Why India could win big or lose everything

The world is bracing for new economic turbulence as US President Donald Trump imposes a new 100% tariff on Chinese goods and bans critical software exports. For India, which is uncomfortably positioned between two global giants, this escalating trade war presents both exciting opportunities and serious risks. The question is not whether India will be affected, but rather how adeptly New Delhi can navigate these treacherous waters.

The immediate reaction might be optimism. After all, when your two opponents fight, you win, right? In theory, Trump’s tariffs could divert global supply chains from China to alternative production hubs like India. American and European companies looking to diversify their supply chains have been looking to India for years. This latest increase may be just the push they need. Sectors such as electronics manufacturing, automotive parts, pharmaceuticals and textiles may see increased foreign investment as businesses look for Chinese alternatives.

The production-related incentive programs that India had launched to attract exactly such producers suddenly look more attractive. The country’s diplomatic balancing act of maintaining reasonably good relations with both Washington and Beijing positions the country as a relatively safe bet for risk-averse companies. Vietnamese and Mexican factories are already booming with orders from China. With its huge domestic market and increasing production capacity, India can get a meaningful share of this cake.

But this is where things get complicated. India is not a manufacturing hub independent of Chinese supply chains. Far from it. Indian manufacturers are highly dependent on Chinese intermediate goods, raw materials, machinery and components. From smartphones to solar panels, pharmaceutical components to electronic components, Chinese imports form the backbone of many Indian industries. The rare earth restrictions announced by China on October 9 particularly affected the immediate environment.

Do you remember what happened in May? Chinese suppliers have demanded written guarantees from Indian automakers that rare earth magnets will not be used for defense purposes. Indian automakers reportedly fear production halts if the government does not intervene. This vulnerability has not gone away. It got worse. China’s new export licensing system for magnets containing 0.1% Chinese rare earth content gives Beijing an extraordinary advantage over Indian production. Electric vehicle production, renewable energy projects, electronics production; If China decides to tighten the screws, it could face serious disruptions.

The domino effect of Trump’s tariffs is creating another headache. When Chinese goods face a 130% tariff on the American market (the current 30% plus Trump’s new 100%), Chinese manufacturers will desperately seek alternative markets. Where will they dump their excess production? Markets such as India, Southeast Asia and Africa are becoming attractive targets. This flood of cheap Chinese goods sold below cost to maintain factory operations could devastate Indian manufacturers who cannot compete on price. We saw this playbook after the 2018 trade war, when imports of steel, aluminum and chemicals from China to India surged and domestic manufacturers were forced to seek government protection.

India’s own tariff structure adds another layer of complexity. New Delhi has steadily increased import duties on Chinese goods in recent years, citing national security concerns and a desire to encourage domestic manufacturing. But these tariffs also make Indian products less competitive globally as manufacturers cannot access cheaper inputs. If China’s export restrictions on rare earths tighten further and American tariffs push Chinese goods onto Indian shores, India faces an uncomfortable choice: raise tariffs higher and hurt its own producers, or keep markets open and watch China’s dumping crush domestic industries.

The geopolitical dimension cannot be ignored. As US-China tensions escalate, both powers will pressure India to choose sides more clearly. Washington will push New Delhi to break away from Chinese supply chains and join American-led technology alliances. Beijing will remind India of its economic dependence and the consequences of turning on its neighbor. India’s carefully cultivated strategic autonomy will face its harshest test yet.

Could this crisis push India and China to ease trade conditions? It’s possible, but don’t bet on it. Border tensions have not been resolved since the 2020 Galwan conflict. Trust between New Delhi and Beijing is at historic lows. Indian policymakers see China’s economic dominance not just as an economic problem but also as a national security threat. China, meanwhile, sees India as a junior partner at best and certainly not equally worthy of significant concessions.

More likely is tactical, sector-specific collaboration where both parties see clear benefits. Chinese companies can increase manufacturing investments in India to circumvent American tariffs by using India as an export platform. Indian firms can gain better access to certain Chinese inputs that are critical to their operations. So, a broad trade deal or a significant easing of restrictions? This seems very difficult given current political realities.

The real danger for India lies in complacency. Simply “not being China” is not enough to capture diverted supply chains. Vietnam, Mexico and other rivals are also in the race, often with better infrastructure, more business-friendly regulations and clearer policy frameworks. Indian bureaucracy, inconsistent policy implementation and infrastructure bottlenecks remain serious obstacles. While the government’s recent efforts to improve ease of doing business and infrastructure are indicative of awareness of these challenges, implementation remains uneven.

India needs a clear strategy. First, accelerate efforts to reduce reliance on critical Chinese inputs, especially in rare earths, semiconductors, and advanced materials. This means significant investment in domestic mining and processing capabilities and alternative supply sources from Australia, Africa and Latin America. Second, make India truly competitive in terms of manufacturing by fixing infrastructure, simplifying regulations and ensuring policy consistency. Tax cuts alone won’t cut it. Third, deepen trade ties with the Americas, Europe, Japan, and Southeast Asia to secure market access and technology partnerships.

Fourth, to maintain pragmatic relations with China where it serves India’s interests, without harboring any illusions about Beijing’s strategic intentions. And finally, use this moment of global supply chain restructuring to negotiate better terms with both American and Chinese firms desperate for alternative arrangements.

Trump’s tariff war presents India with a real opportunity, but this opportunity also comes with significant risks. Whether this turns into an advantage or another missed chance depends entirely on how quickly and smartly India moves. The window won’t stay open forever. Global supply chains are currently being redrawn and India needs to ensure that it holds the pen and not just watches from the sidelines.

(The author of this article is a Defense, Aerospace and Political Analyst based in Bengaluru. He is also the Director of ADD Engineering Components, India, Pvt. Ltd, a subsidiary of ADD Engineering GmbH, Germany. You can reach him at: girishlinganna@gmail.com)

(Disclaimer: The views expressed above belong to the author and do not reflect the views of DNA)