India-China trade strategy: For nearly a decade, India cultivated a narrative that economic ties with China were detrimental to India’s interests. This reached its peak in 2020, amid border clashes and public outrage against Chinese goods — from toys and smartphones to apps like Shein and even games such as PUBG. The rhetoric of self-reliance gained political traction, and disengagement from China became an economic and emotional project.
Today, the sentiment has softened. As trade tensions with the United States deepen and tariffs rise, policymakers have begun to reassess whether India can afford to ignore the world’s second-largest economy. A recent interaction between Prime Minister Narendra Modi and President Xi Jinping, followed by a spate of optimistic commentary, reflected this shift. The political hostility of 2020 seems to be giving way to a pragmatic recalibration.
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China’s centrality in India’s trade outlook
The latest Trade Watch report by NITI Aayog brings the China question back into sharp focus. NITI CEO BVR Subrahmanyam warned that ignoring Asia’s largest economy is self-defeating: “China is a $15 trillion economy — you can’t wish it away.” The statement captures a truth that Indian trade policy has long resisted.
India’s economic strategy stands at a crossroads. Over the last few years, the government pushed for production-linked incentives (PLI), import substitution, and the Make in India campaign — all aimed at reducing Chinese dependence. Yet, complete disengagement from the manufacturing hub of the world has proved unrealistic.
The unequal equation: Numbers tell the story
India’s exports to China fell 7% in 2024 to $15.1 billion, while imports rose 10% to $109.4 billion, leaving a yawning $94 billion trade deficit — the largest with any nation. Much of what India imports — electronic components, chemicals, and machinery — are indispensable to its own manufacturing sectors. From pharmaceuticals to solar panels, many industries remain deeply dependent on Chinese inputs.
The irony is hard to miss. Even as policymakers invoke Atmanirbharta (self-reliance), Indian factories struggle to compete globally because import tariffs on essential inputs make domestic production costlier. The more India walls itself off, the less competitive its manufacturers become.
The tariff trap: Inverted duty structure
The Trade Watch report identifies a structural flaw in India’s tariff regime: it penalises manufacturing instead of promoting it. Duties on inputs such as plastics, rubber, and leather components hover around 10%, whereas countries like Vietnam and Italy levy near-zero tariffs. The result is an inverted duty structure — finished goods are often cheaper to import than the raw materials needed to make them.
Nowhere is this distortion clearer than in the leather and footwear industry. In 2024, India exported only $5.5 billion worth of these products — just 1.8% of the global $300 billion trade. The non-leather footwear segment alone is worth $110 billion, yet India’s share remains negligible. High input costs, fragmented supply chains, and limited access to advanced materials have kept domestic producers on the margins.
Lessons from Vietnam: Integration pays
India’s protectionist instincts, often justified as safeguards for local industry, have instead trapped small and medium enterprises in low-value production. In contrast, Vietnam liberalised its tariffs and embraced integration into regional value chains, particularly with China. The outcome is striking: Vietnamese exports to China have surged, while India’s have stagnated.
By cutting input tariffs and improving logistics, Vietnam has positioned itself as a hub for intermediate manufacturing—attracting investment and linking into the global supply chain. Unless India takes similar steps, it risks being sidelined as Asia drives the next phase of global growth.
The global supply chain realignment that followed the pandemic was perhaps India’s biggest missed opportunity. As multinationals sought to diversify away from China, countries like Vietnam, Thailand, and Mexico positioned themselves as alternative hubs. Japan’s relocation incentives and the US “China+1” strategy led to the creation of new manufacturing clusters across Southeast Asia. India, despite its scale and political stability, captured less than 10% of this redirected investment. High logistics costs, fragmented industrial policies, and regulatory delays discouraged firms from making long-term commitments. The lesson is clear: integration into global supply networks depends as much on domestic efficiency as on geopolitical alignment.
Strategic autonomy, not economic isolation
India’s caution toward China is not without justification. The military standoffs in Ladakh and the broader contest for regional influence make engagement politically sensitive. But strategic autonomy cannot mean economic isolation. The United States and Europe continue deep trade relationships with China even as they diversify supply chains. India can pursue a similar middle path — engaging where beneficial, decoupling where necessary.
Ignoring China will not weaken Beijing; it will merely deprive Indian exporters of access to a vast and growing market. The goal should be to use trade as leverage, not abandon it out of fear.
While India’s merchandise trade deficit with China continues to widen, its growing strength in digital services, IT exports, and fintech offers a potential counterweight. The two economies occupy different ends of the global value chain — China dominates hardware, India software. A pragmatic engagement strategy could explore joint ventures in semiconductors, renewable technologies, and AI-enabled solutions. Such cooperation would not dilute strategic caution but could anchor a more balanced, future-oriented economic relationship. Ignoring the technology dimension narrows the debate to tariffs and deficits, when the real contest is over value creation.
Recalibrating amid US tariffs
India also faces new pressures from the West. Washington’s recent move to double tariffs on Indian exports — some as high as 50% — in retaliation for discounted Russian oil purchases has eroded competitiveness in US markets. With Europe tightening regulations and demand slowing, India must pivot toward Asia, where consumption and infrastructure spending are accelerating.
However, India’s exports to China remain concentrated in low-value commodities such as iron ore, cotton, and chemicals — sectors vulnerable to price swings and limited value addition. Experts argue that India must shift toward processed foods, pharmaceuticals, engineering goods, and renewable energy components to climb the value chain.
India-China trade: From protection to partnership
Trade diplomacy must evolve from defensive posturing to proactive market access negotiations. Indian exporters face multiple regulatory hurdles in China—from sanitary standards on seafood to complex certification rules for pharmaceuticals. A structured dialogue with Beijing is essential to open these channels.
India’s economic equation with China is outdated. Globalisation in 2025 is no longer about surrendering sovereignty; it is about leveraging interdependence for domestic strength. The world’s fastest-growing region will not wait for hesitant participants — and neither should India.
Recalibrating trade ties will yield little without structural reforms at home. India’s manufacturers remain burdened by high power tariffs, slow customs clearance, and a patchwork GST regime that fragments the domestic market. Logistics costs, at nearly 13% of GDP, are almost double those in China. These inefficiencies erode competitiveness far more than any bilateral tariff gap.
A genuine export push must therefore pair trade diplomacy with internal reform—simplifying taxes, improving credit access for MSMEs, and investing in ports and freight corridors. Only then can India convert policy intent into trade performance.