The Great Standoff: Inside the Trump-India Trade War and Its Geopolitical Ripple Effects

Prologue: A Partnership Under Pressure

The relationship between the world’s oldest and largest democracies has long been framed as a “natural alliance,” a bond rooted in shared democratic values, a robust diaspora, and converging strategic interests. However, in recent times, this partnership has been subjected to a profound and unexpected test. The escalating trade friction, colloquially dubbed a “traffic war,” between the United States under the Trump administration and India has transformed a burgeoning alliance into a high-stakes chess match. This report will argue that this conflict is not merely a dispute over tariffs; it is a fundamental test of the strategic alignment between these two nations. The economic fallout, while significant, risks being overshadowed by the long-term geopolitical consequences that could inadvertently reshape global power dynamics.

To understand the scale of this friction, it is essential to first appreciate the magnitude of the economic ties at risk. Bilateral trade between the two nations has soared, reaching $212.3 billion, an 8.3% increase from the previous year. Furthermore, India’s economic footprint in the United States is substantial, with its private sector investment surpassing that of China and generating over 400,000 American jobs, according to National Security Advisor Jake Sullivan. Indian foreign direct investment (FDI) in the U.S. stood at $12.7 billion by the end of 2020, supporting over 70,000 jobs. Over 132,000 Indian students contributed $3.6 billion to the U.S. economy in the 2014-15 academic year alone, with that figure growing to an estimated $7.7 billion annually more recently. This immense economic entanglement underscores why the current standoff is so consequential and why its ripple effects extend far beyond trade ledgers.

The Fraying Thread of a “Natural Alliance”

A Historical Trajectory of Cooperation

For decades leading up to the Trump administration, the trajectory of US-India relations was largely one of collaboration and increasing economic integration. From 2000 to 2014, bilateral trade in goods and services grew significantly, quintupling from $19 billion to over $100 billion. This period was marked by a series of high-level diplomatic and commercial initiatives designed to deepen ties. In 2013, President Barack Obama and then-Prime Minister Manmohan Singh pledged to make the next decade “equally transformative”. A year later, President Obama and Prime Minister Narendra Modi decided to “elevate the bilateral commercial and economic partnership”.

This era saw the establishment of multiple bilateral forums, including the Commercial Dialogue, the Trade Policy Forum (TPF), and the Bilateral Investment Treaty (BIT), all aimed at streamlining policy issues and fostering a more robust investment environment. Efforts were also made to enhance the “Ease of Doing Business” by creating a joint workstream to address contract enforcement and non-tariff barriers. These initiatives painted a clear picture of two nations working to resolve trade irritants through dialogue and mutual cooperation.

The Foundational Friction and the Slowing Momentum

Despite this public narrative of a strengthening partnership, underlying structural issues had long festered beneath the surface, providing fertile ground for a more confrontational approach. The United States had consistently run a significant trade deficit with India, which the U.S. Trade Representative (USTR) viewed as an imbalance. A long-standing source of American frustration was India’s high tariffs on a wide range of goods, which the USTR’s 2025 National Trade Estimate report flagged as “the highest of any major world economy”.

India maintained high applied tariffs on everything from vegetable oils (up to 45%) and apples (50%) to automobiles and flowers (60%). The levies on alcoholic beverages were particularly steep, reaching a staggering 150%. These high tariffs, coupled with non-tariff barriers like restrictive import licensing and complex customs procedures, created significant uncertainty for American exporters, farmers, and ranchers.

However, a deeper look at the trade trends reveals a crucial nuance. Even before the Trump administration, the momentum of the relationship had begun to stagnate. A 2017 PHD Chamber of Commerce and Industry report noted that India’s exports to the U.S. grew by only 5.2% from 2011 to 2015, a significant drop from the 17.4% growth seen from 2001 to 2005. Similarly, India’s imports from the U.S. contracted during that same period. This suggests that the trade relationship had become “lethargic” and had not fully realized the pledged “higher growth trajectory”. The Trump administration’s trade policy did not create this friction in a vacuum; it capitalized on a pre-existing, slowing momentum and a long history of unaddressed trade barriers.

