New Delhi [India], May 12 : The recent US-China trade deal has significantly reduced the tariff gap between India and China, potentially impacting India's competitive edge in attracting companies looking to relocate from China.
According to Ajay Srivastava, Founder of the Global Trade Research Initiative, the US-China agreement to withdraw reciprocal tariffs for 90 days has brought tariffs closer to parity, undermining the "China Plus One" strategy that benefited India.
The 'China Plus One strategy typically involves companies diversifying their investments to countries other than China.
"Now, that edge has narrowed dramatically, with the US and China easing tensions and bringing tariffs closer to parity," Srivastava said in a note.
For global investors, he said the message is clear: "Washington is re-engaging with Beijing."
On Monday, the US and China arrived at an agreement that they will withdraw their previously announced reciprocal tariffs and counter tariffs for an initial period of 90 days. This drastically eased the spiralling trade tensions between the two major trade partners.
As part of the understanding, China will reduce tariffs on US goods from 125 per cent to 10 per cent, and the US proposes to cut tariffs on Chinese goods from 145 per cent to 30 per cent.
Just weeks ago, the US administration at one point vowed to slap 245 per cent duties on Chinese goods.
According to Srivastava, this shift risks undermining the "China Plus One" strategy that saw firms move manufacturing to India, Vietnam, and Mexico.
"While low-investment assembly operations may linger in India for now, deeper manufacturing--the kind that builds real industrial ecosystems--may stall or even return to China. Investors are watching the U.S. tilt, and many will hesitate to commit unless India can lock in a competitive advantage," he argued in his note.
Faced with supply chain disruptions, particularly since the COVID-19 pandemic hit in 2020, along with a subsequent flare-up of geopolitical tensions and protectionism by various countries, including the US, many leading global manufacturing companies have been diversifying their operations across regions.
For companies in such situations, this means exploring emerging global supply chain regions for diversification. India, given its political stability, huge market opportunity, dynamic workforce, and steady rise in income levels was eyed as one of the best places to set up manufacturing bases.
Srivastava suggested that a smart trade deal with the US could help preserve India's 10 per cent tariff access and prevent any hike to the proposed 26 per cent under Trump's new country-specific duties.
But beyond trade policy, he added that India must urgently cut production costs, overhaul logistics, and improve regulatory predictability.
"And as it negotiates future FTAs, India must resist pressure to open up sensitive sectors like automobiles and pharmaceuticals without meaningful reciprocal gains," he further suggested.
US President Donald Trump had imposed reciprocal tariffs on dozens of countries with which the US has a trade deficit. Later, President Trump decided to pause the tariffs for 90 days after many countries initiated talks with the US administration for a trade deal. In these 90 days starting April 9, President Trump imposes a 10 per cent baseline tariff on all countries.
Since assuming office for his second term, President Trump has reiterated his stance on tariff reciprocity, emphasising that the United States will match tariffs imposed by other countries, including India, to ensure fair trade.