India’s Path to Winning the US-China Trade War Is Narrow

India currently finds itself caught between two global superpowers.

The Asian economic powerhouse faces a steep 50% tariff on many of its exports to the U.S., while also grappling with an imbalanced trade relationship with China.

Navigating this path will be challenging, but it could ultimately lead to a stronger industrial base for India.

The tariffs imposed by U.S. President Donald Trump’s administration came as a blow—not just because of the steep rates, but also because most other trading partners received exemptions or faced tariffs in the 15% to 20% range.

Many of these nations compete with India in key sectors, giving them a significant competitive advantage.

Industries at greatest risk include textiles, apparel, leather goods, and gems & jewelry. India’s primary competitors—Bangladesh and Vietnam in textiles and apparel, and Turkey, Thailand, and Vietnam in gems & jewelry—are all facing much lower tariffs.

Labor Market Concerns

While exports from these heavily taxed sectors may account for only 1.4% of India’s GDP, they represent a disproportionately large share of the country’s workforce.

According to India’s Press Information Bureau and the India Brand Equity Foundation, these sectors employ around 55 million workers—nearly one-fifth of India’s urban labor force.

Though the tariff-related disruptions are still in their early stages, major Indian employers are already reporting unsettling developments such as canceled U.S. orders and potential layoffs.

These tariffs could thus deliver a significant economic blow, especially at a time when urban consumption is already sluggish.

The China Pivot

Amid rising tensions with the U.S., India has sought to stabilize its relationship with China. On the surface, shifting focus from the world’s largest consumer to its largest manufacturer may seem contradictory, but it aligns with India’s industrial aspirations.

Relations between India and China have worsened in recent years, particularly following the military clash in Galwan in June 2020. Flights and tourist visas were suspended, and India banned several Chinese apps while ramping up scrutiny of Chinese investments.

However, these restrictions are gradually being eased. Visa issuance has resumed, and New Delhi is reportedly considering allowing Chinese firms to take a 20% to 25% stake in Indian manufacturing, renewable energy, and auto component sectors.

As India publicly leans toward deeper engagement with Beijing, this thaw could accelerate.

Yet, India must tread carefully. Its primary challenge remains balancing national security concerns with the need to boost economic growth. Moreover, the trade relationship remains heavily skewed in China’s favor, with Beijing’s trade surplus widening during India’s winter months.

India has limited maneuverability, as China plays a critical role in its supply chains.

For instance, India depends on China for imports of industrial machinery, electronic components needed for smartphone assembly, and active pharmaceutical ingredients for producing generic medicines.

Curtailing these imports could quickly disrupt India’s tariff-free exports of smartphones and generics to the U.S. To reduce dependence on China, India must localize these supply chains, thereby increasing the value addition in its exports.

This is already underway, albeit not fast enough. A recent study suggests that in 2022–23, only 23% of smartphone manufacturing in India involved domestic value addition. The government aims to raise this to 40% by 2030.

Achieving this will require substantial foreign direct investment (FDI), and Chinese firms—with their proven manufacturing capabilities and scale—are among the most suitable partners.

This means India’s tilt toward China may be well-timed, but capitalizing on the opportunity demands a strategy that encourages Chinese FDI, imports production expertise, and facilitates technology transfer.

Reforms Ahead

Ultimately, if India wishes to expand its export markets, it must resolve its differences with its largest trading partner—the U.S.

Energy policy could be a good starting point. Half of India’s tariff on U.S. exports stems from penalties on Russian oil purchases, a justification that is weakening as Russian and Middle Eastern oil prices converge.

Voices from both sides offer some hope. U.S. Treasury Secretary Scott Bessent’s remarks that both countries “will find a solution,” and Indian Commerce Minister Piyush Goyal’s expectation of a trade agreement by November, bring a glimmer of light to this otherwise grim economic scenario.

That is welcome news, as India will need all the support it can get while trying to chart a careful path between two economic giants.