India’s Trade Dilemma: China vs US – Risks, Challenges, and Opportunities

India-China Trade Challenges Latest News

• With the end of the Modi-Trump camaraderie and the US imposing steep tariffs on Indian goods, New Delhi is redirecting diplomatic focus. 
• Prime Minister Modi will visit Tianjin for the 2025 SCO Summit and meet Chinese President Xi Jinping to strengthen bilateral ties.

India-China Relations: From Conflict to Cautious Recalibration

• India–China relations deteriorated sharply after the June 2020 Galwan Valley clashes, which fueled strong public sentiment in India to cut trade ties with China. 
• In response, the Indian government banned several Chinese apps and imposed restrictions on Chinese FDI.

Trade and Economic Concerns

• India has resisted deeper economic integration with China, most notably by pulling out of the Regional Comprehensive Economic Partnership (RCEP) in late 2019. 
• Policymakers feared Chinese imports would flood Indian markets, undermining domestic industries.

India as a “China +1” Alternative

• Post-Covid, India has sought to position itself as a viable “China +1” investment destination for Western businesses. 
• However, competition from countries like Vietnam, Mexico, and Poland has limited India’s success.

Security and Strategic Tensions

• Beyond trade, Indians increasingly view China as their primary strategic adversary. 
• Even during conflicts with Pakistan, such as after the April 2025 Pahalgam terror attack, India perceived Chinese weaponry in Pakistani hands, deepening security concerns.

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Trump’s Tariffs Push India and China Closer

• The sharp rise in US tariffs has forced both India and China to explore closer cooperation. 
• India now faces 50% tariffs — the second-highest after Brazil — while China, which earlier endured 145% tariffs before seeing them reduced to 30%, has already begun outreach to multiple nations. 
  • The US’s “reciprocal tariff” approach, aimed at balancing trade deficits, made such measures predictable. 
  • Reports reveal that China approached India in March 2025, but New Delhi responded only in June. 
• Recently, China criticised US tariff hikes on India, echoing PM Modi’s own past remarks by calling India and China “double engines” of Asia’s economic growth.

Challenges of Deepening India-China Trade Ties

• Amid rising US tariffs on Indian goods, China’s offers of closer trade ties may appear attractive. However, experts warn that relying more on China could pose long-term risks for India.
• Trade Deficit Concerns – India enjoys a $40+ billion trade surplus with the US, but faces a $100 billion trade deficit with China, highlighting structural imbalances in bilateral trade.
• China’s Manufacturing Dominance – China has emerged as the world’s sole manufacturing superpower, capturing a massive share of global exports, making it difficult for India to compete directly.
• India’s Manufacturing Weakness – Since 2019-20, manufacturing GVA has grown only 4% CAGR, slower than agriculture (4.7%), underscoring India’s struggle to build competitive manufacturing strength.
• Impact on India’s “China +1” Position – If India aligns too closely with China, it may lose credibility as a viable alternative to China for Western businesses seeking to diversify supply chains.
• China’s Overcapacity Challenge – China’s deflation and industrial overcapacity may push it to dump cheap goods in other markets, including India, intensifying pressure on Indian producers.
• Geopolitical Mismatch – While both nations are economic powerhouses, India’s democratic, transparent, private sector-led model contrasts with China’s state-driven system. Moreover, China’s support for Pakistan complicates trust-building.

India’s Trade Dilemma Between the US and China

• India’s reluctance to embrace free global trade stems from its deep-rooted structural weaknesses. 
• For years, coalition politics was seen as a hurdle to reforms, but even a decade of single-party majority governments since 2014 has not delivered significant structural reforms. 
• Instead, India has drifted towards greater protectionism, while its growth momentum has slowed.

China’s Rise and Risks

• During this time, China has expanded its manufacturing dominance, becoming so large that it poses a challenge to the United States. 
• However, China now faces industrial overcapacity and deflation, pushing it to dump cheap goods in foreign markets — a risk that could further hurt Indian industries if India opens up excessively to Chinese imports.

US Challenges

• Meanwhile, the United States appears as a superpower seeking to reassert its global dominance, using tariffs and “reciprocal” trade measures under President Trump. 
• However, such policies are often viewed as arbitrary and counterproductive, creating friction even with traditional allies.

India’s Strategic Dilemma

• India’s growing tensions with both Washington and Beijing place it in a diplomatic and economic dilemma. 
• While China offers market opportunities, its export strength and strategic rivalry with India pose dangers. 
• Conversely, the US remains India’s largest export market, despite current tariff disputes.

Source: IE