US-China Tariff War: India Must Institutionalize Trade Resilience

India Navigates US-China Tariff War: Opportunities, Challenges in Global Trade

By Sesh Kumar Pulipaka

New Delhi, April 17, 2025: The tariff war, far from being a mere external event, has served as a stress test for India’s economic resilience and a clarion call for deeper structural reforms.

India, though not a central actor in the US–China tariff war, has experienced significant ripples from the economic conflict between the world’s two largest economies.

While the initial assumption was that India might benefit from shift in the supply chains from China, results are far more complex. India’s limited infrastructure readiness, regulatory bottlenecks, and protectionist tendencies muted the expected gains.

The disruption in global trade patterns also exposed India’s overdependence on external demand, its vulnerability to foreign capital movements, and the constraints posed by its own industrial and trade policies.

This article critically examines India’s response to the tariff conflict, its missed opportunities, and the strategic imperatives it now faces. It also explains how the US bond market turmoil tied to rising tariffs spilled over to India’s economy.

In the end, India must adopt a layered policy strategy: stabilizing short-term shocks, repositioning itself in the global value chain in the medium term, and reforming its economic fundamentals in the long run.

India’s Position in the US–China Tariff Crossfire

India, though not a primary player in the US–China tariff war, found itself caught in the economic tremors of their conflict. Many believed that the trade tensions between the two superpowers would provide India with an opening to become a preferred manufacturing destination.

With its large labour force, democratic institutions, and growing industrial base, India seemed poised to absorb global supply chains looking to diversify away from China.

However, the anticipated gains were limited. India’s systemic challenges — ranging from rigid labour laws and inadequate infrastructure to bureaucratic red tape — blunted its ability to attract significant shifts in global production.

Even as firms like Apple looked beyond China, countries such as Vietnam and Thailand proved more competitive and agile in absorbing the relocation.

Collateral Damage and Capital Volatility

Instead of emerging as a clear winner, India faced collateral damage. China’s retaliation to US tariffs led to oversupply in other markets, pushing down prices for products that Indian exporters relied on, particularly in agriculture. The Trump administration’s withdrawal of India’s Generalized System of Preferences (GSP) benefits in 2019 further hurt Indian exporters by eliminating duty-free access to the US for many products. Simultaneously, global financial volatility caused by rising US bond yields resulted in capital outflows from emerging markets, including India.

As the US bond market reflected fears of ballooning deficits and inflation due to tariffs, yields rose. China began dumping US bonds. That increase pushed global investors to pull money out of riskier markets, causing pressure on the rupee and a rise in Indian bond yields as well.

The result was tightened domestic liquidity and a more challenging financial environment for Indian businesses and consumers.

Understanding the Bond Market Impact

To understand this spillover, it is important to grasp the basics of the US bond market. When the US government needs funds, it issues bonds — essentially IOUs — to investors, promising to repay them with interest. The return that investors get from these bonds is called the yield.

Yields move in the opposite direction of bond prices: when many people buy bonds, prices go up and yields fall; when they sell, prices drop, and yields rise.

Yields tend to rise when inflation is expected to go up, when the government borrows heavily, or when investors worry about repayment risks. In 2025, fears that Trump’s aggressive tariff strategy would lead to a deeper deficit and economic strain made investors uneasy, pushing yields up.

As US bond yields rose, global investors moved funds away from emerging markets like India, affecting its currency, interest rates, and financial stability.

India’s Mixed Response and Structural Weaknesses

India’s response to the tariff war was a mix of opportunity-seeking and self-inflicted constraints. On one hand, initiatives like ‘Make in India’ and the Production Linked Incentive (PLI) schemes were rolled out to attract global manufacturers. On the other hand, India increased import tariffs on several goods, reflecting a turn toward protectionism.

The lack of deep supply chain integration, inconsistent policy signals, and infrastructure bottlenecks made investors wary. While some sectors like mobile phone assembly saw gains, most investments remained at the final assembly stage without significant value addition. The promise of India replacing China as the world’s factory remained largely unrealized.

A Three-Tiered Strategy for the Future

Going forward, India needs a three-tiered approach to navigate global tariff shocks. In the short term, it must stabilize the economy through active central bank intervention, bilateral currency swap arrangements, and targeted export support.

In the medium term, India must improve trade facilitation — digitizing customs, reducing port delays, and aligning standards — to make exporting simpler and cheaper. It must expand the PLI scheme and encourage domestic value chain development.

India also needs to finalize long-pending free trade agreements with the EU, UK, and Canada to diversify export markets. In the long term, India must focus on reforming labour laws, modernizing education and skilling, and reducing dependence on China for critical raw materials like APIs and rare earths.

India should also build a permanent trade resilience framework with institutions dedicated to monitoring and responding to global trade disruptions. Economic security must become a core element of national strategy, integrated into foreign policy, defense planning, and industrial development.

The US–China tariff war has been more than a bilateral showdown; it has been a global tremor that tested India’s economic readiness. Rather than benefiting outright, India experienced both shocks and openings. While some sectors adapted quickly, deeper structural issues limited the country’s ability to capitalize fully.

More importantly, the spillover effects — especially through financial markets — showed how deeply interconnected India is with global events.

The episode must serve as a wake-up call. India must now institutionalize trade resilience, deepen its manufacturing base, and pursue a smarter, balanced strategy that embraces both competitiveness and strategic autonomy.

In a world where tariffs are as much about politics as economics, India’s policy must be guided by long-term vision, agility, and systemic reform.

(This is an opinion piece; views expressed solely belong to the author)

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