Trump’s Tariff Relaxation Lends A New Face To India-China Relations, Giving An Edge Over Vietnam – Analysis

US President Donald Trump’s recent tariff relaxation on India, in lieu of India’s cutting imports of oil from Russia, draws a new outlook to India-China  trade relations. The USA’s reduction of reciprocal tariffs to 18 percent from 25 percent and the withdrawal of penalty tariff of 25 percent on reducing import of crude oil from Russia, are likely to overlap between trade and national security issues in India-China relations.

Large imports from China are a recognized pivot to growth of new industries in India, instead of being a burden for a wide trade deficit. Large imports from China are no more a threat, instead, it becomes benign and tends to be indispensable to  the growth of new industries in India, as well as a new face in the export basket.

Traditional industries are shifting to the back bench and new industries are emerging  pillars for manufacturing and export growth. The sparkling growth in exports of electronic goods is a case in point, surpassing traditional industries like textile, garments, leather and  chemical products in the export basket. Over a period of a decade between 2014-2025, with the induction of the Make in India initiative, electronic goods emerged the top driver for the growth in India’s export basket. 

Electronic goods leapfrogged to 3^rd  position in the export basket in 2024-25, from 7^th position in 2014-15. It ramped up its share in the export basket from a mere 2.4 percent in 2014-15 to  9.4 percent in 2014-15. 

Production of electronic goods in India surged six fold – from US$21.3 billion in 2014-15 to US$127 billion in 2024-25. India is the second largest manufacturer of mobile phones in the world.                 

What drove the sharp growth in the electronic industries in the country? It was not only PLI (Productivity Linked Incentive) scheme. Correspondingly, the growth relied on imports from China. China emerged as the biggest supporter to the growth of the electronic industry in India. It accounted for nearly 39.7 of India’s total imports of electronic goods from China, comprising of mainly critical component and parts, such as PCBs, display panels and semiconductor devices. 

The current situation nudged India to have a second thought on Chinese investment in India. At present, FDI from China in India is permitted under a restrictive policy regime. It is not permitted through Automatic Route due to security concerns. 

Besides electronics, China is the biggest source of  imports of component and parts for manufacturing telecommunications and automobiles, performing an important role as supply chain. 

Indian engineering industries registered a booming growth under the Make in India regime. It was triggered by the automobile industry, which contributed 7.1 percent to GDP. Interestingly, while China played a key role in the supply chain for the growth of the automobile industry in India, the major investors in automobile industry are Japanese.     

Imports from China also played a significant role in re-shaping India’s export basket. Electronic and engineering goods have become significant role players for exports of the country. In 2024-25 electronics and engineering goods together accounted for 34.4 percent of total exports of the country, as compared to 15.3 percent in 2000-01. These led traditional industries like textile, garment and agriculture rallying behind, slipping to one-tenth of export basket in 2024-25 from one fourth in 2000-01.   

Trump’s tariff relaxation is likely to bolster India’s manufacturing, relying more on Chinese supply chain. It is likely to  give an edge over Vietnam. Hitherto, Vietnam was the core pipeline for China to re-route exports to USA, having a high USA tariff burden in the first term of Trump’s Presidency. 

Under Trump’s MAGA regime, Vietnam attracts lower tariff (20 percent) than India (50 percent), despite being the bigger exporter to USA. Vietnam accounted for 4.0 percent share of USA imports in 2024, against India’s share of 2.7 percent.

Nonetheless, there is a catch. Vietnam attracts a 45 percent transshipment tariff. It is a punitive tariff on goods that are rerouted through a third country to disguise their true origin by changing merely packaging and avoid high tariffs.  

It is argued that the success of Vietnam in the American market was mainly due to the backdoor entry of Chinese exports  to the USA. China was the biggest stake holder in rerouting exports through Vietnam, after it faced high tariffs during the first term of Trump's presidency. According to a study, nearly 30.4 percent of Vietnam exports to USA were rerouted by China in 2022.   

Given  this, India can indeed hope for an opportunity to outpace Vietnam in attracting China to help meet supply chain demands.   

Electronic goods, including telecommunication equipments and parts, emerged as the biggest item of India’s exports to the USA in 2024-25. It accounted for almost one-fifth of India’s exports to the USA in 2024-25, viz, 17.6 percent. Incidentally, the entire imports of electronic goods from India are exempted from Trump’s tariff woes. 

Given the high transshipment tariff, one-third of Vietnam exports to the USA will face higher tariffs. This leaves a wider space for India for export to the USA. As India has emerged as an important exporter of electronic goods to the USA and has been exempted from the US reciprocal tariff, Trump’s tariff relaxation will give an edge to India to challenge its nearest competitor Vietnam.