Can US-China trade tensions boost India's exports? These key sectors remain at risk

The intensifying trade and geopolitical rivalry between the United States and China could have far-reaching consequences for countries beyond the two superpowers, including India, according to a new article by World Bank economist Aaditya Mattoo, IMF official Michele Ruta and WTO chief economist Robert W. Staiger.

The authors argue that while cooperation between strategic rivals remains possible, growing geopolitical competition is changing the nature of global trade and could impose costs on third countries caught in the crossfire.

The paper, published in the June edition of IMF's Finance & Development magazine, notes that countries are increasingly using trade policies to pursue strategic objectives, ranging from technology restrictions to national security goals. As a result, trade is becoming an instrument of geopolitical competition rather than merely economic management.

Third countries can become collateral damage

The authors cite the example of the 2020 Phase One trade agreement between the US and China. Under the deal, China committed to purchase specific quantities of American goods. While the agreement helped reduce tensions between the world's two largest economies, World Bank research suggested that exporters in Europe, Latin America and other regions could have suffered if Chinese imports were diverted away from them toward the US.

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This highlights a broader concern: bilateral arrangements between major powers can unintentionally hurt neutral countries that are excluded from such agreements.

Opportunities and risks for India

For India, the evolving geopolitical landscape presents both opportunities and challenges. Supply chain diversification and the "China+1" strategy adopted by many multinational companies have already boosted India's prospects in manufacturing and exports.

Sectors such as electronics, semiconductors, pharmaceuticals, textiles and chemicals are among those that stand to gain as companies seek alternatives to China.

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India has emerged as a major smartphone manufacturing hub, with global firms expanding production in the country. Government-backed semiconductor incentives are also aimed at positioning India as an important player in the global chip ecosystem.

The pharmaceutical industry, already a significant exporter of generic medicines, could benefit from efforts by Western countries to diversify healthcare supply chains. Textile exporters, meanwhile, may gain from shifting sourcing patterns, while chemical manufacturers could capture a larger share of global demand.

Fragmentation poses risks

However, increasing fragmentation of global trade could also create uncertainties for Indian exporters. Higher tariffs, export controls and competing standards among trading blocs may raise costs and disrupt supply chains.

The authors warn that geopolitical rivalry tends to increase protectionism and reduce trade flows, even though countries still have incentives to cooperate.

They argue that the existing World Trade Organization framework was designed for an era when geopolitical considerations played a smaller role and may require reforms to accommodate strategic competition. One proposal is a "geopolitical exemption" that would allow limited discriminatory trade measures while minimizing damage to the broader multilateral trading system.

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For India, the challenge will be to capitalize on supply chain shifts without becoming overly dependent on geopolitical fractures. As the US-China rivalry reshapes global commerce, New Delhi's export ambitions could receive a boost—but only if the broader international trading system remains stable.