Can India Survive the Trade War?

The Diplomat

3 days ago

Trump's tariff onslaught has forced India into a precarious position, and New Delhi is employing three strategies in tandem to get out of it.
New Delhi has been blindsided by U.S. President Donald Trump's recent tariff temper tantrums. While Indian policymakers anticipated some trade tensions with the United States during Trump's second term, they hoped that Prime Minister Narendra Modi's strong rapport with Trump, along with the geostrategic importance of the India-U.S. partnership, would spare them from the worst of Washington's protectionist impulses.
Indeed, until recently, India-U.S. trade ties seemed to be heading in a positive direction. Trump and Modi agreed to increase bilateral trade to $500 billion by 2030 during their meeting in February. Earlier this summer, India and the United States seemed on the verge of clinching a trade deal.
In a dizzying reversal, on August 7, India found itself with a 25 percent tariff on most products it sells to the U.S., its largest export market. This tariff rate is set to increase by an additional 25 percent on August 27, a punishment for India's purchases of Russian oil and gas. India also faces the looming threats of indirect tariffs, including steep tariffs on pharmaceuticals and semiconductors and a 10 percent tariff on goods from countries that are members of the 'anti-American' BRICS organization.
Trump's tariff onslaught has forced India into a precarious position, and New Delhi is employing three strategies in tandem to get out of it.
First, New Delhi is confronted with the daunting task of securing a deal with Washington, without violating any key redlines that would jeopardize Modi's domestic support. India is also attempting to delicately manage its geoeconomic relationship with China, cooling tensions with Beijing without ignoring preexisting military and economic security concerns. While hedging between the two great powers, India is also seeking to advance its geopolitical ambitions of assuming great power status by diversifying its economy to alternative partners.
Managing Trump's Tariff Pressures
Faced with a barrage of tariff threats, New Delhi has sought to strike a deal with Washington without compromising its key interests. India has refused to rush into an unfavorable agreement, unlike other major U.S. trading partners. While having drawn a clear redline at exposing its agriculture and dairy sectors to competition from U.S. exports, in the hopes of securing a deal, India has offered a range of limited and strategic concessions, including reducing tariffs on 55 percent of U.S. exports and increasing purchases of American defense and energy products.
Thus far, India has refrained from retaliating, aiming to avoid escalation that would jeopardize the prospect of a deal that might ease existing retaliatory tariffs and the impending 25 percent secondary tariff related to India's purchases of Russian oil. Indian officials are reportedly exploring what concessions can be offered at negotiations with the U.S. later this month, including tariff reductions on a limited range of agricultural products, namely cheese and almonds, that would have minimal impacts on domestic producers.
While some Indian oil refiners have decreased their purchases of Russian oil, New Delhi has remained adamant that it will continue imports of Russian oil that are legally permissible under the G-7 price cap. As a clear signal of resolve and as part of a broader effort to hedge against the U.S., India has simultaneously moved to bolster its historically strong economic and defense ties with Russia.
New Delhi's firm stance reflects domestic political pressures. Modi has touted India as an emerging great power destined to play a key role in the future geopolitical and economic order and he cannot afford to be seen as appeasing Trump's whims. Concessions to the United States that undermine the standing of the ruling Bharatiya Janata Party (BJP) with Indian farmers, especially tenuous since the farmer protests that swept the country a few years ago, would be political suicide.
Other factors also reduce India's incentive to rush into a deal: the legality of Trump's tariffs is being openly challenged, and India has no guarantee that Trump would not backtrack on any deal that is reached between them.
This approach is, however, not without risks. Trump has seemingly run out of patience and has already imposed tariffs on India for its refusal to make a deal once. While negotiations have stalled, Southeast Asian economies, including Vietnam, Indonesia, and the Philippines have all secured lower tariff rates that make them more competitive in the U.S. market than India.
India's exports to the U.S. accounted for 2 percent of its GDP last year. Goldman Sachs has suggested that the 25 percent tariff would cut India's economic growth by 0.3 percentage points, with this doubling if the additional secondary tariff goes into effect.
Prolonged trade tensions also risk exacerbating the already notable deterioration in India-U.S. relations, fueled not only by economic disputes but also by Trump's budding friendship with Pakistan's military chief and talks of the U.S. purchasing Pakistani oil. Continued strains on India-U.S. relations are certainly in neither New Delhi nor Washington's geostrategic interests, particularly if they remain committed to countering China's political and economic influence. These tensions could potentially jeopardize this year's Quad leaders summit in India, and even the broader future of the Quad partnership.
While Modi needs to signal resolve for his domestic political audience, his advisers should also find ways to keep the doors open to negotiations and consider concessions they could feasibly make when U.S. trade negotiators visit India later this month.
Can India Count on China?
Increased trade with China could help stabilize India's economy amid tariff threats from Washington, especially if it can increase its raw materials exports to China. India has deep-seated security concerns over its border dispute with China. The border dispute extends back as far as the 1960s and has flared up multiple times, particularly in 2020 when clashes in the Galwan Valley resulted in the deaths of 20 Indian soldiers. The two Asian giants have also competed to position themselves as leaders of the Global South for decades.
