US President Donald Trump’s tariff war has sent shockwaves across the global economy, but no leader has felt its sting more keenly than India’s Prime Minister Narendra Modi. Caught in a high-stakes geopolitical bind, India is grappling with an existential dilemma: balancing its vital economic ties with China against the allure of the American market.
On April 2, 2025, the Trump administration slapped a 26% “reciprocal” tariff on Indian goods, forcing New Delhi into fraught negotiations to preserve access to the American market, its largest export destination.
Despite the Indian media’s portrayal of Modi as a “Vishwaguru” (world leader) and indomitable strongman, India’s response has betrayed a surprising deference, seen in fast and big import duty cuts on Harley-Davidson motorbikes and American-made bourbon whiskey amid a broad pledge to tear down trade barriers. New Delhi has also announced plans to buy more US energy and defense products in a bid to placate Trump.
Sensing the weakness, the Trump team has leveraged a 90-day reprieve on the tariffs to press India into a broader American strategy to isolate China economically and strategically. As part of this diplomatic offensive, US Vice President JD Vance arrived in Delhi on April 22 for a high-profile four-day visit.
Ostensibly a family affair—Vance, with his Indian-origin wife and children, framed the trip as a nod to his Sasural (“in-laws”) and his kids’ “Nana-Nani” (maternal grandparents)—the visit’s true purpose is to tighten the screws on India and secure its alignment against Beijing.
Where Trump dangled the carrot of American investment shifting from China to India in his first term, he brandishes the stick of tariffs to bend Modi to his will in his second.
Economic Affairs Secretary Ajay Seth said this week the “first order” hit from 26% tariffs on India, if imposed, could reduce GDP by between 0.2 and 0.5 percentage points, which he said was “not a huge impact.” Nonetheless, underscoring the urgency of the situation, New Delhi planned to dispatch both its chief trade negotiator and finance minister to Washington this week before the fateful Kashmir attacks.
India’s predicament is rooted in its bifurcated economic reality. Its industrial base, often little more than an “assembly line,” relies heavily on Chinese intermediate goods, raw materials, capital equipment, technology and investment to produce final products for export, particularly to the US.
In 2024-25, China accounted for over 14% of India’s total foreign trade, while India’s imports contributed a mere 1.9 % to China’s global trade, highlighting a stark asymmetry. The US currently accepts 35% value addition in India as sufficient for a “rules of origin” certificate, allowing India to import Chinese components, assemble them and export finished goods to America.
Yet this model leaves India vulnerable to a percentage readjustment. Tilting toward the US risks Chinese retaliation that could choke its production lines; leaning toward China threatens to forfeit US market access.
This is India’s central conundrum. Should India join the US in confronting China, Beijing could unleash a barrage of punitive measures—both overt and subtle—that would disrupt India’s economic trajectory, undermine its security and erode its regional influence, much as it did in 2020 in punitive response to Himalayan border tensions.
China’s most immediate weapon would be trade manipulation, exploiting India’s $100 billion trade deficit in 2024-25. Beijing could impose steep tariffs or non-tariff barriers, such as rigorous quality inspections, on Indian exports like agricultural products, textiles and leather goods, constricting India’s access to Chinese and allied markets.
More devastatingly, China could throttle exports of critical inputs, including pharmaceutical precursors (70% of India’s supply), smartphone components and industrial machinery. In 2020, when India tightened scrutiny on Chinese investments, Beijing retaliated by blocking engineers’ and technicians’ visits and machinery shipments, a tactic it could escalate to even more damaging effect today.
Such restrictions would paralyze India’s smartphone, pharmaceutical and solar energy sectors, which are all tightly tethered to Chinese supply chains. By selectively curbing imports of Indian goods, China could further skew the trade balance, shrinking India’s export revenues.
With China constituting over a third of India’s foreign trade, these measures could precipitate a severe economic contraction, hobbling India’s industrial ambitions and global market competitiveness.
Financial leverage offers China another avenue to squeeze India. With $3.24 trillion in foreign exchange reserves and significant sway in global finance, Beijing could disrupt trade financing for Indian firms by tightening payment terms, delaying processing or restricting credit through Chinese banks. After India’s 2020 ban on Chinese apps, Chinese investors curtailed funding to Indian startups, a precedent that could expand to broader sectors.
Should India deepen its US alignment, China might freeze investments in recently approved joint ventures—such as Vivo, Suzhou Inovance, and ZNShine—or retract new proposals, undermining India’s manufacturing growth and technology transfer plans.
