Author: Maria Pechurina, Director of International Trade @ Peacock Tariff Consulting
Status Quo: US-India Deeply Intertwined & Complex Trade Relationship
Before the recent tariff escalations, the U.S. and India shared a robust and growing bilateral trade relationship. In 2024, total trade reached approximately $212.3 billion, an 8.3% increase from the previous year, signifying a good trajectory (trade with India made up only 1.3% of total US trade, but the U.S. was India’s largest trading partner). India was on a path to becoming a global manufacturing hub, positioning itself as a key alternative for U.S. supply chains in the process of decoupling from China. This relationship is built on an intricate web of mutual dependency.
U.S. Imports from India:
The U.S. imports a vast array of goods from India, including pharmaceuticals (amounting to nearly half of U.S. generic medicines), diamonds (India cuts and polishes most of the world’s supply), electronics like smartphones, textiles, and engineering goods. In 2024, U.S. goods imports from India totaled $87.3 billion. American manufacturers, for example, the luxury linen company Matouk (headquartered in Massachusetts) rely on specialized fabrics sourced from India that are not available domestically.
India’s Imports and Services Trade:
While there is a significant goods trade deficit for the U.S. ($45.8 billion in 2024), the services trade is more balanced, with the U.S. running a small surplus. India is a major buyer of U.S. services like tourism, IP, financial services, IT, professional and business services and R&D.The services will not be subject to tariffs. A crucial element of the status quo is India’s long-standing relationship with Russia. Russia is India’s largest weapons supplier and has become a top source of crude oil, which India needs to fuel its growing energy demands as the country maintains the position of the fastest-growing economy in FY 2024-2025.
Tariffs: A Multifaceted Economic Assault
The Trump administration has imposed several significant tariffs on India, creating major trade friction:
- 50% Section 232 Tariff on Copper Products: Effective August 1, 2025, the U.S. levied a 50% tariff on worldwide imports of semi-finished copper products like pipes, wires, and rods, citing national security concerns. India has formally challenged this at the World Trade Organization (WTO), arguing the levies are “safeguard measures” that were not properly notified under WTO rules with a request for consultations under article 12.3 of the agreement on safeguards on September 2nd. If no agreement is reached, India is permitted to levy reciprocal duties on the U.S.. However, US President Donald J. Trump said that India offered to allow U.S. goods to enter at zero tariffs, indicating a complex and perhaps conflicting strategy.
- Tariffs on Indian Exports: Separate from the copper tariffs, India is currently subject to the highest reciprocal tariffs of 25% under IEEPA, aimed to penalize New Delhi for its own trade barriers and, critically, for India’s refusal to open its agricultural sector to the US. Given a history of food insecurity and foreign intervention, India’s position on agriculture is not at all surprising and it remains a policy priority for Modi to keep the sector closed. An additional 25% tariff was imposed on a wide range of Indian exports as a “punishment” for buying Russian oil and weapons. Some items, such as semiconductors and consumer electronics, are exempt from this blanket tariff; while pharmaceuticals are also exempt from the 50% tariff, with the spreading uncertainty, this may be subject to change, causing a devastating hit to India’s economy.
The Consequences: Harming U.S. Industry and Threatening Indian Exports
The tariffs are causing significant economic repercussions for businesses in both countries.
- Damage to U.S. Manufacturers: U.S. companies that rely on Indian materials are being “punished for sticking with U.S. manufacturing”. George Matouk Jr., CEO of a U.S.-based linen company, states the tariffs damage his domestic operations because essential fabrics and machinery are not available in the U.S.. He argues that his company must shoulder almost the entire burden of the tariffs, making his American-made goods less competitive than those from rivals who produce everything in other countries with lower tariff rates. He warns this policy risks inflicting long-term damage to their industrial base.
- Impact on Indian Exports: The tariffs also place a significant portion of Indian exports at risk. According to a Delhi based think tank, Global Trade Research Initiative (GTRI), Indian exports could fall by $36.5 billion USD (a fall from $86.5 billion to $50 billion). The move threatens hundreds of thousands of Indian jobs, particularly in labor-intensive sectors like textiles, gems, footwear, and chemicals.
- A Potential Silver Lining for Natural Diamonds: In an unexpected twist, the 50% tariff on diamonds from India could benefit the natural diamond industry. Analysts believe the resulting price increase (already 8-10% at the retail level) could help differentiate natural diamonds from cheaper, lab-grown alternatives by emphasizing their scarcity and value and break the illusion of their interchangeability. Since India is also a top producer of lab-grown diamonds, the tariff applies to them as well, but the impact is less significant due to their low and declining production costs.
Geopolitical Layer: How the US is pushing India into China’s “Loving Arms”
The U.S. tariffs, especially those linked to Russian oil, are a key catalyst for a significant geopolitical realignment, pushing India closer to China and Russia. A recent (August 31 -September 1) Shanghai Cooperation Organisation (SCO) summit showcased a rare and surprising show of unity between Chinese President Xi Jinping, Russian President Vladimir Putin, and Indian Prime Minister Narendra Modi. The occasion marked Modi’s first visit to China in seven years. Observers noted the leaders laughing, exchanging long handshakes, and Modi riding in Putin’s limousine, a powerful visual symbol of a newly found trilateral congeniality. This has been interpreted as the formation of a powerful counterweight to U.S. global pressure. As former U.S. Treasury Secretary Larry Summers remarked, “We have pursued policies that have managed to unite our adversaries and divide our friends”.
Economic and Strategic Cooperation
The core of this emerging partnership centers on energy security and the pursuit of creating alternatives to the U.S.-led financial system. India has signaled it will continue buying Russian oil despite U.S. threats, while Russia and China have advanced plans for the Power of Siberia 2 gas pipeline (though Russia displays greater enthusiasm at the project than Beijing, and it may not proceed with Moscow’s desired urgency). President Trump himself acknowledged the shift, posting on Truth Social: “Looks like we’ve lost India and Russia to deepest, darkest China. May they have a long prosperous future together!”. This is further reinforced by India and China reopening border trade after years of restrictions, resuming direct flights and advancing business exchange channels, moves that could significantly lower logistics costs and increase market access for both nations.
India’s “Strategic Autonomy” and Self-Reliance
While the U.S. has seemingly pushed Modi into China’s “loving” and receiving arms, Indian officials frame this as a breaking away from the U.S. orbit of influence rather than a full embrace of Beijing as a strategic counterpart. A high level of distrust remains between India and China following a 2020 border clash. India’s broad stroke similarities to China – a massive population with a unique culture, diversity of languages, a relatively open political system and a favorable talent exchange outlook with the United States may pose challenges down the road once a shift to multipolarity becomes more tangible (this is the issue-at-large with a multipolar order – how are they all ever going to get along?). By engaging with the SCO, Modi is signaling India’s “strategic autonomy,” demonstrating that he has alternatives and will not allow his country to be bulldozed by Washington. However, harsh rhetoric from the Trump administration, including Peter Navarro, economic adviser to the US President, accusing New Delhi of funding “Modi’s war” and going as far as to call India “Russia’s laundromat”, has undeniably accelerated this strategic pivot.