The Shadow Tariff, Why Confusion in the US-India Trade Pact Could Be Costlier Than Any Duty
In the complex world of international trade, tariffs are usually measured in percentages. A 25% duty here, an 18% duty there—these are the numbers that make headlines and shape negotiations. But as trade expert Soumya Bhowmick argues, there is another cost that can be far more damaging than any formal tariff: the cost of confusion.
The recent US-India Joint Statement, issued in February 2026, has generated considerable ambiguity. The two sides say they have reached a framework for an interim agreement, while reaffirming a pathway toward a broader bilateral trade agreement. The statement specifies a reciprocal tariff rate of 18% on goods originating from India at this stage, and notes that broader tariff reductions are tied to the successful conclusion of the interim agreement.
This is an important distinction, suggesting a politically announced staging mechanism rather than a fully concluded, legally consolidated free trade agreement with final schedules, binding annexes, and settled dispute disciplines. In the gap between announcement and finalisation lies the fertile ground for confusion.
Trade as a Bargaining Tool
Trade under the Trump administration is used as a bargaining tool and a form of leverage. That approach rewards strong claims at the announcement stage, but it also raises the domestic cost of later recalibration, especially when early interpretations run ahead of what negotiators can actually lock in.
When a deal is announced with fanfare, expectations are set. Businesses begin to plan based on what they understand the deal to mean. Supply chains are reconfigured. Investment decisions are made. If the final agreement differs from the initial interpretation, the adjustment costs can be substantial.
This is why Bhowmick argues that India’s best response is disciplined sequencing: defining stages with credible boundaries, specifying what is out of scope for stage one, and signalling the domestic process and institutional steps that would govern stage two. The goal is not to pre-empt negotiation but to reduce interpretive space without locking in positions prematurely.
The Shadow Tariff
Why does confusion become costly so quickly? Because it behaves like a shadow tariff—an invisible tax that shows up not in customs schedules but in economic behaviour.
Confusion shows up as deferred shipments. When exporters are uncertain about what duties they will face, they hold back. They wait for clarity before committing goods to transit.
Confusion shows up as paused capital expenditure. Companies planning to expand capacity or enter new markets need to know the rules of the game. Uncertainty leads to delay.
Confusion shows up as cautious inventory behaviour. Importers and distributors adjust their stock levels downward, unwilling to hold goods that might become more expensive or less competitive.
Confusion shows up as delayed hedging decisions. Currency and commodity markets rely on predictability. When trade rules are unclear, hedging becomes more difficult and more expensive.
Confusion shows up as a risk premium on compliance and regulatory exposure. Businesses factor uncertainty into their cost calculations, and that factor acts like a tax on every transaction.
In farm-linked chains, transmission is even faster. Agricultural products are perishable; delays have immediate consequences. Farmers and traders need to know what duties will apply to their goods, and they need to know now.
The Interpretation Problem
The US-India Joint Statement is a classic example of how ambiguity can be costly. The statement specifies an 18% reciprocal tariff on Indian goods, but notes that broader tariff reductions are tied to the successful conclusion of the interim agreement. What does “successful conclusion” mean? What timeline is implied? What happens if negotiations stall?
These are not academic questions. For a manufacturer in Gujarat planning to export to the US, the difference between 18% and something lower matters. For a textile exporter in Tiruppur, the tariff rate determines competitiveness against Bangladesh or Vietnam. For a farmer in Punjab considering a new crop for export, the duty regime shapes the entire business case.
Without clarity, these economic actors make decisions based on their own interpretations—or they defer decisions altogether. Both outcomes impose costs.
The Need for Disciplined Sequencing
Bhowmick’s prescription is for India to adopt disciplined sequencing in its approach to the trade deal. This means several things.
First, define stages with credible boundaries. Make clear what is covered in stage one and what is explicitly excluded and deferred. Do not leave everything open for future negotiation; create firm demarcations that give businesses certainty about the current state of play.
Second, specify what is out of scope for stage one. If certain sectors or issues are too complex to resolve now, say so explicitly. Better to acknowledge difficult issues than to leave them hanging in ambiguity.
Third, signal the domestic process and institutional steps that would govern stage two. What consultations will take place? What approvals are required? What timeline is envisaged? Providing a roadmap reduces uncertainty even if the final destination remains unclear.
Fourth, treat implementation capacity as a core part of the bargain. Trade agreements are only as good as their implementation. Smaller firms, in particular, need support to navigate new rules and take advantage of new opportunities. Building that capacity should be part of the deal.
