Imagine waking up to news that two of the world’s biggest economies, the United States and China, have just shaken hands on a trade deal after years of bitter tariffs and trade wars. That’s exactly what happened on May 12, 2025, in Geneva, Switzerland. This unexpected agreement has sent ripples across the globe, and for a country like India, which has been quietly benefiting from the US-China trade tensions, it’s a moment to pause and rethink. What does this deal mean for India’s booming exports to the US? Will Indian businesses lose their edge, or can they seize new opportunities?
The US and China have been at odds for years, slapping high tariffs on each other’s goods and disrupting global trade. India, with its growing manufacturing base and competitive labor market, had started to shine as an alternative supplier for US buyers. But now, with this new deal, the trade landscape is shifting again.
Understanding the US-China Trade Deal
Who’s Involved?
The deal was negotiated by top officials from both sides. For the US, Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer led the talks, while China’s delegation was headed by Vice Premier He Lifeng, with support from Vice Commerce Minister Li Chenggang. These are the heavyweights of trade policy, tasked with finding common ground after months of tension.
What’s in the Deal?
As of May 12, 2025, the full details of the deal are still under wraps, with both sides promising a joint statement later today. However, early reports suggest the agreement focuses on reducing the sky-high tariffs that have defined US-China trade recently. The US had imposed tariffs as high as 145% on Chinese goods, while China retaliated with 125% duties on American products. President Donald Trump hinted at lowering tariffs to around 80%, and recent posts on X suggest China may have slashed its tariffs on US goods to 10% for 90 days, with the US cutting its tariffs to 30%. These reductions aim to ease trade barriers and revive bilateral trade, which had dropped significantly due to the tariff war.
The deal also includes plans for a new economic dialogue forum to address ongoing issues like the US’s $295 billion trade deficit with China and China’s push for fair market access. While specifics are pending, the agreement is being hailed as a step toward “resetting” trade relations.
When and Where?
The deal was finalized on May 12, 2025, after two days of intense negotiations in Geneva, hosted by the Swiss government at the residence of their UN ambassador. The choice of a neutral location like Switzerland underscores the high stakes and the need for a diplomatic setting.
Why Now?
For the US, the motivations are clear. High tariffs have driven up prices for American consumers, fueling inflation fears. Businesses reliant on Chinese goods, from toy companies to tech firms, have faced supply chain chaos. With Trump’s approval ratings slipping amid recession concerns, the administration needed a win to stabilize markets and reassure voters. The US also wants China to shift away from its export-driven model and buy more American goods to reduce the trade deficit.
China, on the other hand, is grappling with a manufacturing slowdown and declining factory output. The 145% US tariffs have slashed China’s exports to the US by over 20% in April 2025, pushing Chinese firms to find workarounds like trans-shipping through Southeast Asia. Beijing is eager to regain its share of the US market and stabilize its economy, especially as President Xi Jinping navigates domestic challenges and global scrutiny.
India’s Trade Dynamics with the US and China Before the Deal
To understand how this deal affects India, let’s look at where things stood before May 12, 2025.
India-US Trade: A Growing Partnership
India and the US have been strengthening their trade ties, with bilateral trade reaching $120 billion in 2024. India enjoys a $45.7 billion trade surplus with the US, meaning it exports more than it imports. Key Indian exports to the US include:
- IT services: India’s tech giants like TCS and Infosys dominate this sector.
- Pharmaceuticals: India supplies 47% of the US’s generic drugs, worth $8.7 billion annually.
- Gems and jewelry: Polished diamonds and gold jewelry are major exports.
- Textiles: Apparel and fabrics are growing, especially as US buyers shifted from China.
- Electronics and auto components: India’s telecom instruments and auto parts have gained traction.
India is also negotiating a Bilateral Trade Agreement (BTA) with the US, aiming to double trade to $500 billion by 2030 under the “Mission 500” initiative. The US has imposed a 10% reciprocal tariff on Indian goods, much lower than the 145% on Chinese imports, giving India a competitive edge. However, Trump’s “Make in America” policies and calls for American companies to return home could challenge India’s role in global supply chains.
India-China Trade: A Lopsided Relationship with a Growing Deficit
China is India’s largest trading partner, with two-way trade reaching $127.7 billion in FY25. However, this relationship is heavily imbalanced, with India facing a staggering $99.2 billion trade deficit, one of the largest with any country. This deficit has been widening over the years, driven by a surge in imports and stagnant exports, raising concerns about India’s economic vulnerabilities.
Key Imports from China
India’s imports from China, totaling $113.5 billion in FY25, are dominated by industrial goods critical to its manufacturing sector:
- Electronics: Smartphones, EV batteries, solar cells, and telecom equipment.