More subtly, China could influence India’s access to multilateral financial institutions, such as the Asian Infrastructure Investment Bank or New Development Bank, by deprioritizing Indian projects. These financial chokeholds could starve India’s industrial and infrastructure initiatives, limiting its ability to scale up domestic production or diversify away from Chinese inputs.
In the technological sphere, China could target India’s nascent digital and defense industries. India’s 5G networks and smart city projects rely partly on technology from Chinese tech firms like Huawei and ZTE. Beijing could derail India’s digital infrastructure by restricting access or withholding technical support.
A 2021 Harvard Belfer Center report highlighted China’s dominance in artificial intelligence, 5G, quantum computing, and semiconductors. An embargo on semiconductors or high-tech components could cripple India’s fledgling semiconductor industry and defense manufacturing, which depend on Chinese inputs for advanced electronics.
China could also complicate operations for its tech firms in India, halting solar panels or telecom equipment supplies. Such disruptions would stall India’s technological progress and weaken its strategic capabilities, particularly in defense systems critical to countering regional threats.
China’s stranglehold on critical raw minerals (CRMs) and rare earth elements (REEs) poses an even more existential risk. In 2023, India identified 30 critical minerals vital for electric vehicles (EVs), semiconductors, defense equipment, and renewable energy, including lithium, cobalt, gallium, titanium, graphite, silicon, bismuth, tellurium, and REEs like neodymium, praseodymium, dysprosium, and terbium.
India holds 6.9 million metric tons of REE reserves—the world’s fifth largest store—but its processing and refining capacity is negligible. It sources 60% of its REE imports and over 40% of six CRMs—bismuth (85.6%), lithium (82%), silicon (76%), titanium (50.6%), tellurium (48.8%), and graphite (42.4%)—from China. Beijing controls 87% of global REE processing, 58% of lithium refining and 68% of silicon refining.
A Chinese export ban could thus devastate India’s ambitions for 30% EV penetration by 2030, its semiconductor manufacturing plans and its defense production, which relies on REEs for missiles, radar, and guidance systems. India’s pharmaceutical industry, which depends on China for 70% of its precursors, and its smartphone sector, which relies on Chinese components, would face acute shortages.
While India seeks alternatives through the Mineral Security Partnership and Australian partnerships, decoupling from China’s dominance could take decades. An embargo would thus deal a catastrophic blow to India’s industrial and strategic aspirations.
Diplomatically, China could isolate India within the Shanghai Cooperation Organisation (SCO) and BRICS+ by casting its US alignment as a betrayal of collective interests. In 2024, China’s foreign ministry condemned such alliances, and Beijing could rally SCO members like Pakistan and Russia to obstruct India’s initiatives.
In BRICS+, China might bolster ties with Brazil, South Africa and new members to marginalize New Delhi. Regionally, Beijing could intensify Belt and Road Initiative projects in India’s neighbors—Nepal, Sri Lanka, Maldives, and Bangladesh—eroding India’s “Neighbourhood First” policy.
In 2023, Chinese envoy Chen Song underscored BRI’s role in South Asia, signalling Beijing’s intent to encircle India. Such maneuvers would isolate India diplomatically and alienate it from Global South allies, framing it as a Western proxy and undermining its regional influence.
If India persists in antagonizing China, Beijing could escalate to hard measures. Border tensions could reignite, with incursions in Ladakh or Arunachal Pradesh, as witnessed in the 2020 Galwan clash. In 2021, China deployed 100 advanced rocket launchers along the Line of Actual Control, signalling its readiness to escalate.
Naval exercises in the Indian Ocean, leveraging ports like Gwadar, Hambantota and Chattogram, could challenge India’s maritime dominance. Cyberattacks, such as the 2020 Mumbai power outage linked to Chinese state-sponsored groups, could target India’s telecommunications, energy and banking sectors, potentially paralyzing its economy.
Proxy threats via Pakistan or Myanmar, potentially armed by China, could create a multi-front challenge, straining India’s security apparatus.
Soft power offers China a subtler tool to destabilize Modi’s domestic standing. The 2024 agreement to resume Indian pilgrimages to Tibet’s Kailash Mansarovar, a sacred site for Hindus, Jains, and Buddhists, was a goodwill gesture. Reimposing a ban could provoke a backlash from these communities, denting Modi’s political capital.
In Washington, India’s trade talks with the US this week will test Modi’s ability to navigate this minefield. With China’s outsized role in India’s supply chains and minimal reliance on Indian trade, Beijing clearly holds the upper hand.
A misstep could plunge India into economic turmoil, compromise its security and diminish its global stature, forcing Modi to weigh the costs of defiance against the perils of dependence.
Bhim Bhurtel is on X at @BhimBhurtel