The Danger of Ambiguity as a Bargaining Device
Both sides should resist using ambiguity as a bargaining device. It may be tempting to keep options open, to leave room for manoeuvre, to avoid committing too early. But the costs of ambiguity—the shadow tariff—are real and substantial.
When negotiators use ambiguity to claim credit for outcomes that are not yet locked in, they create expectations that may not be met. When those expectations are disappointed, the political fallout can damage the relationship and undermine future cooperation.
Transparency, by contrast, builds trust. When both sides are clear about what has been agreed and what remains to be negotiated, businesses can plan, investors can commit, and the economic benefits of the deal can begin to flow even before final ratification.
The Broader Lesson
The US-India trade negotiations offer a broader lesson about trade policy in an era of geopolitical uncertainty. Traditional trade agreements took years to negotiate and were presented as final, comprehensive packages. That model is increasingly difficult to sustain.
The future may lie in staged agreements—interim deals that lock in early gains while leaving room for future expansion. But staged agreements require disciplined communication. They require clarity about what each stage delivers and what remains outstanding. They require a roadmap that businesses can understand and trust.
Without that clarity, the shadow tariff of confusion will continue to exact its toll.
Conclusion: Clarity as a Public Good
In trade, as in many areas of economic policy, clarity is a public good. It reduces transaction costs, enables investment, and allows markets to function efficiently. Governments that provide clarity give their businesses a competitive advantage.
The US-India Joint Statement has created a measure of confusion. That confusion is now acting as a shadow tariff, imposing costs on exporters, investors, and farmers. The task for negotiators on both sides is to move quickly to dispel that confusion—to provide the clarity that businesses need to plan and invest.
Disciplined sequencing, transparent communication, and a commitment to avoid ambiguity as a bargaining tool are the way forward. The alternative is to let the shadow tariff continue to accumulate, eating away at the potential gains from one of the world’s most important economic relationships.
Q&A: Unpacking the Cost of Confusion in Trade Pacts
Q1: What does the author mean by “the costliest tariff right now is confusion”?
A: The author argues that the uncertainty surrounding the US-India trade deal—what has been agreed, what remains to be negotiated, and what timelines apply—imposes real economic costs that function like a hidden tariff. This “shadow tariff” shows up as deferred shipments, paused capital expenditure, cautious inventory behaviour, delayed hedging decisions, and a risk premium on compliance. Unlike formal tariffs, which are visible and measurable, confusion creates invisible but substantial frictions throughout the economy.
Q2: Why is the US-India Joint Statement particularly prone to causing confusion?
A: The joint statement specifies an 18% reciprocal tariff on Indian goods but notes that broader tariff reductions are tied to the “successful conclusion” of an interim agreement. This creates ambiguity about what “successful conclusion” means, what timeline is implied, and what happens if negotiations stall. The statement is described as a “politically announced staging mechanism” rather than a fully concluded, legally consolidated FTA with final schedules and binding annexes. The gap between announcement and finalisation creates fertile ground for confusion.
Q3: How does confusion manifest in economic behaviour?
A: Confusion shows up in multiple ways: exporters defer shipments pending clarity; companies pause capital expenditure; importers adjust inventory downward; hedging decisions are delayed; and businesses factor a risk premium into compliance and regulatory exposure. In agricultural supply chains, where products are perishable, the transmission is even faster. Collectively, these behavioural adjustments act like a tax on trade, reducing economic activity and eroding the potential gains from the agreement.
Q4: What is “disciplined sequencing,” and why is it important?
A: Disciplined sequencing means defining stages of the trade agreement with credible boundaries, specifying what is covered in stage one and what is explicitly excluded and deferred, and signalling the domestic process and institutional steps that would govern stage two. This approach reduces interpretive space without pre-empting negotiation, providing businesses with the clarity they need to plan and invest. It treats implementation capacity as a core part of the bargain and resists using ambiguity as a bargaining device.
Q5: What broader lesson does the US-India experience offer for trade policy?
A: The experience suggests that the traditional model of comprehensive, years-long trade negotiations may be giving way to staged agreements that lock in early gains while leaving room for future expansion. However, staged agreements require disciplined communication and transparent roadmaps to be effective. Without clarity about what each stage delivers and what remains outstanding, the “shadow tariff” of confusion will continue to impose costs. Clarity in trade policy is a public good that enables investment and allows markets to function efficiently.
