Trump’s Tariffs on India Could Unravel Decades of Strategic Partnership

Ishaan Thakker is a research associate for geoeconomics at CFR.

The United States and India have enjoyed nearly two decades of sustained strategic, defense, and technological cooperation after signing the Civil Nuclear Deal in 2008. New Delhi was even optimistic about President Donald Trump’s return to the White House, owing to the then-favorable personal relationship between Trump and Indian Prime Minister Narendra Modi.  

However, relations have nosedived since Trump’s return to office, driven largely by bilateral trade issues. Trump has claimed that he used the threat of reduced bilateral trade and a worse trade deal to moderate a ceasefire between India and Pakistan during their recent conflict in May (a claim that New Delhi has vehemently denied) and, on August 6, he imposed 50 percent tariffs on India due to its high trade barriers and continued purchases of Russian oil.  

The U.S. reversal on Indian imports of Russian oil (the United States had previously condoned it to stabilize global oil prices) is especially incensing for New Delhi, which sees Trump giving China and other importers a free pass while unjustly penalizing India. Negotiations on a trade deal are ongoing, but the path to normalcy remains elusive—though not impossible. Any improvement would thus depend on leader-level engagement to set the tone for trade negotiators and other interlocutors. Such a meeting appears unlikely in the near term, however, due to Trump’s comments on India at the United Nations General Assembly and Modi’s absence at the summit.  

New Delhi’s response has been relatively muted as Modi balances domestic political pressures to retaliate to Trump’s threats along with an increasingly aggressive Washington. Instead of conceding to Trump’s demands (like Japan and Europe) or taking a more combative approach (like Brazil), Modi has pursued a slate of domestic reforms aiming to boost growth and offset the tariff hit while engaging with partners and adversaries alike.  

While Modi has essentially chosen to wait the current storm out, some Indian policymakers are questioning the United States’ reliability as a strategic partner, threatening the trust that has grown between the United States and India over the past twenty years. Although Washington’s apparent trade strategy is to force New Delhi into closer alignment with U.S. economic and security goals, India has indicated that it will engage with U.S. allies and adversaries alike; Washington’s threat does not compel New Delhi to change its current policies.  

Part of that inefficacy is the relatively limited scale of India’s exports to the United States. Indeed, even though the United States is India’s largest export market, goods exports to the United States only make up around 2 percent of Indian gross domestic product (GDP), compared to 29 percent for Vietnam or 11 percent for Thailand.  

Instead, domestic priorities, rather than international economics, have driven India’s response to Trump’s tariffs: On August 7, just after Trump’s 50 percent tariff announcement, Modi vowed that “India will never compromise on the wellbeing of its farmers, dairy (sector) and fishermen. And I know personally I will have to pay a heavy price for it.” Indian policymakers have since spurred into action, as the government has cut taxes on hundreds of consumer items and is pursuing a range of other reforms to improve the ease of doing business. Those measures are expected to soften the tariff bite to annual growth from 0.5 percent to 0.2–0.3 percent, according to India’s chief economic advisor. 

Potentially of greater concern to U.S. policymakers, however, are India’s attempts to diversify from the U.S. market. India and Japan launched a Dialogue on Economic Security during Modi’s recent visit to Tokyo, advancing bilateral cooperation in building resilient supply chains and critical infrastructure for semiconductors, critical minerals, and clean energy. The United States is the largest market for Indian pharmaceuticals and India is actively exploring diversifying those exports, despite the sector currently being exempt from tariffs. India is also fast-tracking free-trade agreement negotiations with the EU. More concerningly, India is reportedly considering re-permitting Chinese investment after New Delhi imposed harsh restrictions following a border clash in 2020. Those measures could reduce U.S. access to key goods such as pharmaceuticals and push another U.S. partner economically closer to China, harming bilateral economic relations as well as U.S. grand strategy in Asia.  

Bilateral defense ties could face similar headwinds, despite historically being well insulated from political pressures. Indeed, the Indian and U.S. armies recently participated in the Yudh Abhyas combined military exercise at Fort Wainwright, Alaska, and negotiations are currently ongoing for the sale of $4 billion in maritime patrol aircraft to the Indian Navy, signaling that military-to-military ties are still strong.  

However, Trump’s claim of using the trade threats to mediate between India and Pakistan—something India has consistently viewed as a bilateral matter—crossed a significant red line for New Delhi, potentially souring closer defense ties. In a speech on India’s Independence Day, Modi noted that “national security cannot rely on foreign dependence.” India has ramped up military purchases from the United States, France, and Israel in recent years as it moves away from Russian equipment. India is concerned, however, that closer defense ties with the United States could impede its autonomy in future conflicts, a worry amplified by volatile U.S. trade and foreign policy.  

In the meanwhile, China has emerged as the clear winner of the U.S.-India trade spat. U.S. tariffs on Indian exporters are higher than on Southeast Asian exporters, impeding India’s capture of manufacturing capacity from China as well as the United States’ friendshoring strategy. For example, Trump’s push to onshore iPhone production contrasts with his first-term call to shift manufacturing from China to countries such as India, creating policy uncertainty that complicates Apple’s planning.  

China has also increased oil imports from Russia in the past two months, further signaling to New Delhi that the tariffs were unreasonably imposed on India and not intended to reduce Russian oil exports. An emboldened China is also likely to continue economically coercive policies toward India, including the recall of Chinese workers and export controls on manufacturing equipment, fertilizers, and rare earths. New Delhi recognizes its precarious situation and has made attempts to thaw relations with Beijing through a border deal in late 2024 and Modi’s recent participation at the Shanghai Cooperation Organization summit in Tianjin, China. But New Delhi knows it cannot counter Beijing’s economic coercion without trusted partners.   

Ultimately, India’s overtures to China, the EU, and Japan are both symbolic and substantive. Modi wants to convey to the world that India has options, for reasons foreign and domestic, but also seeks to deepen economic and security linkages with partners across the world. At the same time, the United States remains a critical partner for India’s global ambitions, based on shared security interests in the Indo-Pacific and cooperation on technology, supply chains, and critical minerals.  

The U.S.-India relationship could rebound in the near term if defense cooperation continues, a trade deal is reached, and the new U.S. ambassador is able to facilitate a Trump-Modi call or meeting in the coming months. If not, things could get worse, including potential restrictions on Indian services exports and the imposition of actual secondary sanctions. Regardless, regaining structural trust that leads to better economic and strategic policy cooperation could take much longer.