However, New Delhi is tentatively seeking to thaw ties with Beijing, hoping to avoid having tensions with both great powers at once. Defense Minister Rajnath Singh's visit to Shanghai in June marked the first visit by a senior Indian government official to China since 2020. Modi is also expected to attend the Shanghai Cooperation Organization (SCO) summit at the end of August, marking his first visit to China since 2018. Beijing has also shown willingness to improve bilateral relations, having eased export controls on urea, of which India is the world's largest importer.
However, New Delhi's deep-rooted concerns about the challenges Beijing poses to India's economic and national security mean that cooperation will remain limited. Last year, India ran a massive $99.21 billion trade deficit with China, which includes imports in a variety of sectors that are critical to the Indian economy, such as electronics, textiles, and manufacturing. Too much economic cooperation with China could very well result in the Indian market being flooded with Chinese imports.
Additionally, China may not seek to cooperate with India given its ambitions to play a greater role in manufacturing and supply chains, in which China currently dominates. Whether China will play ball with India depends on decisions made in Beijing, which are highly strategic and often only made in their own best interest.
While working to foster better ties with China, India must carefully consider the broader geopolitical implications of its actions. On one hand, thawing relations with China while keeping its head above water with the U.S. will position India well in the event of a China-U.S. grand bargain. On the other hand, making concessions to China while Beijing maintains an aggressive stance toward their disputed borders would make Modi look weak and invite opposition criticism.
India's Diversification Efforts
Given the risks associated with further economic integration with the United States and China, might India be able to forge meaningful trade ties with alternative partners?
New Delhi embarked on a flurry of trade negotiations between 2021 and 2022 as part of a broader effort to reduce India's economic exposure to China; this campaign lost momentum between 2023 and 2024 as concerns over protecting key domestic industries and contentious issues like rules of origin and data regulation stalled negotiations with several partners. However, the onslaught of U.S. tariffs has re-energized India's interest in diversifying its trade relationships to reduce its vulnerability to economic coercion from both Washington and Beijing.
New Delhi has recently finalized a free trade agreement with the U.K. and has accelerated or revived trade negotiations with the EU, New Zealand, Peru, and Oman, while working to deepen existing agreements with Chile and Australia. India has also sought to strengthen ties with other members of the BRICS bloc, agreeing to boost bilateral trade with Brazil and resuming talks with South Africa. However, considering that about 18 percent of India's exports go to the U.S. and about 15 percent of India's imports come from China, such efforts may not significantly reduce dependence on the two great powers.
New Delhi has a prime opportunity to capitalize on a moment when many countries are seeking alternatives to both the U.S. and China to attract greater foreign investment and strengthen trade ties with countries that occupy strategic positions in critical supply chains. This, in turn, would bolster India's role in global manufacturing and advance India's economic influence and geopolitical ambitions. The opportunity for India is particularly evident in sectors like pharmaceuticals – where it has long been seen as an alternative manufacturing hub to China – and semiconductors, where the government has launched ambitious domestic initiatives and forged partnerships with South Korea, Japan, and Taiwan to fuel its ambitions to rise as a semiconductor manufacturing power.
India's efforts to diversify are not without potential pitfalls. Trade liberalization has proven to be slow and politically contentious within India, and attracting sustained foreign investment will require structural reforms that the government may be unwilling or unable to implement. Major substantive disagreements between India and key partners persist and will remain challenging to resolve.
India's ambitions to bolster its role in global manufacturing and trade also face several challenges. Indian exports face stiff competition from China and emerging Southeast Asian economies, which are also diversifying away from the U.S. market. India will struggle to match China's manufacturing scale, and Indian exports may struggle to compete in developed markets – such as the EU and Canada – that already have FTAs with India's Southeast Asian competitors. Trump's recent warnings to Apple CEO Tim Cook against expanding manufacturing operations in India also suggest that he will not respond favorably to any efforts by. U.S. firms to shift manufacturing to India.
Conclusion
New Delhi's efforts to strategically hedge and diversify are a significant geopolitical and economic gamble. India has little choice but to try to soothe simmering trade tensions with the U.S. without abandoning its redlines, while carefully managing the implications of increased cooperation with China, and expanding its network of trade ties beyond the two great powers. Imminent pressure from Washington and Beijing could render this gamble a failure for New Delhi, resulting in long-term economic turmoil and political grievances that could end Modi's career.
However, if successfully implemented, India could find itself in a geopolitical sweet spot, capitalizing on many countries' desires to reduce their exposure to U.S. and Chinese trade policies to garner greater economic and geopolitical clout.
India's long history of strategic autonomy may mean that it will find it easier than many others to adapt in an international system that is rapidly dissolving into chaotic transactionalism. Still, it faces many stumbling blocks, including the uncertainty of U.S. economic statecraft, in its efforts to claim great power status in a fracturing world.