India, Japan, and the New Tariff Reality

United States President Donald Trump slapped wide-ranging tariffs on countries around the world, including India, which has been hit with a 26% tariff. While some countries like China have imposed retaliatory tariffs on the US, India has, so far, refrained from doing so.

So, what does India plan on doing?

India is planning to ink a bilateral deal with the US instead. This is better for India as it runs a huge trade surplus with the US. The total trade between the US and India stood at $129.2 billion in 2024, which is a new record. Pearls, semi-precious stones, pharmaceutical products, and electrical equipment were among the top Indian exports to the US.

The Broader Geopolitical Context

However, there is a bigger geopolitical picture here. India understands that the tariffs are not aimed at it. Instead, they have affected all nations, some of which are US allies like Japan and South Korea.

On the other hand, there is a lot of cooperation between India and the US on the international front. Besides, the two leaders, Indian Prime Minister Narendra Modi and US President Trump, are quite friendly with each other. Modi has already visited the US very early in the American president's new term.

President Trump has imposed a huge 125 % tariff on China, and India can benefit from that if the lines of production can be moved away from China. Already, iPhones are being manufactured in India and shipped to other countries. At this point, neither the US nor China seems to be backing down.

Opportunity for India

A key priority is upgrading the infrastructure sector. The Government of India has already placed strong emphasis on enhancing infrastructure and streamlining the business environment, notably through single-window clearance mechanisms.

In the long term, the tariffs could also be reduced, given the bilateral talks going on between the different parties. Meanwhile, India continues to be one of the world's fastest-growing major economies. However, its growth could slow down from the high of 9.2% recorded in the financial year 2023-24.

Nevertheless, the good news (in a sense) is that India's share of total global exports is less than 2%. Hence, it remains largely insulated from the tariff shocks. Add to that the huge domestic market, to realize that there is a silver lining for the Indian economy amidst the turmoil of the Trump tariffs.

*People dining in a crowded market, New Delhi, India (©AP/Kyodo)*

A Catalyst for Engagement

President Trump has now paused the tariffs for 90 days. This gives countries like India enough maneuvering space to work out a bilateral trade treaty. India is also the world's biggest country in terms of population and hence an attractive proposition for American companies. Furthermore, India has also opened its doors to major American companies, including Tesla. Many other leading US firms have already established a presence in the country.

New Delhi is the world's biggest arms importer and could also dangle the bait of more defense purchases from the US. American defense imports have already surged from virtually zero to over $20 billion — a development that marks a significant game changer in bilateral relations.

No wonder the Trump tariffs could act as a game-changer for India and the Indian industry. However, the outcome will depend on India making the necessary changes, and quickly. This, in the long run, could spell good tidings for the Indian economy. As they say, strike the iron when it is hot.

Economic Dilemma for Japan

Japan has been hit by the US with 24% tariffs on its exports to the US. However, like many other countries, it has won a 90-day reprieve lasting until early July. Meanwhile, Japan still faces a 10% universal rate, besides a 25% duty on automobile exports, one of the mainstays of Japan's export-led economy. At the same time, the US dollar has hit a seven-month low of 140.615 to the Japanese yen recently.

Tokyo has been trying to work out some kind of concessions, and talks are ongoing. Just like India, Japan has not slapped retaliatory tariffs on the US. However, it does face a double whammy: Washington has imposed 145% tariffs on China, one of Japan's largest trading partners, while America remains its closest security ally.

There is also a likelihood that the US could ask Japan to increase its imports of US automobiles and agricultural products to reduce trade deficits.

Tokyo's Policy Options

One option is to work out a concerted response along with other countries in the region, like China and South Korea. However, that may not be music to Washington's ears.

Japan faces a catch-22 situation as President Trump has asked American trade partners to reduce trade ties with China. Beijing, meanwhile, has threatened countries that heed President Trump's call. Japan also benefits significantly from the influx of Chinese tourists. This deepens its dilemma, as the Chinese government could weaponize tourism by encouraging cancellations, placing economic pressure on Japan.

What needs to be understood is that both India and Japan have taken a conciliatory approach when it comes to the Trump Tariffs. This is in their wider national interest. India and Japan, along with Australia and the US, are also members of the Quad. They need to remember that the larger goal should be to ensure cooperation between these four democratic nations so that they can take on an increasingly belligerent and isolated China.

Author: Dr Rupakjyoti Borah

Dr Rupakjyoti Borah is a Senior Research Fellow with the Japan Forum for Strategic Studies. The views expressed here are personal.