The First Salvos: A New Doctrine and Escalating Tariffs

The Shift in Doctrine

Upon taking office, the Trump administration swiftly introduced a new trade doctrine that prioritized what it called “reciprocal trade” and the aggressive use of unilateral tariff actions. This marked a profound departure from the previous administration’s multilateral engagement and diplomatic forums. The legal basis for these actions was found in U.S. trade laws, particularly Section 232 (national security) and Section 301 (unfair trade practices).

The initial salvos in this new approach were the global tariffs on steel and aluminum. On January 22, 2018, President Trump imposed safeguard tariffs on washing machines and solar panels. Then, on March 1, 2018, he announced a 25% tariff on steel and a 10% tariff on aluminum on national security grounds, a move that went into effect on March 23, 2018.

The GSP Withdrawal

A major escalation came in June 2019, when the Trump administration terminated India’s designation as a beneficiary developing country under the U.S. Generalized System of Preferences (GSP). This was a significant move, as the GSP program, first authorized by the Trade Act of 1974, provided nonreciprocal, duty-free tariff treatment to thousands of products from eligible developing nations. The official rationale was that India had not met the program’s basic agreements, specifically its failure to provide “equitable and reasonable access” to its markets.

The withdrawal, which took effect on June 5, 2019, meant that Indian imports that had previously entered the U.S. duty-free would now be subject to normal tariff rates. India’s Ministry of Commerce and Industry expressed disappointment, calling the move “unilateral” and “unfortunate” but affirming that the nation would continue to “uphold its national interest”.

The Timeline of Tariffs

The trade conflict escalated further in 2025 with a series of tariff announcements that targeted India specifically. The timeline of these events provides a clear picture of the growing pressure.

• April 2, 2025: The U.S. announced a 26% “reciprocal” tariff on Indian goods, later adjusted to 25%.
• August 1, 2025: An initial 25% tariff (10% baseline plus a 15% reciprocal levy) became effective on Indian goods.
• August 7, 2025: A White House executive order formally implemented the 25% tariff. This order exempted key sectors like pharmaceuticals, electronics, and energy from the new duties.
• August 27, 2025: A second, additional 25% tariff was set to take effect, bringing the total duty to a staggering 50% for most Indian goods.

A crucial element of this escalation is that the Trump administration is not just using tariffs; it is also employing financial sanctions. A recent report notes that the administration has begun using the term “sanctions” to describe the additional 25% penalty. Furthermore, in July 2025, the U.S. Treasury Department sanctioned six Indian firms for facilitating oil transactions with Iran. These secondary sanctions, which can sever access to the U.S. financial system, represent a more aggressive, multi-pronged approach to exert pressure. The fact that this use of economic pressure is linked to a “bipartisan consensus in Washington” suggests that this type of policy may outlast the current administration, making it a long-term challenge for the US-India relationship.

Table 1: Timeline of Key US Tariff Actions on India (2019-2025)

The Geopolitical Firestorm: Russian Oil and the “Indian Arbitrage”

The Core Accusation and India’s Position

The most recent and significant flashpoint in the trade conflict is India’s massive increase in Russian crude oil purchases since the start of the Russia-Ukraine conflict. U.S. Treasury Secretary Scott Bessent has publicly accused India of “profiteering” and engaging in what he calls the “Indian arbitrage”. This is the strategy of buying discounted Russian oil, processing it into refined products like petrol and diesel, and then reselling them to countries that have imposed sanctions on Moscow, including Europe. Bessent claimed that Indian refiners had made $16 billion in “excess profits” from this practice.

The U.S. government has framed these tariffs, which it refers to as “secondary tariffs,” as a tool to pressure Russia toward a diplomatic resolution. This narrative, however, has been met with a defiant and pragmatic defense from India. External Affairs Minister S. Jaishankar has repeatedly stated that India’s oil imports are driven by “national interest” and the need to ensure energy security for its 1.4 billion people. He has also argued that India’s decision to purchase Russian oil was supported internationally as it helped stabilize global market prices, a move that serves a “global interest”.

