India’s Undeniable Economic Heft and American Economic Security

The free trade community has raised alarm bells about the incoming Trump Administration’s plans to pursue higher tariffs against key trade partners. However, the security reasons for accelerating decoupling from China, at least in strategically significant sectors, remains an imperative broadly supported by both political parties. If the goal is to slow China’s domination in the production of critical and emerging technologies, the United States must improve our ability to work with key partners. India is arguably the most significant country to proactively engage as the United States seeks to strengthen an economic firewall against Chinese technology dominance.

Today, India contributes about 4 percent of total global Gross Domestic Product (GDP). Despite recent slowdowns in annual projected growth rates, most experts predict India to grow between 6 percent and 7 percent for the rest of the decade, easily out-pacing other large economies. India currently has the world’s fifth-largest economy in real terms at around $3.4 trillion. India is poised to pass both Germany ($4.9 trillion) and Japan ($4.3 trillion) by the end of this decade, and if the country can maintain six percent growth, will be the world’s third $10 trillion economy in less than twenty years. By the end of the decade, organizations like the International Monetary Fund (IMF) predict India will provide up to 18 percent of total global growth, behind only China. India’s weight in the global economy will be increasingly difficult to ignore.

China’s ability to invest in economic modernization through global manufacturing investments and trade surpluses, is far more challenging if both the United States and India work together to limit exposure to Chinese technology sectors. 

Unlike other major economies, India is less reliant on economic integration with China. While China is India’s largest source of imports, Indian industry has less exposure to using India as a manufacturing hub, making the adoption of import restrictions a bit easier than it would be for the United States, Japan, and Germany. Cumulative Indian investment into China is only around $1 billion, per the Chinese Ministry of Commerce, while China drew $163 billion in FDI from all partners in 2023.

Still, India does rely on imports from China for a range of sectors, from electronics to active pharmaceutical ingredients to capital equipment. In fiscal 2024 China was the source of around 15 percent of all of India’s imports; Hong Kong contributed another 3 percent. Despite Indian trade policies meant to slow imports from China, India’s imports from China have grown from $65 billion in FY2020 to $101 billion in FY2024. India’s imports from Hong Kong have steadily increased, too, from $17 billion in FY2020 to $20.5 billion in FY2024. It might be particularly challenging for India to wean off of Chinese input materials that it uses for manufacturing.

India has adopted a number of trade policy measures in recent years to limit imports. Some of these policies were applied globally, such as local manufacturing mandates and higher customs duties. Other policies have been applied directly against imports from China in sectors such as power equipment, firecrackers, toys, and more. India’s expanding list of products with “Quality Control Orders (QCOs)” is also claimed by trade partners to be a form of indirect trade protectionism.

The Trump Administration’s instincts, as we saw from 2017-2021, will be to attack India for protectionist trade policies. While understandable, re-igniting the past trade war with India could also undercut the Trump Administration’s larger focus on economic security. India has a trade deficit with the world (as a percent of GDP) that dwarf’s America’s trade deficit. India can accommodate some level of U.S. trade policy pressure, but domestic imperatives will always win out.

Smart U.S. economic engagement with India can help India wean itself off China while also creating new market opportunities for American firms. The Biden Administration managed this dual approach effectively, resolving a range of specific trade disputes while encouraging American companies to “friendshore” investments in India—even in sectors like solar panels and semiconductors where the U.S. had launched domestic incentive programs. Simultaneously, U.S. and India can align on the strategic sectors they should focus on to reduce China’s influence through tariffs and other measures.

While we would certainly like India to buy more merchandise from the United States to improve the bilateral balance of trade, India’s desire to see “Make in India” succeed can be leveraged to improve commercial ties and indirectly strengthen American economic security.