Donald Trump’s sweeping tariff hikes have pushed the world to the edge of a potential global trade war, prompting strong reactions from major economies. The European Union has pledged a coordinated response, while China has warned of retaliatory action.
Credit rating agencies like Fitch have cautioned that the widespread tariffs could slow global growth, drive up inflation, and possibly tip some regions into recession.
Amid these global disruptions, all eyes are on how India—Asia’s third-largest economy—will respond.
Asian countries have borne the brunt of Trump’s tariffs, with China now facing 34% duties on top of a previous 20%, while Vietnam and Cambodia are being hit with 46% and 49% tariffs, respectively. India, comparatively, is facing a 27% tariff rate—a relatively better position, but still a significant burden.
According to Priyanka Kishore of Asia Decoded, the tariffs will heavily impact India’s labour-intensive export sectors, which could in turn dampen domestic consumption and GDP growth—already under strain.
However, the shifting trade landscape may also present new opportunities for India. The tariff gap with its Asian competitors might prompt some businesses, like footwear and garment manufacturers, to shift their sourcing to India—if the country can position itself well, says seasoned fund manager Nilesh Shah.
But capitalizing on these openings will take time. In the meantime, the Modi government must tread carefully about the potential trade war.
One key step, says public policy expert Rahul Ahluwalia, is expediting a trade deal with the US—India’s biggest export destination. Goods exports to the US total around $91 billion, or 18% of India’s total. Trade talks are already in progress with a tentative deadline set for later this year, but that timeline might need to be fast-tracked now.
Simultaneously, India must broaden its export reach beyond the US, focusing on low-tariff regions such as the EU, Southeast Asia, and Africa, advises the Global Trade Research Initiative (GTRI).
Recent years have seen India ramping up its pursuit of free trade agreements (FTAs), including with the EU and the UK. A major $100 billion FTA with the European Free Trade Association (EFTA) was signed last year, and other negotiations could now pick up speed as global tensions rise.
Even as external trade talks proceed, the government must also prepare for domestic impacts. Key sectors like textiles and jewellery, which employ millions, could be hit hard. To mitigate this, consultancy firm Ernst & Young suggests ramping up support mechanisms like production-linked incentives to keep Indian industries competitive and capable of capturing new opportunities.
According to Agneshwar Sen of Ernst & Young India, the tariffs are reshaping the global trade system, necessitating a strategic overhaul of India’s trade policies as new supply chains form.
India must also guard against new threats such as “Chinese dumping,” warns Shah. With limited access to the US, China will likely target other large markets—India being a prime candidate given the size of its consumer base and emerging middle class.
So far, the Indian government hasn’t offered a formal response. It has already lowered tariffs on a few American goods like premium motorcycles and bourbon, opting for a more conciliatory stance compared to Canada, Mexico, or the EU—a move experts believe is unlikely to provoke backlash from Washington.
Still, uncertainty looms for Indian businesses. And with the Trump administration pushing for even more substantial tariff cuts, the future remains murky, and prompting trade war.
“The question remains—what will finally satisfy the Trump administration?” asks Milan Vaishnav of the Carnegie Endowment.
