USA-CHINA RELATIONS: CHALLENGES AND OPPORTUNITIES FOR INDIA

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Picture Courtesy:  BBC

Context

Recent 90-day extension of the US-China trade truce creates both export opportunities for India in sectors like IT, pharmaceuticals, auto components, and agriculture where Chinese goods face higher US tariffs, but also introduces the risk of increased competition or a potential flood of cheap Chinese goods redirected to the Indian market, particularly in electronics and consumer goods.

Current US-China trade relationship and its Global impact

The US-China trade relationship is now at a trade war. Both nations have put high tariffs on almost all goods from the other side. The US taxes 100% of Chinese goods with an average tariff of 54.9%. China taxes 100% of US goods with an average tariff of 32.6%.

This intense trade conflict disrupts global supply chains and makes international trade less predictable, and forces companies to follow a "China+1" strategy to mitigate risks from tariffs and geopolitical tensions. This strategy navigates investment toward alternative manufacturing locations like India, Vietnam, and Mexico.

India's trade relationship with China and USA

India-US trade relationship

• The United States is India's largest trading partner in 2024-25, with bilateral trade reaching $131.84 billion.
• India maintains a trade surplus with the US, which reached $41.18 billion in 2024-25.
• Key Indian exports to the US include drug formulations, telecom instruments, precious stones, petroleum products, and iron & steel products.
• Major US exports to India include crude oil, petroleum products, coal and coke, cut and polished diamonds, and electric machinery. 

Current strains and future outlook

• The relationship is currently facing stress due to US tariffs imposed on Indian goods. The Trump administration implemented a 25% tariff on August 7, 2025, and announced an additional 25% tariff, from next month.
• These tariffs are linked to the failure to secure a trade deal and US pressure on India regarding its trade with Russia. Despite these tensions, India and the US are negotiating a trade agreement aimed at boosting two-way trade in goods and services to $500 billion by 2030.
• The long-term course of India-US relations is expected to stay due to shared strategic interests, especially in counterbalancing China's influence. 

India-China trade relationship

• China is India's second largest partner, with bilateral trade reaching $127.7 billion in 2024-25, trade deficit with China reached $99.2 billion.
• Dependency on Chinese imports, particularly in key sectors like electronics, machinery, and pharmaceuticals, makes India vulnerable to economic pressure from China. 

What opportunities emerge for India from US-China tensions?

Manufacturing and Supply Chain Diversification: As US and other Western companies seek to "de-risk" and diversify their supply chains away from China, India has an opportunity to position itself as a global manufacturing hub.

• "Make in India" initiative and Production Linked Incentive (PLI) schemes are designed to attract foreign investment in sectors like electronics, textiles, and pharmaceuticals.

Increased Exports: India can fill the gap in the US market left by Chinese goods.  

• Textiles and Garments: US retailers are shifting sourcing from China to India, leading to increased orders for the Indian garment industry.
• Electronics and Smartphones: Global giants like Apple and Samsung are expanding their manufacturing base in India, partly to diversify from China.
• Pharmaceuticals: As the largest supplier of generic medicines to the US, India's pharmaceutical sector can boost its export potential due to supply chain disruptions in China.

Strengthened Strategic Partnerships: Geopolitical rivalry between the US and China has led to a strengthening of India-US strategic ties. The US views India as a key partner in its Indo-Pacific strategy to counterbalance China. This has resulted in increased defense and technology cooperation.

What economic risks India face from escalating trade wars between USA-CHINA?

Vulnerability to Chinese Economic Pressure: India's heavy reliance on Chinese imports for critical components makes it vulnerable to supply chain disruptions and economic coercion. China could leverage this dependency to influence India's foreign policy decisions.

Impact of a US-China Thaw: Reconciliation between the US and China could be a "double-edged sword" for India. A US-China détente could reduce India's strategic leverage and importance to the US as a counterbalance to China.

• It can lead to a situation where China, with renewed access to the US market, competes more aggressively with India in global trade.

US Protectionist Policies: India is not immune to US protectionist measures. The Trump administration has imposed tariffs on Indian goods, harm the competitiveness of Indian exports, particularly in sectors like textiles, gems, and jewelry.

Competition from Other Nations: India faces competition from other Southeast Asian nations like Vietnam and Bangladesh, which are also competing to attract companies looking to move their manufacturing out of China.

Indian Government policies Promoting India's strategic Interest

"Make in India" and "Aatmanirbhar Bharat": To boost domestic manufacturing, reduce dependency on imports, and attract foreign investment.

Production Linked Incentive (PLI) Schemes: Offer financial incentives to companies to increase domestic production in key sectors like electronics, pharmaceuticals, and automotive components.  

"Act East" Policy: Deepen engagement with East and Southeast Asian countries, which aligns with the US "Indo-Pacific" strategy and serves as a counterbalance to China's influence.

Reforms to Improve Ease of Doing Business: Simplifying regulations, speeding up approvals, and investing in infrastructure.

Scrutiny of Chinese Investments: In response to border tensions, India mandated government approval for any investment from countries sharing a land border with India, a move aimed at preventing opportunistic acquisitions by Chinese firms.

Way Forward for India to navigate the USA-China trade war challenges

Enhance Domestic Manufacturing and Reduce Dependencies: Building a comprehensive domestic manufacturing ecosystem to reduce dependency on China for critical goods. This requires sustained investment in infrastructure, technology, and skilled labor.

Diversify Trade and Strategic Partnerships: Diversify export markets and strengthen partnerships with like-minded countries such as the US, Japan, Australia, and the EU through platforms like the Quad, help mitigate the risks of over-reliance on any single country.

Engage in Direct and Pragmatic Negotiations: Engage in direct and pragmatic negotiations with both the US and China to protect interests.

• With China, negotiate with key firms to secure critical supply chains.
• With the US, finding a middle ground on trade issues to avoid escalating tariffs.

Maintain Strategic Autonomy: Pursue a foreign policy of "strategic autonomy," engaging with all major powers to maximize leverage and avoid being drawn into a binary choice between the US and China.

Invest in a Dedicated, Multi-Agency Team: Engage with key Chinese firms and attract long-term investment, establish a dedicated, multi-agency team of experts to build strong relationships and offer transparent, predictable guidelines.

Source: BBC