When the United States announces an additional 100 per cent tariff on Chinese imports and tightens export controls, global trade dynamics shift abruptly. India, sitting between two giants, faces both a windfall of opportunity and a set of serious challenges. Whether the balance tilts in India’s favour depends less on external developments and more on how decisively India acts.
One of the most immediate gains for India could come through trade diversion. As the U.S. becomes less dependent on Chinese suppliers, American firms will hunt for alternative sources. India, with its diversified manufacturing base and improving export infrastructure, can aim to fill some of the gaps. Analysts from RSIS note that India can “take advantage of the situation” created by bilateral trade friction between the world’s two largest economies.
Already, export orders are shifting. China’s shipments to the U.S. have slowed sharply, with US shipments plunging 33 per cent year-on-year in one month. This signals that U.S. importers are actively rethinking supply chains. India, as part of the “China+1” alternative, is well-positioned to capture new export demand in sectors such as textiles, auto parts, pharmaceuticals, and industrial equipment.
In some segments, India already appears to be winning. For instance, Apple’s supply chain has shifted significantly toward India. In Q2 2025, 44 per cent of U.S. iPhone imports were assembled in India, compared to 61 per cent from China the previous year. As more global firms retrench from China, India may continue to benefit from similar high-technology or electronics exports.
Input Costs And Supply Chain Constraints
On the flip side, India’s firms depend heavily on Chinese inputs, especially in electronics, chemicals, and speciality materials. Tightened export controls or Chinese countermeasures will make those imports costlier or harder to source. For instance, China has already withheld approvals on heavy rare earth magnet exports to Indian firms. Since China dominates rare earth processing, any disruption reverberates globally, hurting tech and green energy sectors in India as well.
A recent academic study underscores how global supply chains are reconfiguring in the face of US-China conflict. The researchers show that while many trade flows are shifting toward “China+1” partners (like India or ASEAN countries), the upstream dependence on Chinese intermediate goods persists. That means India’s ability to scale up as an alternative is constrained by its ability to build robust domestic or alternative input networks.
India must also reckon with retaliatory policies from the US. In 2025, the Trump administration imposed 50 per cent tariffs on a large swathe of Indian exports to America. This is striking because it targets sectors in which India has comparative advantages: textiles, gems, leather, and furniture. These tariffs could blunt the advantage India might gain from trade diversion.
Indeed, Reuters notes India now faces a “narrow path to victory” in this trade war: though it has opportunities, U.S. retaliation reduces the margin for error. The complexity of this dual exposure, both benefiting from US-China tensions and being directly targeted by U.S. tariff measures, is a tightrope walk for Indian policymakers.
Beyond immediate trade, global firms seeking to de-risk their China exposure may view India as a safer bet. Increased foreign direct investment (FDI) into manufacturing could accelerate, especially in sectors where scale and supply chain resilience matter. That would help India rise from assembly-based exports to more value-added production.
At the same time, global volatility may drive capital toward safer assets. Indian markets could see foreign capital flows become more erratic. Already, foreign portfolio investors withdrew over Rs 23,800 crore (around USD 3 billion) in September 2025, citing tariff fears and policy uncertainty.
Moreover, with the global economy under stress from trade wars, demand across export destinations may weaken, reducing the upside potential of gaining market share.
Policy Imperatives: Turning Threats Into Gains
To realise the upside and shield against the downside, India must act fast and strategically:
Scale input substitution and supply chain resilience: India needs to ramp up capacity in critical inputs, chemicals, electronics components, rare earth alternatives, and diversify sourcing away from China. Strategic incentives, R&D support, and industrial clusters can help.
Negotiate trade relief and avoid escalation: Diplomacy will matter. India should press for tariff alleviation, negotiate new trade partnerships, and deepen free trade agreements. For instance, India is poised to activate its trade pact with EFTA (European Free Trade Association) from October 2025, boosting access to markets in Europe.
Focus on competitiveness in export sectors: Export sectors must improve productivity, quality, and scale. India cannot rely on tariff windfalls alone; it must become low-cost, high-value.
Macroeconomic stability and policy consistency: Stable inflation, predictable trade policy, and clear incentives will attract investment and reassure markets. Sudden tariff changes or sectoral policies that flip can destroy confidence.
Hybrid diplomacy to manage China relations: India must maintain a delicate balance with China. On one hand, it will need to push for more openness and reciprocal trade; on the other, it must avoid escalation that undercuts its longer-term interest. For instance, China’s easing of urea export curbs to India may signal diplomatic flexibility.
The US escalation against China brings India a rare opening: a chance to move from peripheral to strategic in global supply chains. But the gains won’t be automatic; India also faces retaliation, cost pressures, and global headwinds. The ultimate outcome hinges on Indian ambition, execution, and agility.
If India can convert trade diversion into sustainable export strength, build deep domestic supply chains, and manage policy credibility, the impact could turn positive. But if it dithers or mismanages the external shocks, the risks could overshadow the gains. In the end, India’s moment is now, but success is something it must decisively seize.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication. |
