Why India Must Act Now to Rebalance Trade with China

Introduction

The resurgence of trade tensions between the United States and China, reignited by Trump-era tariffs, has sent ripples across global supply chains. While the spotlight often remains fixed on the US and China, India could be a silent but significant beneficiary. 

As China scrambles to counterbalance its reduced access to the US market and global corporations seek alternative manufacturing destinations, India finds itself at the crossroads of economic opportunity and strategic recalibration. This article explores how India can use this geopolitical and trade disruption to rebalance its financial relationship with China, reduce its chronic trade deficit, and emerge stronger in the global value chain.

The Current Indo-China Trade Equation

India’s trade relationship with China is both critical and complicated. According to India’s Ministry of Commerce, China is India’s second-largest trading partner, with bilateral trade reaching $136.2 billion in FY2023. However, the trade is overwhelmingly skewed—India imports around $101 billion worth of goods while exporting only about $35 billion, leaving a trade deficit of over $66 billion.

The imports are concentrated in critical sectors like electronics, chemicals, and pharmaceuticals, making India structurally dependent on Chinese inputs. This reliance limits India’s bargaining power in the global trade hierarchy and exposes vulnerabilities, especially during geopolitical or economic shocks. 

Trump’s Tariffs and Global Trade Realignment

Former US President Donald Trump’s aggressive tariff policies on Chinese goods—first initiated in 2018 and recently revived in rhetoric during his 2024 re-election campaign—have thrown global trade dynamics into flux. These tariffs, aimed at protecting American industry, are inadvertently reshuffling supply chains globally.

According to a recent Economic Times editorial, Trump’s tariffs have created “global overcapacity” as China seeks to redirect its manufacturing exports away from the US and into other markets—including India. Simultaneously, the US is looking to de-risk Chinese supply chains, creating space for new manufacturing hubs like India and Vietnam to fill the void (Economic Times).  

A Strategic Window for India

Former RBI Governor Raghuram Rajan has highlighted that India must not miss this rare opportunity (India Today). The reshuffling of global trade offers India a chance to reduce its trade deficit with China and rebalance the structural terms of the relationship.

This rebalancing is not about decoupling—it’s about redefining dependencies in areas where India can become a supplier rather than a perpetual buyer. With China looking to expand into newer markets due to US restrictions, India can negotiate better access to Chinese markets for its exports—especially in IT services, pharmaceuticals, and agricultural products.

What Can Be Done?

1. Push for Sectoral Diversification in Trade

India must aggressively expand its export base to China. Pharmaceuticals, where India is a global leader, represent a small fraction of its exports to China, primarily due to regulatory bottlenecks. Streamlining approvals with Chinese regulators can unlock billions in potential exports. 

2. Leverage the PLI Schemes for Electronics and Semiconductors

Production-linked Incentive (PLI) schemes launched by the Indian government in electronics, textiles, and renewable energy sectors can reduce dependency on Chinese imports and even position India as an export hub. As global firms look to exit China, India must create the right tax, infrastructure, and regulatory environment to capture this shift. 

3. Use FTAs as Economic Leverage

India must tactically re-engage in bilateral and regional trade negotiations, particularly with ASEAN, Australia, and the EU, to dilute China’s influence on its trade mix. India’s exit from RCEP in 2019 was seen as protectionist, but new trade alignments can help create supply chain alternatives to China.

4. Seek a Bilateral Reset

While China calls for India to “stand together” against what it labels Trump’s “tariff abuse” (News18), India should strategically use this olive branch to demand more balanced trade practices. This could include easing non-tariff barriers for Indian exporters and greater reciprocity.

5. Engage in Global Trade Blocs: Tactically re-engaging in trade pacts can dilute Chinese influence. 

How Will It Help India Economically?

Reducing the Trade Deficit

Even a modest 10–15% increase in exports to China could reduce India’s annual trade deficit by $7–10 billion, easing pressure on the rupee and foreign reserves.

Boosting GDP Growth

Statista said India’s exports stood at $453 billion in FY2023. A trade realignment that increases market share in China could boost GDP growth by 0.2% to 0.3% annually through higher export volumes and job creation in sectors like textiles, electronics, and pharma.

Attracting Manufacturing FDI

India’s FDI in manufacturing hit $16.7 billion in FY2022 (DPIIT data). With global manufacturers relocating from China, India can double this inflow by 2026 if policy and infrastructure reforms keep pace. 

Benefits for China

• Stable Alternative Markets: With the US becoming increasingly protectionist, India offers a large and growing consumer base. India’s projected middle-class population is expected to exceed 600 million by 2030, offering a robust demand environment for Chinese electronics, green tech, and machinery.
• Supply Chain Integration: A recalibrated relationship with India allows China to diversify its supply chain risk, particularly in sourcing APIs, agricultural goods, and tech services. Collaboration in electric vehicles (EVs), solar energy, and smart manufacturing could help China cushion the loss of US demand.
• Preserving Export Volumes: By tapping into the Indian market, China can mitigate the volume losses from shrinking access to the US. This helps maintain its industrial utilization rates, a critical factor for sustaining employment and avoiding domestic overcapacity.
• Geopolitical Softening: An economic détente with India could reduce tensions along the LAC and provide a foundation for multilateral cooperation across BRICS and RCEP frameworks. Economic engagement may create a political buffer that stabilizes the region.

Challenges Ahead

While the opportunity is real, execution risks remain. Regulatory bottlenecks, bureaucratic delays, and inconsistent infrastructure policies may blunt India’s appeal. Moreover, China remains economically dominant in many critical inputs—meaning India’s transition will need careful pacing rather than abrupt shifts.

Geopolitical tensions, especially after incidents like the Galwan Valley clash, cast shadows over diplomatic engagement. However, economics has always had a way of recalibrating politics, especially when mutual benefits are clear.

Conclusion

The trade war between the US and China presents an opportunity for countries like India to reduce trade deficits and enhance their position in the global supply chain. While the conflict may seem restricted to the two countries, its impact is far-reaching. India must approach this situation with a pragmatic and strategic mindset. This is not only vital from an economic perspective, but also from a geopolitical standpoint.

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