[Reuters Analysis] India has narrow path to victory in US-China trade war: Raychaudhuri

By Manishi Raychaudhuri

HONG KONG, Sept 12 (Reuters) - India currently finds itself caught between the world's two global superpowers.

The Asian economic titan faces 50% tariffs on the majority of its exports to the United States, yet it also has to contend with a severely unbalanced trade relationship with China.

Navigating this path will prove tricky, but the upshot could be a stronger Indian industrial base.

The tariffs imposed by U.S. President Donald Trump’s administration were a shock to India, not only because of the prohibitively high rate, but also because most other trading partners got off relatively lightly, with only 15% to 20% duties.

Many of those nations compete with India in the U.S. market, and thus will now have a significant competitive advantage.

The industries that could suffer most include textiles, apparel, leather goods and gems and jewellery. India’s main competitors in these areas – Bangladesh and Vietnam in textiles and garments, and Turkey, Thailand and Vietnam in gems and jewellery – all face far lower tariffs.

LABOUR PAINS

While exports from these now-heavily tariffed industries may only represent about 1.4% of the country’s GDP, these sectors account for a disproportionately high percentage of India’s labour market.

In fact, these sectors employ about 55 million workers, almost a fifth of India’s urban workforce, according to the government’s Press Information Bureau and the India Brand Equity Foundation.

It is, of course, still early days in the tariff turmoil, but some large Indian employers are already painting a disquieting picture, noting U.S. order cancellations and possible worker retrenchments.

These tariffs could therefore pack a big economic punch, especially at a time when urban consumption is already weak.

CHINA PIVOT

Amid India’s escalating tensions with the U.S., it has sought to stabilise its relationship with China. On the surface, it may appear counterintuitive to shift focus from the world’s biggest consumer to the world’s biggest manufacturer, but it makes more sense when considering India’s industrial ambitions.

The relationship between India and China had soured in recent years, particularly after the military clash in Galwan in June 2020. Flights between the two countries and the issuance of tourist visas were both stopped, while India banned multiple Chinese apps and ratcheted up scrutiny of Chinese direct investments.

However, these restrictions are now gradually being lifted. Not only have visa issuances resumed, but New Delhi is also considering a plan to allow Chinese entities to take 20% to 25% stakes in Indian manufacturing, renewable energy and auto component firms. With India now publicly aligning itself more with Beijing, this thaw could accelerate.

India will have to tread carefully though. The key challenge remains balancing national security concerns and the need to boost economic growth. Additionally, trade relations continue to be heavily imbalanced in favour of China, as Beijing’s trade surplus rose steadily during the two nations’ frosty period.

India has little room to maneuver here, however, given that China plays a key role in India’s most important supply chains.

For example, India relies on China for imports of industrial machinery, electronic components for manufacturing smartphones and the active pharmaceutical ingredients needed to produce generic drugs.

Cut these off and India’s tariff-free exports of smartphones and generic medicine to the U.S. could quickly dry up.

To curtail Chinese imports, India would need to bring more of these supply chains onshore and thereby add more value to its exported merchandise.

That’s happening, but possibly not fast enough. A recent study pegged India’s domestic value addition in smartphone manufacturing at 23% in 2022–23. The government is seeking to boost this to 40% by 2030.

India’s supply chain ambitions will, therefore, necessitate large foreign direct investment, and the companies most well-suited to provide that happen to be Chinese, as they have the proven manufacturing capabilities and giant scale.

That means India’s pivot to China could be coming at a fortuitous time, but to take full advantage, India would need to pursue a strategy based on encouraging Chinese foreign direct investment, importing Chinese production skills and, eventually, facilitating technology transfer.

MAKING AMENDS

Ultimately, however, if India wants to expand its export markets, it is going to need to sort out its differences with its largest trading partner, the U.S.

Energy policy would be one place to start. Half of the U.S. tariff rate on India is a penalty for buying Russian oil, the economic rationale for which is weakening. Prices of Russian and Middle Eastern oil are progressively converging.

Conciliatory noise on both sides offers some hope. U.S. Treasury Secretary Scott Bessent’s remark about the two nations “getting this solved” and Indian Commerce and Industry Minister Piyush Goyal’s expectation of a trade deal by November are flickers of light in an otherwise dark economic picture.

That's a good thing because India will need all the light it can get as it tries to skillfully navigate a path between two economic giants.

(The views expressed here are those of Manishi Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd. and the former Head of Asia-Pacific Equity Research at BNP Paribas Securities.)

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Tariffs imposed by the U.S. on notable trade partners (%)

Indian exports to the U.S. in 2024 (US$ bn)

China's trade surplus with India ($bn) rising

India's product-wise import from China in 2024 ($ bn)

Price difference between Dubai crude and Urals (Russia) crude ($/bbl) steadily declining