 "India trade policy, India china trade, tariffs")
As was once famously said, there are decades when nothing happens and weeks when decades happen. It’s safe to say we are living through the latter.
“Liberation Day” for the United States was perhaps the end of globalisation as we know it. The reciprocal tariffs announced that day, in conjunction with new tariffs earlier this year, meant the effective tariff rate imposed by the US increased ten-fold from 2.3 per cent last year to 23 per cent — even higher than the Smoot-Hawley tariffs of the 1930s. These tariff walls, along with immigration curbs, suggest a Brexit-like moment for the world’s largest economy, with lasting damage to the supply side and collateral damage to the rest of the world.
While the reciprocal tariffs have been temporarily paused, those on China have reached such prohibitive levels that risk a complete decoupling of trade between the world’s two largest economies. Meanwhile, dozens of other countries seek bilateral trade deals with the US — negotiations that are likely to be complex, uncertain and testy — and may involve the US goading these economies into constructing their own trade barriers on China. For many Asian economies, whose supply chains are inextricably linked to China but whose end consumers are in the US, this represents being caught between a rock and a hard place. More worryingly, the world is setting itself up for a byzantine “spaghetti bowl” of new tariffs, bilateral trade deals, trade destruction and diversion — none of which bodes well for global growth or welfare.
What does all this mean for India? There is a sense that if India can only dodge the US reciprocal tariffs by concluding a bilateral trade deal, the economy can escape this global turmoil relatively unscathed. A trade deal with the US involving mutual tariff reduction will be unambiguously positive. But in the current global environment, that’s not the only transmission channel India needs to think about.
At a minimum, the US appears committed to a 10 per cent universal tariff alongside higher sectoral tariffs. So even if the pause on reciprocal tariffs is permanent and the China-US escalation steps back from the brink, the US will still be staring at tariffs that are likely to be five to six times higher than in 2024. In effect, this will be a very large tax hike on US households and can be expected to sharply squeeze consumption. This is likely to be amplified by an uncertainty channel that will likely depress US and global investment. Who is going to invest in the current environment when the rules of the game change every day? Finally, US exports may suffer from trade retaliation. If consumption, investment and exports are all impacted, one can expect the US economy to slow sharply, with non-trivial odds of a recession. Add to that the large growth to China and the spillover effect to the rest of Asia and the odds of a global recession in the coming quarters increases discernibly.
Therefore, reciprocal tariffs apart, India will also have to confront the prospect of a sharp slowing of global growth. In that scenario, the entire basket of goods and services exports (22 per cent of gross domestic product, or GDP) could be impacted rather than just the 2.3 per cent of GDP of goods exports that flow to the US. Recent trade data reveals a slowing of both India’s goods and services exports, and these effects are likely to magnify in the coming months.
Second, gargantuan tariffs by the US on Chinese exports create powerful incentives for China to continue re-directing its overcapacity into other emerging markets including India — as was the case in the first trade war. Even before the recent tariff increases, India’s bilateral trade deficit with China had swollen to almost 3 per cent of GDP in FY25 — the highest on record. The risk is more Chinese imports coming India’s way. The chart below shows sectors that may be vulnerable, reflected as the intersection of Chinese exports to the US (which may eventually need to be redirected) and China’s revealed comparative advantage (RCA) relative to India. As the chart reveals, machinery and electronics comprise almost half of China’s exports to the US. This is also an area where China’s RCA is very high — relative to India —and, therefore, poses a key risk in terms of future imports.
What does this imply for India’s growth? The direct impact will inevitably be on exports and will receive much attention. But it’s the indirect impact on private investment that is likely to be the more important and enduring channel.
