- Rising compliance costs erode Indian exporters’ already thin margins.
India’s readymade garment exporters are preparing for a fresh challenge in their biggest overseas market after the United States recently proposed additional tariffs of up to 12.5 per cent on imports from countries that Washington says have not done enough to address forced labour concerns.
The proposal, issued by the Office of the United States Trade Representative under a Section 301 investigation, imposes a 12.5 per cent duty on imports from countries including India, China, Vietnam, Japan, South Korea and Australia. Several countries, including Bangladesh, Pakistan, Malaysia and Indonesia, face either similar or slightly lower duties.
No Relative Advantage Over China
For India’s apparel industry, the measure offers little competitive advantage over China while increasing compliance costs at a time when exporters are already operating on thin margins.
The proposed tariff structure places India in the same bracket as China and several competing sourcing destinations. Industry executives quoted by Financial Express said this removes the possibility of a major sourcing shift away from Chinese suppliers toward Indian manufacturers.
Vietnam, Bangladesh, Malaysia and Thailand are also expected to remain competitive because they face similar tariff treatment. Indonesia enjoys marginal relief with a proposed 10 per cent duty.
As a result, Indian exporters are unlikely to gain market share solely because of the new US measures, despite China being one of the principal targets of Washington’s trade actions, according to industry executives cited by the publication.
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Compliance Costs Threaten Margins
The immediate impact of the tariff could be felt through rising compliance expenses. Industry estimates suggest exporters may face an 8-10 per cent erosion in operating margins, even though existing margins in the sector generally range between 5 per cent and 8 per cent.
Exporters may also see production costs rise by 3-5 per cent because of additional documentation, verification and traceability requirements. The extra cost could range from a few cents to more than one dollar per garment, depending on the level of certification and tracking technology adopted.
According to the report, many US buyers are unlikely to absorb the additional costs, forcing Indian exporters to bear a significant portion of the burden.
Why China+1 Did Not Deliver For India
The United States banned imports linked to forced labour in China’s Xinjiang region in 2022, prompting major retailers such as Walmart, Target, Gap and JCPenney to diversify sourcing under China+1 strategies.
Although some additional orders came to India, much larger gains went to Vietnam and Bangladesh because of stronger manufacturing ecosystems, better integration with global supply chains and greater scale, according to industry assessments.
Industry estimates indicate that India witnessed only a modest 4-6 per cent diversion in sourcing between 2022 and 2025 in categories such as cotton-rich home textiles and basic apparel. The gains were insufficient to significantly improve the fortunes of the country’s garment exporters.
Data cited by industry bodies also show that Vietnam, Indonesia and Cambodia captured a larger share of sourcing shifts, while Bangladesh remained the second-largest apparel supplier to the US during January-April 2026.
Dependence On Chinese Inputs Remains Limited
For cotton apparel, India’s exposure to Chinese inputs remains low because the country is a net exporter of cotton products. Exporters mainly import limited quantities of specialised cotton varieties.
The dependence is higher in synthetic and blended garments. Chinese materials account for around 12-15 per cent of inputs used in these products, particularly specialty yarns, performance fabrics and decorative trims, according to industry estimates cited in the report.
India imported about $3.8 billion worth of textile inputs from China during FY26, compared with apparel exports of $15.8 billion. However, a substantial portion of these imports is consumed domestically in segments such as home textiles and technical textiles.
Industry representatives said that India has struggled to diversify and upgrade man-made fibre production, increasing reliance on Chinese suppliers in this category.
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Small Exporters Face The Biggest Challenge
The new compliance requirements may prove particularly difficult for smaller exporters that lack the financial resources to invest in advanced traceability systems.
Large integrated mills and leading exporters have accelerated the use of blockchain tracking, DNA tagging and certification systems to maintain access to Western markets. Organic cotton supply chains already have stronger farm-to-retail traceability, according to industry sources cited by the report.
Conventional cotton remains harder to trace because of fragmented farming patterns and multiple layers in agricultural marketing channels. Industry sources said complete farm-level traceability remains difficult for mass-market cotton products.
Trade analysts believe that Washington is also using Section 301 investigations to gain leverage in broader trade negotiations with India. New Delhi is seeking preferential tariff access through an ongoing trade agreement with the United States.
Notably last week, Commerce and Industry Minister Piyush Goyal said both countries were moving quickly towards finalising the first phase of a trade deal, potentially by mid-July.
