The US-China Tariff War: An Opportunity for India?
States always seek to maximise their wealth, influence and territory, and when the interests of states clash, especially those of powerful states, international systems bear its brunt. Such conflict was seen after President Trump’s Liberation Day, in which the United States imposed a barrage of tariffs on the world, resulting in markets tanking, diplomatic tensions and global economic uncertainty. China’s retaliation to these measures infuriated Trump, pushing him to exclude China from the tariff reprieve later granted to other nations. China responded in kind, leading to significant friction between the two nations.
However, a 90-day tariff truce between the two nations has calmed the waters of international trade, with China reducing reciprocal tariffs from 125% to 10% and the US from 145% to 55%(formerly 30%, but has been increased to 55% following recent negotiations). The reinstatement of bilateral negotiations between the superpowers has affected the economic strategies of nations aiming to capitalise on Chinese isolation, one of these nations being India.
India’s strategy is to leverage redirected foreign investments from China towards its economy in order to grow and bolster itself as a key global production hub. This is under the China-Plus-One model, a model that investors adopted to avoid investing in China alone by diversifying investments into other promising, developing countries. However, the presence of Chinese manufacturing with its efficient production, low costs, and streamlined logistics has effectively flooded global markets, dulling the competitive edge that manufacturing hubs like India aim to establish for themselves. Furthermore, India faces domestic challenges in manufacturing with significant structural inefficiencies, preventing it from competing with China on equal terms.
Nonetheless, the tariff debacle still cultivated conditions for diversification and foreign investment, providing India a window for improvement, which then poses a crucial question: how can India capture this pivotal chance?
The Current Situation
When it comes to exports, India benefitted from the tariff fiasco, with exports to the US increasing 17.3% to 8.8 billion USD(May 2025). This, combined with a decrease in Chinese exports to the US from 44 billion to 28.8 billion USD (May 2025). This is reflected in the recent China shock, with China flooding Latin American, European and Asian markets with goods to replace lost US demand. The shock preyed on the vulnerability of global supply chains, which are heavily dependent on Chinese manufacturing. Consequently, the need for investors to diversify into other countries has heightened, which makes the China+1 model all the more imperative. This has increased opportunities for Indian manufacturers to compete at the global level, providing an alternative manufacturing avenue for investors.
But China always remains an option, which investors and buyers have not eliminated. This is because India faces a myriad of domestic issues with its manufacturing ecosystem that limit the inflow of foreign investment, such as intense, protectionist tariffs, a highly regulated business climate, fragmented logistics and regulatory uncertainty. These contrast significantly with the industrial ecosystems of its competitors, such as Malaysia, Thailand and Vietnam, all of which have simpler taxes, regulations, lower tariffs, higher ease-of-doing-business and active FTAs for imports and exports. This has also been acknowledged by the Indian government’s think tank, Niti Aayog.
Despite companies like Apple looking to increase production capacities in India, such as Apple focusing on keeping India as the country of origin for 25-30% of future shipments, India’s competitors are neck-to-neck, if not ahead, with Vietnam becoming a hub for the production of Apple’s iPads and MacBooks. Vietnam has also begun competing on closer terms with China than India has, as seen with similarities in quality and pricing amongst manufactured items from Chinese and Vietnamese factories. Companies like Google, Samsung and Nike have also shifted production bases to Vietnam,
Drew DeLong, leader of the Geopolitics Dynamic Unit at consulting firm Kearney, believes that India may already be viewed as a key global manufacturing hub, but the underlying issues with its business climate ward off any form of investment into its manufacturing ecosystem. India needs to position itself as a resilient, cost-efficient partner, one that could withstand ongoing global uncertainties. While investors and businesses have avenues to rely on Chinese manufacturing, geopolitical tensions and uncertainties tied to the unpredictability of Chinese foreign policy open possibilities for India to redirect these investors’ attention to Indian manufacturing. But to capitalise on these possibilities, India needs to reform its manufacturing system, which it has not yet completed, especially highlighted by the prevalence of internal manufacturing deficiencies.
So, how can India circumvent these disadvantages and integrate itself as a key player in the global supply chain? Should India still direct a sustained focus towards attracting foreign investment in the manufacturing sector, or should it first focus on overhauling domestic issues?
Onwards We Go
India’s first objective should be to repair its manufacturing ecosystem. In the short term, cutting production costs, improving infrastructure, slashing tariffs and overhauling logistics are just a few methods through which India can reform its manufacturing ecosystem. India should also focus on reducing legal uncertainties while building zero-tolerance mechanisms for inefficiencies, as these contribute significantly to increasing the ease of doing business for foreign firms. India’s red-tapism must be reduced in order to allow entrepreneurs to freely conduct business. Simultaneously, India should also focus on negotiating smart FTAs with key players such as the US and EU in order to bring strategic access to their markets while building a stronger reputation amongst stakeholders it deals with. India has stepped forward in this direction, reaching agreements with the EU on sectoral access while forming interim agreements with the US to gain strategic access to markets and address regulatory barriers. The interim deal will have a positive yet subdued impact on the Indian economy, as suggested by an analysis by global wealth management firm Bernstein. According to this analysis, this deal will be welcomed by the markets, showing some growth; however, it will not serve as a prospect for long-term boosts in manufacturing and economic growth.
To put it simply, India needs to maintain a climate that allows these businesses to thrive, which will indeed attract foreign investment. However, with limited manufacturing capabilities and overdependence, it is easier for businesses to approach Chinese manufacturers or other competitors instead. India needs to focus on growing its manufacturing ecosystem and ensuring that it creates a profitable, cost-effective environment for entrepreneurs.
Author
Dhruv Jain
Dhruv is an Intern at the Takshashila Institution and is a 12th Grade Student at Neev Academy, Bangalore.