- Machinery and chemicals: Essential for industries like manufacturing and agriculture.
- Active pharmaceutical ingredients (APIs): India relies on China for 70% of its bulk drug needs.
- Consumer durables: Goods like toys, umbrellas, and leather products.
In March 2025 alone, imports from China jumped 25% year-on-year to $9.7 billion, led by electronics and batteries. Notably, 98.5% of these imports are industrial goods, with China accounting for 29.8% of India’s industrial goods imports. For instance, China supplies 62% of India’s solar equipment, and even alternative suppliers like Vietnam rely on Chinese components. This heavy dependence on Chinese inputs, particularly in sectors like electric vehicles and transformers, poses strategic risks, as India’s industries could face disruptions if supply chains are affected.
Limited Exports to China
India’s exports to China, valued at $14.3 billion in FY25, dropped 14.5% from the previous year, reflecting a narrow export basket and market access challenges. Major exports include:
- Raw materials: Iron ore, cotton, and minerals.
- Agricultural products: Shrimps and castor oil.
- Chemicals: Light naphtha and p-xylene.
These low-value, primary commodities contrast sharply with China’s high-tech exports to India, such as personal computers, lithium-ion batteries, and integrated circuits. India’s exports to China are now lower than in 2013/14, despite a stronger rupee back then, highlighting structural barriers. For example, India faces non-tariff barriers in China’s pharmaceutical and IT sectors, where Indian firms are highly competitive globally but struggle to penetrate the Chinese market. In 2023, India’s exports to China grew by 7.13% to $16.23 billion, but this was overshadowed by a 2.96% drop in imports to $99.59 billion, still resulting in an $83.36 billion deficit.
Why the Deficit Persists
The trade deficit with China, which ballooned from $48.65 billion in 2019-20 to $99.2 billion in FY25, stems from two main factors:
- Narrow Export Basket: India’s exports are limited to primary commodities like iron ore and cotton, which fetch lower value compared to China’s technology-intensive exports. Over the past decade, India’s export growth to China (30%) has been outpaced by import growth (47%), exacerbating the imbalance.
- Market Access Barriers: China imposes restrictions on Indian agricultural products, pharmaceuticals, and IT services, citing regulatory hurdles or local experience requirements. For instance, Indian drugmakers face lengthy approval processes in China, while IT firms encounter data localization rules.
The deficit also reflects India’s reliance on Chinese inputs for its own exports. For example, India’s electronics and pharmaceutical industries import components like APIs and solar cells from China, which are then used to produce goods for export. This creates a structural dependency, as rising Indian exports to markets like the US can inadvertently fuel Chinese imports, further widening the deficit. Ajay Srivastava of the Global Trade Research Initiative (GTRI) warns that this reliance could see the deficit double to $160 billion within five years if unchecked.
Economic and Strategic Implications
The trade deficit has far-reaching consequences:
- Economic Pressure: The deficit strains India’s foreign exchange reserves and weakens the rupee, as more foreign currency is needed for imports. This can increase external debt and deter foreign investment, signaling economic instability.
- Threat to MSMEs: Cheap Chinese imports, often subsidized, undercut India’s micro, small, and medium enterprises (MSMEs) in sectors like steel, chemicals, and textiles, leading to job losses and stunted growth. For example, Indian textile mills have scaled back due to an influx of low-cost Chinese yarn.
- Strategic Vulnerabilities: Over-reliance on Chinese goods, especially in critical sectors like electronics and pharmaceuticals, poses national security risks. China could leverage this dependency during geopolitical tensions, such as border disputes, to disrupt supplies. Additionally, Chinese firms may use India as a conduit to bypass US tariffs, risking India’s trade relations with the US.
- Dumping Concerns: India has flagged Chinese firms for dumping goods at artificially low prices, hurting domestic industries. In response, the government plans to set up a monitoring unit to track such imports, particularly in electronics and consumer durables.
Efforts to Address the Deficit
India has taken steps to curb the deficit, though results have been mixed:
- Import Curbs: Since 2016, India has raised duties on over 500 items, including electronics and steel, to protect local industries. However, these have not significantly reduced Chinese imports due to India’s manufacturing gaps.
- Domestic Manufacturing: Initiatives like the Production Linked Incentive (PLI) scheme aim to boost local production of electronics, APIs, and solar equipment. For instance, smartphone imports from China dropped 70% to $252 million in FY25 due to increased local production by companies like Apple.
- Trade Negotiations: India engages China through forums like the Joint Economic Group (JEG), established in 1988, to push for market access. The last JEG meeting in 2018 set up working groups to address trade imbalances, but progress has been slow.
