At a time when India and the US are working to conclude a Bilateral Trade Agreement (BTA), a fresh trade dispute over the US Section 301 investigation could lead to an economy-wide 12.5% tariff on Indian exports.
Washington has alleged that India lacks a dedicated legal prohibition on the import of goods made with forced labour. India, however, has strongly opposed the proposal, arguing that the US is using human rights as a pretext for protectionism while simultaneously carving out broad exemptions for products that serve its own economic interests.
What is the US proposing?
The Office of the US Trade Representative (USTR) has initiated a Section 301 investigation into more than 60 economies, including India, alleging they do not prohibit imports of goods produced with forced labour.
Section 301 of the US Trade Act, 1974, authorises the USTR to investigate foreign trade practices deemed "unreasonable" or discriminatory and harmful to US commerce. If violations are established, Washington can impose unilateral trade remedies, including tariffs. In India's case, the proposal is an additional 12.5% tariff across almost all product categories, subject to limited exclusions.
The current investigation differs from previous Section 301 probes, which focused on issues such as intellectual property, digital taxes and technology transfers. In 2020, for instance, the US launched a Section 301 investigation into India's equalisation levy on digital services. Similar probes were initiated against countries including Italy, Turkey and the UK.
What makes the current exercise unprecedented is its scale, covering over 60 jurisdictions and focusing on labour standards rather than trade practices.
What is India's argument?
India has argued that the US proposal is internally inconsistent because it exempts nearly 1,600 products unavailable in the US while imposing forced-labour-linked tariffs on others. It has also questioned exemptions for products made using US cotton and certain agricultural goods despite acknowledged forced-labour risks, arguing that these undermine the stated objective of eliminating forced labour from global supply chains.
India's response rests on three key arguments. First, the USTR has failed to produce country-specific evidence linking Indian exports to forced labour. During the public hearing, Commerce Ministry Joint Secretary Brij Mohan Mishra argued there was "inadequate and insufficient evidence" to establish that India's legal framework gives exporters an unfair competitive advantage over US industry. India criticised the USTR for a sweeping conclusion across more than 60 economies without conducting country-specific assessments.
Second, India contends that labour protection need not take the form of a single import ban. Although it lacks a standalone law prohibiting imports made with forced labour, constitutional safeguards, criminal statutes, labour laws and enforcement mechanisms collectively prohibit forced labour.
Third, India argues that labour standards should be addressed through bilateral trade negotiations rather than unilateral tariff measures.
"If forced-labour risk really drove the policy, flagged-risk commodities wouldn't be waived on commercial grounds. India also separately argues USTR lacks country- and product-specific evidence linking Indian exports to forced labour, making the 'unreasonable' finding legally unsupported," said Gulzar Didwania, Partner, Deloitte India.
Indian industry has also argued that a uniform tariff ignores differences across sectors. Many exporters already comply with stringent ESG (Environmental, Social, Governance) standards, third-party audits and contractual labour compliance requirements. They warn that additional tariffs would ultimately increase costs for US consumers without materially improving labour standards.
Is this really about forced labour?
Industry representatives argue that if the objective were solely to eliminate forced labour, the US would apply the policy uniformly instead of selectively exempting products.
They point to the European Union's Forced Labour Regulation, which bans products proven to involve forced labour irrespective of their country of origin, including within the EU itself. There are no exemptions based on domestic supply shortages, and products are prohibited only after forced labour is established in the supply chain.
"A measure that taxes instead of bans, exempts what it needs, and offers lower rates to countries that buy American cotton invites the question of what its objective really is," said Pratik Bakshi, Counsel (ESG) and Chief Strategy Officer at BTG Advaya.
Which sectors face the biggest risk?
The proposed tariffs have created uncertainty across several export-oriented industries. Textiles and apparel are among the most vulnerable because of their thin margins and dependence on the US market. The Automotive Component Manufacturers Association of India (ACMA) is seeking exemptions to protect the $6.2 billion auto component exports. According to ACMA, exports to the US have remained flat over the past year amid growing trade uncertainty.
"The real risk is not losing out to countries that face no tariff; it is being treated worse than direct competitors. India is placed in the 12.5% bracket, while Pakistan, because it has a forced-labour import ban, gets 10%. In apparel, where the two compete directly on thin margins, that 2.5 percentage-point gap matters," Bakshi said.
Emerging sectors such as solar equipment, electronics and battery supply chains could also be affected, alongside engineering goods, metals, agriculture and seafood.
Can Indian exporters demonstrate compliance?
India maintains that it already has a robust legal framework against forced labour. Article 23 of the Constitution prohibits forced labour as a fundamental right, while the Bonded Labour System (Abolition) Act, 1976, criminalises bonded labour. India has also ratified key International Labour Organization (ILO) conventions and introduced corporate governance measures such as the National Guidelines on Responsible Business Conduct (NGRBC) and SEBI's Business Responsibility and Sustainability Reporting (BRSR) framework.
Manoj Mishra, Partner and Tax Controversy Management Leader at Grant Thornton Bharat, said organised sectors such as pharmaceuticals, automobiles, engineering and IT are already well aligned with global labour compliance standards through customer audits and ESG requirements. However, labour-intensive sectors with fragmented supply chains—including textiles, apparel, leather, gems and jewellery, seafood and agriculture—remain under greater scrutiny because traceability is more difficult.
What lies ahead?
The USTR will review submissions from governments, businesses and industry bodies before deciding whether to proceed with, modify or withdraw the proposed tariffs. Indian exporters are awaiting clarity on the final product coverage, tariff rates, implementation timelines and exemption lists.
The interim tariff arrangement expires on July 24 and the USTR is expected to announce its final determination in late July or early August. The timeline may also depend on progress in the parallel India-US BTA negotiations.
The public consultation process concluded on July 6, followed by hearings beginning July 7, where the Commerce Ministry and industry bodies including FICCI and CII presented India's case.
What should exporters do?
Trade experts say exporters should use this period to strengthen supply-chain compliance irrespective of the USTR's final decision. Global regulations increasingly demand end-to-end supply-chain transparency, making compliance a long-term business necessity rather than a response to one investigation.
Exporters should map suppliers beyond the first tier, identify labour-related risks and invest in digital traceability and independent verification.
"Proving your supply chain is free of forced labour is becoming a condition of market access everywhere... Fighting a flawed American measure and fixing our own supply chains are not either-or. Do both. The exporters who move first will turn a compliance cost into an advantage," Bakshi said.
