The Deteriorating US-India Trade Relationship and Its Implications for Global Supply Chain Diversification

The U.S.-India trade relationship has entered a critical phase of strain, marked by the Trump administration’s imposition of 50% tariffs on Indian exports in July 2025. These tariffs, targeting sectors like textiles, gems, and auto parts, were framed as a response to India’s continued purchases of Russian oil and stalled trade negotiations [1]. The move has not only strained bilateral economic ties but also catalyzed a strategic realignment in India’s trade partnerships, reshaping global supply chains and unlocking new investment opportunities.

Strategic Realignment: Diversifying Trade and Geopolitical Alliances

India’s response to U.S. tariffs has been twofold: deepening ties with non-U.S. partners and accelerating domestic economic reforms. The country has intensified engagement with Brazil, China, Russia, and the European Union, leveraging its position in the BRICS bloc to counter unilateral trade pressures [4]. For instance, India’s energy imports from Russia surged to 35% of total oil imports in 2025, enabling it to maintain energy security and manage inflation despite U.S. criticism [2]. This shift has allowed India to balance its foreign policy priorities while safeguarding economic interests.

Simultaneously, India has pursued bilateral trade agreements to diversify its export markets. The India-UK Free Trade Agreement (FTA), finalized in May 2025, eliminates tariffs on 99% of Indian exports to the UK and reduces tariffs on 90% of UK goods to India, creating a $100 billion trade corridor by 2030 [2]. Similarly, the India-EFTA Trade and Economic Partnership Agreement (TEPA), set to take effect by late 2025, is expected to boost investment in sectors like semiconductors and renewable energy [4]. These agreements align with India’s “China Plus One” strategy, reducing reliance on a single market and fostering regional value chains.

Emerging Investment Opportunities in India’s Sectors

The U.S. tariffs have accelerated India’s focus on self-reliance, particularly in renewable energy and manufacturing. The country attracted $12.67 billion in FDI to its renewable energy sector by March 2025, driven by 100% FDI liberalization and ambitious climate targets [3]. Projects like the 30 GW Khavda Renewable Energy Park and Reliance Industries’ refining upgrades underscore India’s ambition to become a global clean energy hub [2]. For investors, this sector offers long-term growth potential, with the government aiming for 500 GW of non-fossil fuel capacity by 2030.

In manufacturing, India’s Production-Linked Incentive (PLI) schemes have spurred FDI inflows of $81 billion in FY2025, despite a record-low net FDI of $353 million due to foreign divestments [3]. Sectors like electric vehicles (EVs), semiconductors, and pharmaceuticals are particularly resilient, with PLI allocations exceeding ₹9,000 crore for FY2025–26 [3]. The U.S. tariffs have also pushed Indian firms to diversify production, with textile companies like Pearl Global shifting some operations to Vietnam and Bangladesh [1]. However, India’s domestic demand-driven economy and AI-driven efficiency in agriculture and mining position it as a key player in global supply chains [4].

Global Supply Chain Diversification and Geopolitical Shifts

India’s strategic realignment is reshaping global supply chains, particularly in the Indo-Pacific. The India-Middle East-Europe Economic Corridor (IMEC) and Regional Comprehensive Economic Partnership (RCEP) initiatives are fostering deeper integration with South and Southeast Asia [1]. Meanwhile, U.S. transshipment rules, which impose 40% tariffs on goods with significant Chinese inputs, indirectly benefit India by making it a preferred alternative for de-risking supply chains [1].

For investors, the key lies in balancing risks and opportunities. While tariff-sensitive sectors like textiles face headwinds, India’s pharmaceuticals, IT services, and renewable energy sectors remain resilient [4]. The Modi government’s 100-day reform plan, including GST simplification and infrastructure investments, further enhances the country’s appeal as a manufacturing hub [3].

Conclusion

The U.S.-India trade tensions have forced India to recalibrate its economic strategy, accelerating its pivot to non-U.S. partners and domestic innovation. This realignment not only mitigates the impact of tariffs but also creates compelling investment opportunities in renewable energy, manufacturing, and regional trade agreements. As global supply chains evolve, India’s strategic position as a diversification hub will likely strengthen, offering investors a unique vantage point in a shifting geopolitical landscape.

Source:
[1] India-US Tariff War Escalation and Its Impact on Global Supply Chains [https://www.ainvest.com/news/india-tariff-war-escalation-impact-global-supply-chains-navigating-risks-opportunities-shifting-trade-landscape-2508]
[2] UK-India: A 21st-century partnership [https://www.mckinsey.com/featured-insights/future-of-asia/uk-india-a-21st-century-partnership]
[3] India pushes for further reforms amid US tariffs [https://www.fdiintelligence.com/content/6a0ae806-353f-47f2-8b88-ba8af87039c7]
[4] India's FTA Updates 2025 [https://www.india-briefing.com/news/indias-fta-updates-2025-36271.html]