In a significant geopolitical maneuver, Indian Prime Minister Narendra Modi is set to visit China for the first time in seven years. This move comes in the wake of U.S. President Donald Trump’s imposition of a hefty 50% tariff on Indian goods, a decision that has thrust India into economic emergency mode. The tariff makes India the second BRICS nation to face such a penalty, following Brazil’s earlier encounter with U.S. tariffs.
India’s response to this economic challenge is not just about tariffs; it’s a strategic pivot. Modi’s decision to attend the Shanghai Cooperation Organization meeting in Beijing on August 31 underscores a shift in India’s diplomatic strategy, possibly signaling a closer alignment with China amidst escalating tensions with the U.S.
Trump’s Tariff Strategy and Its Global Impact
The Trump administration’s aggressive tariff policies have not been limited to India. Brazil was the first to face a 50% tariff, ostensibly as a consequence of holding former President Jair Bolsonaro accountable for a coup attempt in 2022. Meanwhile, South Africa is contending with a 30% tariff, the highest in sub-Saharan Africa, while countries like Nigeria, Ghana, Lesotho, and Zimbabwe face a 15% tariff.
Trump’s tariffs are part of a broader strategy to pressure BRICS nations, which he accuses of aligning with anti-American policies and attempting to replace the U.S. dollar as the world’s reserve currency. The tariffs are seen as a direct response to these geopolitical dynamics.
The Economic Ramifications for India
Economists warn that the 50% tariff on Indian goods could act as a “trade embargo” against the world’s largest democracy, severely impacting its economy. According to Nomura Holdings, this tariff poses a significant threat to India’s role as a counterweight to China’s regional ambitions.
“If the extra 25% tariff that President Trump has announced on imports from India remains in place, India’s attractiveness as an emerging manufacturing hub will be hugely undermined,” says economist Shilan Shah at Capital Economics.
India, the world’s fifth-largest economy, is bracing for a turbulent period. The U.S. is India’s largest trading partner, with $87.4 billion worth of goods exported to the U.S. in 2024 alone. Specific sectors such as gems and jewelry, apparel, textiles, and chemicals are particularly vulnerable to these tariffs.
Sectoral Impacts and Government Response
UBS economist Tanvee Gupta Jain highlights that certain sectors are more exposed to the U.S. tariffs and may require targeted government support. Additionally, Rajat Agarwal from Societe Generale notes that the tariffs have already led to a weaker Indian rupee and increased currency volatility, impacting foreign investment flows.
In response, Modi has assured key political constituencies, including farmers, that he will not compromise their interests. Speaking at an agricultural conference in New Delhi, Modi emphasized his commitment to protecting farmers, livestock owners, and fishermen.
Global Trade Dynamics and Strategic Shifts
Trump’s tariff policies have created ripples beyond India, affecting global trade dynamics. His recent deals with Japan and the European Union have been fraught with confusion and contention, particularly regarding tariffs on automotive imports. Richard Katz, publisher of the Japan Economy Watch newsletter, notes that U.S. automakers are concerned about being disadvantaged by these agreements.
In Europe, the Trump administration’s demand for the EU to purchase $750 billion of U.S. oil and gas has prompted European Commission President Ursula von der Leyen to clarify that the EU cannot compel private companies to comply with such demands.
India’s Strategic Pivot and Future Prospects
As Modi prepares for his visit to China, the potential for a realignment of alliances looms large. The BRICS bloc, which recently met in Rio de Janeiro, is exploring the possibility of creating a currency to rival the U.S. dollar. This ambition seemed unlikely with India and China at odds, but Trump’s actions may inadvertently bring these two nations closer.
“With two uneasy bedfellows – China and India – in its ranks, it is difficult for BRICS to turn its goal of a currency to rival the US dollar into a reality,” says Moody’s Analytics economist Sarah Tan.
Economists at Barclays suggest that while Trump’s tariffs will likely inflict economic damage on India, the domestic orientation of the Indian economy may limit the impact. Meanwhile, Morgan Stanley economist Bani Gambhir predicts that the Reserve Bank of India will take measures to boost growth, possibly through interest rate cuts.
As the world watches the unfolding dynamics, the potential for a closer India-China relationship could have far-reaching implications for global trade and geopolitics. Modi’s visit to China may mark the beginning of a new chapter in international relations, one that could surprise both Washington and the world.
