Three body problem: US, India, and China

Ovidiu Tierean is a Senior Advisor at PKF Malta

In the ever‑shifting theatre of global trade, the latest act features a dramatic escalation between Washington and New Delhi. The United States, in a move that has startled even seasoned trade observers, has doubled tariffs on Indian goods to an unprecedented 50%. This is not merely a technical adjustment in customs schedules — it is a seismic policy shift with reverberations that extend far beyond the ports of Mumbai or the corridors of Capitol Hill.

For two decades, successive US administrations, Republican and Democrat alike, invested in cultivating India as a strategic partner, recognising its democratic credentials, economic potential, and pivotal geography. This courtship was not merely rhetorical; it was institutionalised in defence pacts, trade frameworks, and intelligence cooperation. In a telling signal of India’s rising stature, US strategic planners and intelligence agencies began referring to the “Pacific” theatre as the “Indo‑Pacific” – a deliberate rebranding to underscore New Delhi’s centrality in counterbalancing China’s influence. Yet, in the span of barely six months, Donald Trump’s tariff offensive unravelled much of this painstaking work. What had been a slow‑built edifice of trust and alignment was abruptly destabilised, leaving Washington’s credibility in question and forcing India to reassess its strategic calculus.

The economic shockwave

India, now the world’s fifth‑largest economy and on track to claim third place within the decade, counts the United States as its largest trading partner. In 2024, Indian exports to the US stood at approximately $80 billion. Analysts forecast that, should the tariffs persist, this figure could contract by over 40% by 2026, a staggering $30 billion loss.

The sectors most exposed are emblematic of India’s export identity: textiles, jewellery, and gemstones. These industries are not mere statistics; they are the livelihoods of hundreds of thousands, often in labour‑intensive clusters where a downturn can ripple through entire communities. The blow lands squarely on Prime Minister Narendra Modi’s flagship “Make in India” programme, designed to elevate manufacturing’s share of GDP from its current 14% to a more robust 25%.

In a bid to cushion the impact, New Delhi has suspended certain duties on raw materials and accelerated trade talks with alternative partners such as the UK and Australia. Yet, as any seasoned negotiator in Valletta will attest, trade agreements are marathons, not sprints. The lag between diplomatic intent and economic relief may prove costly.

On paper, the US exposure appears smaller: $42 billion in exports to India in 2024. Yet the secondary effects could be more insidious. American universities, long reliant on the steady influx of Indian students, may see enrolments dip. Corporate strategies to diversify manufacturing away from China could stall. And in the grander geopolitical game, Washington risks nudging New Delhi closer to Beijing.

Indeed, the tariffs have already catalysed a quiet thaw between India and China. Direct flights are resuming, visa regimes are loosening, and trade talks are intensifying. Beijing, ever attuned to strategic openings, has pledged to supply India with rare minerals, critical for both the green transition and defence manufacturing.

The Dragon and the Elephant in a pragmatic waltz

The Sino‑Indian relationship is a study in contradictions. Border disputes, Beijing’s close ties with Pakistan, and the legacy of the 2020 deadly clashes on the Himalayan frontier remain unresolved. Yet economic logic exerts its own gravitational pull. China’s slowing economy, plagued by deflation and industrial overcapacity, needs new markets. India, with its 1.4 billion predominantly young citizens, offers precisely that.

Since early 2024, discreet overtures have been made. President Xi Jinping’s letter to India’s ceremonial head of state, Droupadi Murmu, was a symbolic yet calculated gesture. By mid‑2025, high‑level meetings between foreign ministers and national security advisers were underway.

Trump’s Tariffs: catalyst or catastrophe?

Donald Trump’s decision to impose the 50% tariff was ostensibly linked to India’s purchases of Russian oil. Yet the broader effect has been to disrupt years of careful US diplomacy aimed at positioning India as a counterweight to China. In the words of one US analyst, Trump has “treated India as an enemy”, a characterisation that, while hyperbolic, underscores the depth of the rupture.

For Modi, the stakes are both economic and political. The erosion of export revenues threatens growth targets, while the optics of a trade war with Washington could undermine his image as a global statesman. Yet getting closer to China carries its own risks, not least the domestic backlash from constituencies wary of Beijing’s intentions.

Still, the economic imperatives are compelling. Economists estimates that if US tariffs remain at current levels, up to 60% of India’s exports to America could vanish, shaving nearly 1% off GDP in the medium term. To offset this, India will need foreign investment in manufacturing. China, paradoxically, may be the most viable source.

The path to a durable Sino‑Indian normalisation is marked with obstacles. Beijing’s military support for Pakistan, India’s growing ties with Taiwan, and its membership in the Quad security alliance all complicate the picture. The sensitive issue of the Dalai Lama’s succession, with Beijing insisting on its right to approve the next spiritual leader, remains a potential flashpoint.

Given these complexities, both sides appear committed to a gradualist approach. As one former Chinese diplomat observed, President Xi is unlikely to invest heavily in personal rapport with Modi until structural mechanisms for managing the relationship are in place.

The US‑India tariff war is more than a bilateral spat, it is a catalyst for a potential realignment in Asia’s geopolitical architecture. For Washington, the risk is that punitive trade measures drive New Delhi into Beijing’s embrace. For India, the challenge is to extract economic benefit from this rapprochement without compromising its strategic autonomy.