- Diversification: India is exploring trade agreements with ASEAN, the EU, and Australia to reduce reliance on Chinese imports. However, the trade deficit with ASEAN has doubled to $35 billion post-pandemic, indicating broader structural challenges.
Despite these efforts, the deficit remains a formidable challenge. China has signaled willingness to address India’s concerns by easing tariff and non-tariff barriers, as reported on April 12, 2025. However, experts caution that such moves may benefit China more by enabling direct imports, bypassing current routes through ASEAN countries with which India has free trade agreements. India’s decision to opt out of the Regional Comprehensive Economic Partnership (RCEP) in 2019, citing deficit concerns, underscores the complexity of balancing trade liberalization with economic sovereignty.
Potential Impact of the US-China Trade Deal on India’s Exports to the US
The US-China trade deal could reshape India’s export landscape in several ways, particularly in light of its trade dynamics with China. Let’s break it down.
Increased Competition from China
If tariffs on Chinese goods drop significantly, China’s exporters could flood the US market with competitively priced products, thanks to their advanced manufacturing capabilities and economies of scale. India had gained ground in sectors like electronics, textiles, and seafood when US tariffs on China were high. For instance, Indian exporters reported increased inquiries from US buyers, and Chinese firms even approached Indian suppliers to fulfill US orders. A tariff reduction could reverse these gains, as US buyers might switch back to Chinese suppliers.
- Electronics: China dominates non-leather footwear and telecom equipment, areas where India is still building capacity. Indian manufacturers admit they can’t yet meet US demand in these segments.
- Textiles: India’s apparel exports to the US grew as Chinese yarn faced tariffs. But with Chinese producers now potentially dumping yarn at lower prices, Indian textile mills are struggling to compete, compounded by cheap Chinese imports flooding India’s domestic market.
- Seafood: Indian shrimp exporters benefited from tariffs on Chinese seafood, but a tariff cut could see China reclaim market share.
Richard Baldwin, a professor at IMD Business School, noted that high tariffs on China had “hobbled” its competitiveness, benefiting emerging markets like India. A US-China thaw could allow China to “regain lost ground,” reducing India’s geo-strategic advantage.
Supply Chain Shifts
The US-China trade tensions had pushed US buyers to diversify supply chains, with India emerging as a key alternative. Companies like Apple expanded manufacturing in India, and Indian suppliers stepped in to fill gaps left by Chinese exporters. If tariffs on Chinese goods fall, some US buyers might revert to Chinese suppliers, reducing demand for Indian products. Chinese exporters, who had partnered with Indian firms to bypass US tariffs, may also scale back these collaborations, leaving Indian suppliers in a lurch. This could exacerbate India’s reliance on Chinese components, as local production struggles to scale up.
Tariff Implications
India currently faces a 10% US tariff, compared to China’s 145% (potentially dropping to 30%). If US-China tariffs align closer to India’s, India’s cost advantage could shrink. This could also affect India’s leverage in BTA negotiations with the US. A US-China deal might signal a broader US push for trade agreements, potentially pressuring India to offer concessions like lower tariffs on US goods or relaxed regulations. India must carefully navigate these talks to protect its interests, especially given its trade deficit with China, which limits its bargaining power.
Sector-Specific Impacts
Let’s zoom in on key Indian export sectors:
- Pharmaceuticals: India’s $8.7 billion pharma exports to the US are relatively insulated, as US tariffs don’t cover this sector. However, if China ramps up API exports to the US or further dominates India’s API supply, it could indirectly pressure India’s drug industry, which relies on Chinese inputs for 70% of its needs.
- Textiles: India’s textile exports face stiff competition from China, especially if Chinese yarn prices drop. Indian mills are already scaling back due to cheap Chinese imports, which could worsen if China regains US market share.
- Electronics: India’s telecom exports ($6.5 billion to the US) could lose ground to China’s superior technical expertise in non-leather footwear and components. India’s reliance on Chinese components for its electronics exports adds further risk.
- Gems and Jewelry: This sector may see opportunities if the US reduces tariffs on Indian diamonds and jewelry to balance trade, but competition from China remains a risk.
- Auto Components: India’s auto parts exports are resilient but could face challenges if Chinese manufacturers undercut prices.
Broader Implications for India’s Trade and Economy
Impact on GDP Growth
India’s economy is projected to grow at 6.5% in FY26, partly driven by export growth. A slowdown in US exports could dent this projection, as the US accounts for 18% of India’s total exports ($78.66 billion). Sectors like textiles and electronics, which employ millions, could see job losses if Chinese competition intensifies. The trade deficit with China further complicates this, as it drains foreign exchange reserves and could weaken the rupee, making imports costlier and slowing growth. However, India’s diverse export markets and domestic consumption may cushion the blow.
