In the wake of escalating trade tensions incited by former U.S. President Donald Trump's tariffs, India and China are actively seeking to revitalize their business relations. Trump's decision to impose a steep 50% tariff on Indian exports, effective August 27, 2025, has significantly strained ties between the U.S. and India, prompting India to explore closer relations with Beijing. These tariffs, the highest levied against any country, target key Indian sectors such as textiles, jewelry, and mechanical appliances, raising concerns about job losses and slower economic growth.
The tariffs were imposed in response to India's continued purchase of Russian oil, a move that Washington views as indirectly funding Russia's war against Ukraine. However, this justification has been met with skepticism in India, particularly as China, the largest buyer of Russian oil, faces no comparable penalties. This situation has led to a perception in India that the tariffs are deliberately punitive rather than a rational economic policy.
Prime Minister Narendra Modi's visit to China this weekend for the Shanghai Cooperation Organisation (SCO) summit marks a significant step towards mending relations. This is his first trip to China in seven years, and it comes at a time when India's relations with the U.S. have soured due to the tariffs. The meeting provides an opportunity for Modi to meet with Chinese President Xi Jinping and Russian President Vladimir Putin, potentially strengthening ties between the three nations.
The growing trade deficit between India and China remains a concern. In the fiscal year 2024-25, the deficit widened to $99.2 billion, with India exporting goods worth $14.25 billion and importing $113.5 billion. This imbalance has raised concerns in India about its dependence on Chinese goods, especially in key sectors. Experts have warned that this dependence could give Beijing leverage over India, potentially using supply chains as a tool of pressure during political tensions.
Despite these concerns, there are signs of a thaw in India-China relations. China has eased curbs on urea shipments to India, and discussions are underway to settle border disputes. India is also considering relaxing investment rules for Chinese companies in sectors such as manufacturing, renewable energy, and auto components. This move signals a pragmatic shift aimed at securing new economic opportunities amidst mounting external pressures.
The impact of Trump's tariffs on India's economy is expected to be substantial. The tariffs could shave off 60-80 basis points from India's GDP growth if they remain in place for a year. Key sectors like textiles, gems, and jewelry are bracing for a significant collapse in exports, potentially endangering hundreds of thousands of jobs.
In response to these challenges, India is exploring alternative markets and supply chains. Diversifying trade and boosting domestic manufacturing are key strategies to reduce dependence on any single country. Some analysts suggest that India should focus on diplomatic solutions and strengthen trade deals with other nations to mitigate the economic fallout from the U.S. tariffs.
While the U.S. remains India's largest export market, the current trade tensions have prompted India to seek a new equilibrium with China. Whether this "reboot" will lead to a sustainable long-term partnership remains to be seen, given the historical tensions and trust deficits between the two countries. However, the immediate need to navigate the challenges posed by Trump's tariffs has created a window of opportunity for India and China to explore closer economic cooperation.