Prime Minister Modi’s public posture has been one of steadfast resolve. He has stated that “India will never compromise on the interests of farmers, fishermen and dairy farmers” and that he is “ready” to pay the “heavy price” of the tariffs. Commerce Minister Piyush Goyal has further clarified that India’s trade decisions will be guided by national priorities, not geopolitical considerations, making it clear that there are “red lines” in negotiations.

A Political Reversal and a Double Standard

The U.S. government’s justification for the tariffs on Russian oil purchases is profoundly undermined by a critical contradiction. A former advisor to President George W. Bush, Bob McNally, has stated that it was the Biden administration that “specifically encouraged” India to accept Russian oil after the Ukraine invasion. The purpose of this encouragement was to prevent a significant increase in global oil prices that could have led to elevated petrol prices in the U.S.. This historical context refutes the Trump administration’s narrative of India’s behavior as an opportunistic betrayal and suggests that the new policy is a political reversal of a prior strategic decision.

The inconsistency of the US policy is further highlighted by the fact that the administration has largely spared China from these “secondary tariffs,” despite Beijing being an equally significant buyer of Russian energy. US Treasury Secretary Scott Bessent has explained this by stating that the Trump administration viewed China’s imports more favorably because it was already a major Russian customer before the war. This differential treatment demonstrates that the tariffs are not a principled stand against Russian oil purchases but a strategic tool used to exert pressure on a key partner over other issues, particularly market access and trade demands. The use of a geopolitical excuse to justify economic coercion risks alienating a pivotal US ally and calls into question the very basis of the trade policy.

The Economic Fallout: A Test of Resilience

The tariffs, particularly the jump to a 50% duty on many products, have had an immediate and palpable impact on India’s export-oriented industries. The Federation of Indian Export Organisations (FIEO) has warned of “significant job losses if export orders are cancelled, especially in the MSME sector”. While overall exports to the U.S. initially surged as exporters “frontloaded” shipments to beat the deadlines, many are now grappling with a sudden deceleration.

A granular, sector-by-sector analysis reveals the depth of the blow.

• Textiles & Apparel: This labor-intensive sector is facing one of the steepest tariff hikes. One expert has warned that the tariff regime could put up to 100,000 jobs at immediate risk in this sector alone.
• Leather & Footwear: The industry, a key hub in Kolkata, is reportedly “paralyzed” by the sudden spike in duties. With a total tariff of up to 50%, a pair of shoes that costs $100 to land in U.S. retail will now face an additional $50 in duty, making it uncompetitive against products from Vietnam or Indonesia, which face duties of only 19-20%.
• Gems & Jewelry: This sector is also highly exposed, with an expert warning of “widespread job losses” in hubs like Surat and Mumbai due to shrinking demand and rising costs.

Table 2: Key Indian Export Sectors Impacted by US Tariffs (August 2025)

An Adaptive Corporate Response

The Indian business community has not passively accepted the blow. The tariffs are accelerating a long-term strategic re-evaluation, forcing companies to restructure their global supply chains. This is a dynamic response to the challenge.

• Relocation of Production: Companies are shifting manufacturing to countries with lower tariffs to retain access to the U.S. market. Pearl Global, a major garment exporter, is moving some production to Bangladesh, Vietnam, and Guatemala. Similarly, Titan is considering moving part of its jewelry manufacturing to a Gulf Cooperation Council (GCC) nation. This “Make outside India” strategy is a direct consequence of the trade friction.
• Direct Investment in the U.S.: Some Indian firms are doubling down on their U.S. presence by making direct investments. Welspun Corp is expanding its facility in Arkansas with a $100 million investment, while Piramal Pharma is investing $90 million to expand its operations in two U.S. locations. This demonstrates a sophisticated approach where companies are not just seeking to escape the tariffs but are also repositioning themselves closer to their largest market.

The tariffs are not simply destroying business; they are forcing a fundamental and strategic restructuring of Indian global supply chains, pushing firms to accelerate a pre-existing diversification strategy.

