China Emerges As A Trade Buffer For India As U.S. Tariffs Reshape Export Flows

Summary:

India’s exports to the United States lost momentum under steep tariffs, while shipments to China surged and helped stabilize overall trade performance...

U.S. Tariff Pressure And Rising Policy Uncertainty

Official data released on January 15 show that India’s exports to the United States declined by 1.8% in December 2025, falling to $6.8 billion. While the contraction remains moderate in absolute terms, it signals growing strain from exceptionally high U.S. tariffs imposed on Indian goods. Washington currently applies tariffs of up to 50% on imports from India, placing New Delhi among the most heavily penalized U.S. trading partners and even above China on certain measures.

These tariffs affect not only trade volumes but also strategic planning for Indian exporters. The United States has long been India’s largest export market and a key source of trade surplus. Between April and December 2025, India recorded a surplus of more than $26 billion with the U.S. However, elevated tariffs weaken this advantage and reduce the predictability of long-term market access, prompting firms to reassess their exposure to what was once considered a stable anchor market.

Negotiations between the two governments have so far failed to produce a breakthrough. Indian officials have stated that talks are “very close” to completion, yet months of discussions have not yielded a final agreement. Recent remarks by U.S. Commerce Secretary Howard Lutnick, who suggested the deal collapsed due to insufficient high-level engagement, further underline the fragility and sensitivity of bilateral trade relations.

Trade Balance Deterioration Highlights Structural Stress

The broader impact of tariff pressure is visible in India’s aggregate trade figures. In December 2025, merchandise exports rose by 1.9% year on year, but imports expanded much faster at 8.8%. This divergence pushed India’s merchandise trade deficit up by 21.4% to $25 billion. The widening gap reflects an imbalance between external demand growth and domestic import needs rather than a temporary statistical distortion.

Although exports had surged unexpectedly in November, rising 19.4% with U.S.-bound shipments up 22.6% on hopes of a deal, the December reversal illustrates how quickly sentiment-driven gains can fade when policy clarity fails to materialize.

China’s Market Absorbs Export Momentum

In contrast to the slowdown in the U.S., China has absorbed a growing share of India’s exports. Shipments to China jumped 67% in December 2025 to $2 billion. Over the first nine months of the fiscal year ending in March 2026, exports to mainland China increased by nearly 37%, while exports to Hong Kong rose by more than 25%.

This expansion has repositioned China as India’s largest merchandise trading partner during the April to December 2025 period. Total trade with China reached $110.20 billion, surpassing trade with the United States at $105.31 billion. The figures indicate a strong association between constrained access to the U.S. market and India’s accelerated engagement with Chinese demand, positioning China as a stabilizing outlet rather than a full replacement.

Diplomatic Thaw Supports Commercial Reorientation

Trade growth has coincided with signs of improving diplomatic engagement between New Delhi and Beijing. Recent high-level meetings, including talks between India’s foreign secretary and senior Chinese party officials, have focused on stabilizing bilateral ties with an emphasis on business cooperation and people-to-people exchanges.

Momentum for this recalibration began after Prime Minister Narendra Modi and President Xi Jinping met at the Shanghai Cooperation Organization summit in September, where both leaders emphasized partnership over rivalry. These diplomatic signals align with the expansion in trade volumes, suggesting coordination rather than coincidence between political engagement and commercial flows.

Persistent Deficit And Strategic Limits

Despite rising trade volumes, the structure of India–China trade remains asymmetric. From April to December 2025, India’s trade deficit with China widened to $81.7 billion. This contrasts sharply with the surplus enjoyed in trade with the United States and reflects India’s continued dependence on Chinese imports across manufacturing inputs and consumer goods.

This imbalance introduces strategic constraints. Border disputes and geopolitical frictions remain unresolved, limiting China’s capacity to fully replace the U.S. as a long-term anchor market. As a result, China’s role functions more as a tactical buffer that eases short-term pressure rather than a comprehensive solution to India’s export ambitions.

Diversification As A Strategic Response

Alongside China, India has intensified efforts to diversify export destinations. New trade agreements with the United Kingdom, Oman, and New Zealand are scheduled for signing in the first half of 2026, while negotiations with the European Union appear close to conclusion. Established markets such as the UAE, Germany, the Netherlands, and the UK continue to feature prominently in India’s export mix.

This broader diversification strategy reflects adaptation to a global trade environment shaped by policy volatility, geopolitical frictions, and shifting alignments. The ability to balance engagement with the United States, China, and alternative partners will shape whether India can sustain export growth and advance its ambition to become a major global exporting power in the years ahead.

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