levies that mirror the trade barriers its trading partners put on American goods punctuate a fundamental transformation in global trade politics. Although the policy has been presented domestically as an effort to "level the playing field," its impact goes well beyond American borders, affecting developing regions that have depended on export-led growth. Nowhere is this clearer than in South Asia, where the economies of countries like Bangladesh, India, Pakistan, and Sri Lanka are deeply interwoven with those of the United States. Now, the predictable dynamics of tit-for-tat tariffs are poised to change that, with potential implications for the region's long-term economy.
South Asia's participation in global value chains has been a function of its comparative advantages, such as cheap labor, strong manufacturing potential, and preferential access to Western markets. Not only is the United States, in many cases, the largest export market for South Asian countries, but it has also been a significant factor in creating jobs through textiles and apparel, leather, agricultural products, IT services, and light manufacturing. The move to reciprocal tariff enforcement will bring added uncertainty for these sectors. This is particularly serious for economies that rely heavily on the U.S. to maintain earnings from exports and industrial growth.
Bangladesh, for example, exports more than 20 percent of its total exports, largely ready-made garments to the United States. With over 4 million people employed in the sector, and still price-sensitive. In 2024, U.S. trade with Bangladesh was estimated $12.4 billion, up 3 percent compared to 2023. Total goods trade was $10.7 billion, U.S. goods exports were $2.3 billion and imports from the United States reached $8.4 billion, according to the Office of the U.S. Trade Representative (USTR). The goods trade deficit in the United States expanded to $6.1 billion. Overall, services trade between the two countries reached $1.8 billion in 2024. There was also a sharp rise in U.S. exports of services to $ 1.3 billion, while imports of services climbed to $423 million. The U.S. continued to register a healthy services trade surplus (of $926 million), 17.4 percent higher over the previous year's level.
Even a relatively small increase in tariffs could make Bangladeshi goods less competitive compared to those of suppliers in Latin America, which have duty-free access to the United States under American trade agreements. This may trigger a shift in how U.S. retailers source products, resulting in fewer orders, factory shutdowns, and job losses as well. Bangladesh is an emerging economy still recovering from the COVID-19 economic shock and the Russia-Ukraine war, as well as this year's global supply chain disruptions and inflationary shocks. U.S. tariffs would add fuel to an already overheated engine.
In India, which has a more diversified export basket, the challenge may be different but no less complex. Pharmaceuticals, machinery, metals, and ICT services, in particular, are 'bunching' sectors traded between the U.S. and India. U.S.-India trade totaled $212.3 billion by 2024, representing an 8.3% increase over the prior year. Trade in goods totaled $128.9 billion. Exports of goods to India rose to $41.5 billion and imports from India rose to $87.3 billion. The U.S. goods trade deficit expanded to $45.8 billion, up 5.9 % from 2023, according to the data of the Office of the U.S. Trade Representative (USTR). Mutually levied tariffs that are not already in place may be imposed on products where India has protective duties, specifically on consumer electronics, automobiles, and agricultural products. For India, the risk is not just ceding competition in U.S. markets, but also unleashing a broader cycle of retaliation. New Delhi could attempt to apply its own countermeasures to maintain some bargaining power, potentially leading to a destabilizing cycle. As India is transforming itself into a global manufacturing hub through "Make in India", uncertainty surrounding tariffs can deter foreign direct investment and hinder the growth of supply chains.
Pakistan and Sri Lanka, which are currently experiencing economic crises of their own, would be even more susceptible. Pakistan depends heavily on textile exports, a sizable portion of which goes to the U.S. Any increase in duties would erode the profit margins of a sector already beleaguered by high energy costs and a credit crunch. Sri Lanka, by contrast, relies on the U.S. market for garments, rubber items and tea. In a context in which the country is undergoing debt restructuring and fiscal adjustment, lower earnings on exports might derail stabilization efforts. Reciprocal U.S. tariffs could still add to the harm, leaving both countries with little policy space and even deeper unemployment, poverty and social unrest.
The disintegration of global trade governance is a big worry for the region. Reciprocal tariffs signal a departure from multilateral norms under the WTO, toward unilateral policy tools and transactional negotiations. This shift undermines the interests of South Asian economies, which have historically gained from predictable trade rules and stable tariff schedules. Many lack the leverage to wrangle for Washington exemptions or special treatment and are in a weaker position than they have been for years. The asymmetry is evident; the United States can cushion disruptions through domestic subsidies and market diversification, but small South Asian exporters have far fewer buffers.
If tariffs by the United States increase, South Asian countries may have to rely more on China, which remains their largest source of raw materials, machinery, and intermediate goods. That deepened reliance would run counter to the United States' strategic goal of countering China's power in Asia. Opportunities could also arise for countries like Vietnam or Mexico, potentially undermining years of strategy on the part of U.S. businesses to shift away from China to them as a low-cost alternative production center with more favorable U.S. trade terms. Unless South Asia adjusts its strategy, there is a distinct danger that it will be shunted aside.
And yet, amidst this crisis,, there is also an opportunity. It presents an opportunity for South Asian governments to implement structural reforms in their countries. Diversification is key not just to export destinations but also to making products more complex and scaling up towards higher-value manufacturing. To adapt to new requirements from Western markets, the region needs to invest in technological upgrading, logistics efficiency, and compliance with labor and environmental regulations. Prospecting for more intra-regional trade under SAARC or BIMSTEC can serve as a counter to excessive dependence on a single export market.
A second strategic response is to pursue bilateral trade agreements. South Asia also lacks the extensive list of sweeping trade agreements with the United States that is found in places like Southeast Asia or Latin America. Countries such as Bangladesh may preferential market access to be assured as they move out of LDC status, but India may also use tariff negotiations as leverage to ensure its long-term strategic interests. It will be necessary to have proactive diplomacy, not just reactive policymaking.
In short, the effect of U.S. reciprocal tariffs on South Asia is anything but uniform, although heightened exposure is a common dominant thread. The impact will be manageable for some countries, but potentially severe for others. The policy represents an inflection point, rendering it a necessity for South Asian states to reconsider their export-import strategy, trade diplomacy, and economic resilience. The risks are enormous, but the moment is also a push toward long-overdue change. Figuring out how to manage in this changing trade landscape will demand a new combination of foresight, flexibility, and commitment to regional cooperation.
Arafatur Rahaman is a researcher from Southeast University, Bangladesh, and Co-founder & Executive Director of Adroit Discovery Lab. He can be contacted at: a.rahaman133@gmail.com His academic work addresses issues in finance, corporate governance, migration, gender, and digital transformation, contributing to stronger intellectual connections between Asian and Western perspectives.
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