Global Supply Chain Reconfiguration
The US-China deal could signal a partial return to pre-trade war supply chains, with China regaining its role as a primary US supplier. India must position itself as a reliable alternative by investing in manufacturing and logistics. The deal may also prompt other countries to renegotiate trade terms with the US, affecting India’s role in global value chains. India’s heavy reliance on Chinese imports for critical components could hinder its ability to compete if global supply chains realign.
Impact on Other Trade Relationships
A US-China thaw could influence India’s trade talks with the EU, ASEAN, and Australia. For example, if China redirects excess goods to these markets, India could face increased competition. The trade deficit with ASEAN, which doubled to $35 billion post-pandemic, highlights India’s challenges in competing with low-cost producers like China. Conversely, India could leverage its recent trade agreements with Australia and the UAE to diversify exports and reduce reliance on both the US and China.
Opportunities for India
Despite challenges, the deal opens doors. If the US and China focus on high-tech sectors like semiconductors, India could target labor-intensive sectors like textiles and agriculture. India’s basmati rice, spices, and coffee exports to the US are expected to hit record highs in FY25, and these could grow further if China’s agricultural exports face scrutiny. India could also attract more foreign investment as companies hedge against US-China volatility, provided it addresses infrastructure and regulatory bottlenecks. Reducing the trade deficit with China through import substitution and domestic manufacturing could further bolster India’s economic resilience.
Strategies and Solutions for Indian Businesses
Indian businesses and policymakers must act swiftly to navigate this new reality, especially given the trade deficit with China. Here’s how:
Enhancing Competitiveness
- Quality and Innovation: Invest in R&D to create high-value products. For example, Indian textile firms could develop sustainable fabrics to stand out against Chinese competitors.
- Efficiency: Streamline production to cut costs. Adopting automation in electronics manufacturing could help India compete with China’s economies of scale.
- Branding: Promote “Made in India” as a mark of quality to build trust with US buyers, countering China’s price advantage.
Market Diversification
- Expand Globally: Strengthen trade with the EU, ASEAN, Africa, and Latin America. For instance, India’s IT services could target growing African markets, reducing dependence on the US.
- Reduce US Reliance: Diversify export destinations to mitigate risks from US market fluctuations and Chinese competition.
Strengthening Domestic Capabilities
- Build Manufacturing: Reduce dependence on Chinese components by boosting local production of APIs, solar cells, and electronics. The PLI scheme has shown success in smartphones and should expand to other sectors.
- Improve Infrastructure: Address logistics bottlenecks like port delays to speed up exports and lower costs, making Indian goods more competitive.
- Skill Development: Train workers in advanced manufacturing and tech to meet global standards, reducing reliance on imported expertise.
Strategic Trade Negotiations
- BTA with the US: Push for lower tariffs on gems, jewelry, and textiles while protecting agriculture and electronics. Use India’s trade surplus with the US as leverage, but address the China deficit to strengthen bargaining power.
- Engage China: Press China to ease market access barriers for Indian pharma and IT firms. Use the JEG and other forums to negotiate predictable trade terms and address dumping concerns.
- Address Non-Tariff Barriers: Simplify US regulatory requirements for Indian pharma and food exports while seeking reciprocal concessions from China.
Leveraging Government Support
- Export Promotion: Engage with the Federation of Indian Export Organisations (FIEO) and Export Promotion Councils for market insights and trade fair opportunities.
- Incentives: Utilize schemes like the PLI and Duty Drawback to boost manufacturing and exports, offsetting losses from Chinese competition.
- Trade Monitoring: Support the trade ministry’s committee to track Chinese dumping and protect local industries, particularly MSMEs vulnerable to low-cost import.
Conclusion
The US-China trade deal of May 12, 2025, is a pivotal moment in global trade, with profound implications for India. The agreement could intensify competition for Indian exporters in the US market, particularly in sectors like textiles and electronics, where China’s manufacturing prowess and potential tariff reductions pose challenges. India’s massive trade deficit with China, driven by heavy import reliance and limited exports, adds complexity, straining its economy and exposing strategic vulnerabilities. Yet, this deal also offers opportunities for India to carve out niches in labor-intensive sectors, attract foreign investment, and strengthen domestic manufacturing to reduce dependence on Chinese goods.
By enhancing competitiveness, diversifying markets, and leveraging government support, Indian businesses can navigate these challenges. Policymakers must strategically manage trade negotiations with the US and China, addressing the trade deficit and securing favorable terms to protect key sectors. India’s journey in global trade is one of resilience and ambition. With proactive strategies, it can turn challenges into stepping stones, ensuring its exports thrive and its economy grows. As the world watches this new chapter unfold, India has the potential to shine as a global trade leader, balancing opportunity with innovation.