At a time when fiscal policy is progressively retrenching to ensure debt dynamics remain stable, India’s future prospects depend crucially on the revival of corporate investment. Despite GDP growth being revised up to 9.2 per cent in 2023-24, corporate investment grew at only 0.5 per cent that year, such that the ratio of private investment/GDP actually declined by 1.4 per cent of GDP. What’s holding private capex back? Quite simply, demand visibility in an environment where manufacturing capacity utilisation is rangebound between 74 per cent and 76 per cent, and China sits on large excess capacities. Now on those initial conditions, superimpose prospects of a US/global recession, even more excess capacity from China headed into India, and sustained Trumpian policy uncertainty. The implication is that private investment in India, like around the world, may choose to remain on the sidelines for the foreseeable future, compounding the impact from exports.
To be sure, India will benefit from cyclical growth offsets: Benign inflation should give the RBI more space to ease monetary policy in the coming months, and the fall in crude prices constitutes a positive terms-of-trade shock for the economy. These dynamics will be magnified by “deflator effects” in GDP computation. Lower commodity prices are expected to sharply push down wholesale price index (WPI) inflation whose outsized role in the GDP deflator will statistically push up GDP growth for a few quarters, making it look like India may have bucked the slowdown — a notion that policymakers must resist.
All told, while India’s economy may be relatively less impacted than some others, the near-term pressures on activity, exports and investment prospects are likely to be non-trivial in absolute terms.
But just as near-term pressures may be underestimated, so may be medium-term opportunities for India. The regional trade diversion, which is likely to result from US actions, represents India’s best chance to better integrate into global value chains. The continual ratcheting up of US-China trade tensions is bound to accentuate “China Plus One” impulses, pushing both multinational companies and Chinese foreign direct investment (FDI) to look for additional homes in the region. In the first trade war, much of this went to Southeast Asian economies (often through Chinese FDI). But these economies are now also in the crosshairs of US policy because the latter seeks to clamp down on transshipment and minimise Chinese value-add in exports reaching the US. As such, Southeast Asian nations — traditional beneficiaries of China Plus One— will be seen as being more vulnerable to US actions. The implication: Countries like India, which are less integrated with the Chinese value chain, may be seen as more attractive regional havens to invest in to better access US markets. There are, therefore, powerful “push” forces for global value chain (GVC)-related investment to be directed to India in Trade War 2.0.
But these “push” factors will need to be complemented with commensurate “pull factors” to realise the opportunity. What will GVC-related investment seek from India? First, relatively frictionless access to export markets around the world. If India can conclude a bilateral trade deal with the US and get preferential access, that will certainly help. But while a necessary condition, it may not be a sufficient one. Instead, India will also need to push aggressively to conclude deals with the EU and the UK. As many have argued, equally important will be becoming a member of a mega-regional trade agreement (such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP) and expediting the review of the India-Association of Southeast Asian Nations (Asean) Free Trade Area (FTA), given that regional value chains involve goods crossing borders numerous times.
Second, in a world of GVCs, an import tariff is tantamount to an export tax. While there has been encouraging progress in recent Budgets, India must work relentlessly to reduce import tariffs to come across as an attractive destination to export from. A careful balance will, therefore, need to be struck between preventing dumping from China and not pushing up the cost of imported intermediate goods more broadly.
Third, we must continue to reduce the cost and increase the ease of doing business in India, to compete with our Asian counterparts. The “Deregulation Commission” the Prime Minister proposed and complementary factor market reforms never seemed so urgent.
All told, in a world clouded with chaos and turmoil, India must present itself as offering openness, consistency and reform.
This is not a time to succumb to export pessimism. India’s share of global manufacturing exports is still less than 2 per cent. A more decisive integration into GVCs — enabled by their forced recalibration from US actions— could increase that share meaningfully, even if the global pie is not growing as desired. Export buoyancy, in turn, could be just the tonic that India’s demand-constrained private investment is craving.
None of this will be easy or fast. But the opportunity is presenting itself. The payoff from doubling down on reforms at this moment — when everything is up for grabs globally — could be very high. India must seize the moment.
The writer is Head of Asia Economics at JP Morgan. Views are personal
