What is India’s advantage in the global trade reset amid US’s tariff flip-flops?

The US-China relationship–oscillating between tariff reductions and technology restrictions–has left many countries uncertain about their export prospects. Recent developments include the Trump administration’s first free trade agreement with the UK, which tied lower tariffs to excluding China from some supply chains, followed shortly by a temporary US-China tariff cut and then a sweeping ban on Huawei AI chip use.

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This erratic approach puts the “China plus one" strategy into question and raises concerns about whether other emerging economies could secure similar tariff reprieves, potentially eroding India’s tariff-driven export gains. So, where does that leave India? Can it turn these tariff shifts into strategic advantages in the evolving trade reset?

India’s strategic positioning

A crucial consideration is that China has established itself as a global leader in industries integral to both economic and national security, such as steel, aluminium, cement, shipbuilding, and automotive manufacturing. Aware of the strategic risk of relying on China, especially during conflicts or pandemics, the US is advocating for diversified global value chains.

India, while not matching China’s manufacturing prowess, holds a unique advantage: its capacity for scaling up without being perceived as a threat. As one of the world’s top three producers of steel, aluminium, and cement, India is well-placed to become part of the new, less China-centric supply chains.

Push and pull factors

To assess India’s trade prospects, it is essential to distinguish between “push" and “pull" factors. Push factors stem from external global shifts, while pull factors are rooted in India’s own economic structure.

Initially, the high tariffs on China presented a positive push for Indian exports. The subsequent easing of these tariffs weakens but does not entirely negate this advantage. Moreover, two geopolitical factors continue to work in India’s favour.

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First, India's relatively modest manufacturing share, rising from 1.5% in 2004 to 2.9% in 2023, contrasts sharply with China’s leap from 8.6% to 28.8% over the same period. Ironically, this perceived weakness might turn into an asset, as India is not seen as a direct competitor to China.

Second, India has never been a hub for re-routing Chinese exports to the US, unlike countries such as Vietnam or Mexico. And given India’s relationship with China, it is unlikely to take on this role in the future. This positions India as a more reliable partner for trade realignment.

On the pull side, India has two advantages, both originating from its unique economic structure.

The first is its large domestic market: household consumption is the mainstay of economic growth, and contributes to two-thirds of its gross domestic product. In contrast, China’s strong investment and export focus has led to its disproportionately low private consumption rate for its level of income. The fact that China accounts for 30% of global manufacturing but only 11% of consumption is one of the global imbalances that the current US administration wants to correct.

In addition, robust domestic consumption is a source of comfort to foreign companies setting up export-oriented facilities. For example, Maruti Suzuki, which was set up with Japanese collaboration in the 1980s, is the market leader in passenger cars and also a leading car exporter (it has been exporting made-in-India cars since 1986).

In a flip scenario, Apple Inc., which has plans to assemble all US-bound iPhones in India, could eventually supply India’s rapidly growing smartphone market also. The idea is not far-fetched: by 2030, India is expected to have 773 million consumers, next only to China and far higher than comparable emerging economies.

The second pull factor is the rising importance of India in future industries and technologies.

Of the 44 future technologies analysed by the 2023 Critical Technology Tracker, the US and China lead the world in high-impact research capability by a wide margin, but India and the UK, together with Australia and Japan, frequently appear among the countries next in line. These countries could, potentially, band together to create an alternate ecosystem to complement China’s striking progress in advanced technologies.

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The path forward

World trade is projected to decline in 2025 on the back of rising trade tensions. A tariff advantage would have been incredibly useful as Indian exporters compete for a share of the shrinking trade pie. But given that more countries are turning protectionist, relying solely on tariffs is not sustainable.

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Instead, India has to stack up its strengths: young labour force, strong growth, rapid digitisation and core industrial capacity; and boost these macro positives with business-friendly policies to pull in trade.