The recent trade agreement between the United States and Bangladesh, which offers zero tariffs on apparel exports from Bangladesh if they are made with U.S. cotton or man-made fibers, is expected to have a limited impact on India's textile industry.

Preliminary estimates suggest that Bangladesh would only gain marginally from this deal. The higher cost of U.S. cotton is expected to offset the tariff advantages.

The US-Bangladesh trade deal may indirectly deal a blow to the export ambitions of India's textile sector. The US is reducing the tariff rate on Bangladesh goods to 19%, which is marginally higher than the 18% imposed on India. However, a clause in the joint statement will serve as a significant boost to Bangladesh's textile exports to the US, while eroding some of the competitive advantage that India was hoping to enjoy.

The negative market response reflected investor concerns that preferential provisions extended to Bangladesh under the new US-Bangladesh trade deal could weaken the competitive advantage Indian exporters were anticipated to enjoy in the US market. The possibility of even limited tariff-free access could reduce the competitive benefit India appeared to gain in the US market. Several key aspects of the exemption remain uncertain.

This trade deal weakens India's textile industry and puts millions of livelihoods at risk. The commerce minister will now need to address the benefit Indian textile exporters will get with an 18% tariff over Bangladesh's 0% tariff. The US-Bangladesh trade deal is likely to hurt India in two ways: cotton exports from India to Bangladesh may fall further, and the cotton-linked zero tariff provision for Bangladesh may make Indian textile and apparel products less competitive in the US market due to higher costs.

With the new deal favoring Bangladeshi garments made using US cotton, Dhaka is likely to shift even more towards American cotton. This will put additional pressure on Indian cotton traders. The impact was already seen on Tuesday, with Indian textile and spinning stocks coming under pressure.

Even though India's overall tariff rate is lower than that of Bangladesh, the zero-tariff provision for Bangladeshi garments made using American cotton completely changes the competitive equation. Essentially, Bangladeshi garments made using US cotton will face zero tax, while Indian textiles will be levied an 18% tariff. This possibly means that Bangladeshi apparel is likely to be cheaper than Indian exports to the US.

Another major concern for India is the cotton-related exemption that Bangladesh has secured in its deal with the Trump administration. The US is the top market for India's textile exports.

Bangladesh's base reciprocal tariff will stand at 19 percent, slightly higher than India's 18 percent, but that is not easing the stress in India's policy circles. The fine print of the agreement between Washington and Dhaka features a 'zero-duty' clause, whereas India does not have that. It is also likely to force Dhaka to cut imports of Indian cotton, which stand at around $3 billion per year. Historically, Dhaka has also been a massive buyer of Indian yarn. If it moves to the US due to zero tariffs, it will get a dual advantage in terms of raw material and entry into the US at 0 per cent.

Indian textile companies are now facing renewed headwind from the export segment after the US-Bangladesh trade deal. The US reduced the tariffs on Bangladesh textile exports to zero if they are made with US cotton. The move is expected to impact India's cotton exports to Bangladesh and further make the overall textile garments less competitive in the US.