India’s Strategic Response: The Art of Multi-Alignment

Official Government Measures

In response to the economic pressures, the Indian government is adopting a “strategic and pragmatic” stance. Instead of implementing a broad, overarching loan guarantee scheme for exporters, it is considering targeted measures for specific, affected industries. These include offering sector-specific credit lines with relaxed collateral and a one-year moratorium on loan repayments, which would provide critical support to cash-strapped exporters. The government is also engaging in active dialogue with export promotion councils to evaluate the impact of the tariffs.

The Diplomatic Posture and a New Geopolitical Equation

On the diplomatic front, India has maintained a firm posture. Foreign Minister Jaishankar has made it clear that India has “red lines” in its trade negotiations, centered on protecting the interests of its farmers and small producers, as well as its commitment to strategic autonomy. The message to Washington is that while the partnership remains “very consequential,” trade agreements are exclusively guided by “what’s good for the industry and the country”.

A significant and potentially unintended consequence of this trade conflict is its effect on India’s geopolitical alignment. The friction with the U.S. has coincided with a “cautious diplomatic reopening” with China. Both countries have eased visa restrictions, reopened border trading posts, and held high-level diplomatic meetings. The trade war is also a factor in pushing India closer to Russia, a long-standing military and energy partner. This situation risks strengthening the RIC (Russia, India, China) grouping, which would directly undermine the U.S. Indo-Pacific strategy aimed at countering Beijing’s influence. The tariffs aren’t just an economic tool; they are a geopolitical blunder that risks alienating a key strategic partner and inadvertently pushing it closer to its rivals. This highlights a fundamental disconnect between the US’s preference for formal alliances and India’s long-standing commitment to non-alignment.

Beyond the Bottom Line: A Test of Strategic Alignment

Economic Resilience vs. Political Posturing

While the immediate economic fallout on Indian exporters is severe, a number of analysts believe the long-term macroeconomic impact will be limited. Credit rating agencies like S&P Global and Fitch Ratings have noted that India’s economy is uniquely sheltered due to its strong domestic orientation. With external demand contributing only 15% to its overall economy and 85% driven by domestic factors, the country is well-positioned to weather the storm. The long-term growth story remains sound, bolstered by a focus on reforms, infrastructure investment, and domestic demand.

The true blow of this conflict is not to India’s GDP but to the strategic partnership itself. It is a direct result of an approach that, as former U.S. Secretary of State John Kerry noted, relies on “a little bit too much ordering, pressuring and pushing people around”. This contrasts starkly with the Biden administration’s more cooperative stance, which resolved a number of trade disputes and revived key forums like the Trade Policy Forum. The tariffs have revealed that a trade war can be a weapon of foreign policy, but it is one that can inadvertently damage a strategic partnership. The real test is whether the long-term shared interests—particularly in balancing against China’s rise—can outweigh the short-term political and economic friction.

Conclusions

The “Trump traffic war” with India represents a critical inflection point in the bilateral relationship. It has exposed the underlying frictions that existed even during periods of apparent cooperation and has demonstrated a new willingness by the U.S. to use tariffs and sanctions as instruments of foreign policy.

The analysis indicates that the justifications for the tariffs—the trade deficit and Russian oil purchases—are, at least in part, political pretexts. The US-India trade relationship had already been showing signs of stagnation, and the tariffs on Russian oil stand in direct contradiction to a previous administration’s policy and are applied with a geopolitical double standard.

The economic fallout is acute for specific, labor-intensive Indian sectors, but the overall Indian economy is likely to prove resilient due to its strong domestic demand. This is forcing Indian companies to fundamentally restructure their supply chains, accelerating a global diversification strategy. On a geopolitical level, the conflict is having the opposite effect of its stated goals, inadvertently pushing a key strategic partner closer to rivals like Russia and China.

The future of the US-India partnership hinges on whether both nations can move past these “trade irritants” and re-engage on their shared long-term interests. The ultimate resolution will depend on the ability of both nations to balance their economic needs with their geopolitical priorities, ensuring that a short-term trade standoff does not lead to long-term strategic estrangement.

Table 3: India’s Top Exports to the US and their Status under the New Tariffs