US President Donald Trump and Japan's Economic Revitalization Minister Ryosei Akazawa during tariff negotiations. The White House posted this on X (formerly Twitter) on July 22.
Japan has been significantly impacted by recent United States tariff policies, with Prime Minister Shigeru Ishiba describing the situation as a "national crisis at one point. While Tokyo finalized a trade agreement with the US on July 23, it is worth revisiting the deal-making's broader implications.
In April, the US imposed a baseline 10% tariff on all imports, along with proposed reciprocal tariffs on countries with trade surpluses. That included Japan, which posted a $63.63 billion USD surplus in 2024. Additional measures include a 25% tariff on auto imports and the reinstatement of 25% tariffs on Japanese steel and aluminum products. Starting July 9, Japan was to face 25% tariffs on exports to the US.
Accordingly, the July 23 agreement reduced tariffs on cars and other goods to 15% in exchange for a $550 billion Japanese investment package directed to the US, including equity, loans, and guarantees. It also ensured that Japan would always receive the lowest tariff rate on chips and pharmaceuticals compared to all other pacts negotiated by Washington. President Donald Trump signed an executive order on July 31st that reaffirmed the trade deal.
Leading up to the deal, US tariffs were having a severe impact on trade, leading to declines in Japanese exports in May. Measured by value, exports decreased by 1.7% compared to 2024. Declines were primarily due to prices in the car, steel, and mineral fuel sectors, while overall export volume rose by 8%.
Furthermore, Japanese imports declined by 7.7%, with crude oil and coal experiencing some of the sharpest declines. This resulted in a trade balance deficit of ¥637.6 billion ($4.4 billion) for Japan.
A Strategic Role for India
These numbers rattled investor sentiment, causing the Japanese yen to drop by roughly 1% overnight in July. The Japanese currency remained under pressure, falling to a two-week low of 147.5 per dollar as of August 4.
In this context, India could become a strategic economic partner for Japan by boosting bilateral trade, strengthening supply chain cooperation, and encouraging long-term investments in the manufacturing and technology sectors.
This article explores the potential enhancement of economic diplomacy between the two countries.
Look Out for Reliable Partners
Geopolitical shifts and uncertainties under Trump 2.0 create opportunities. Tokyo is moving from a mainly bilateral strategy to increased coordination with middle powers, and the India-Japan partnership can address this strategic gap.
Japan has growing concerns about the long-term openness of the US market, viewing its heavy dependence on US trade as a risk. The weakening of multilateral trade institutions during both Trump administrations has hurt global trade and weakened rule enforcement. In response, Japan is expanding its broader trade connections, including pursuing a multilateral strategy with regional partners, such as South Korea and Taiwan. It is also increasing its engagement with the European Union (EU), the Association of Southeast Asian Nations (ASEAN) countries (Malaysia, Indonesia), and frameworks like the Supply Chain Resilience Initiative involving Australia and India.
In May, India and Japan notified the WTO of plans to impose retaliatory tariffs on US goods, citing WTO rules. India estimated it had $7.6 billion in affected exports. Japan's WTO notification reveals that its retaliatory measures would have targeted not only US steel and aluminum tariffs, but also American import restrictions on automobiles and auto parts.
These were part of a coordinated effort to counter US tariffs as part of the proposed suspension of concessions. They provided an opportunity for recalibration of priorities, passively positioned within the US alliance structure. Meanwhile, they were accompanied by active reconsideration of ways to develop resilience.
Warming Up of India-Japan Partnership
The US tariffs provide India with room to negotiate a new framework of cooperation with Japan that could have long-term ramifications. First, as the world's most populous country, India attracts Japanese companies. Existing cooperation with Australia on rare earths also enhances trade opportunities and economic integration.
Second, Japan–India economic ties are intensifying. India becomes a more attractive manufacturing partner—a trend indicated by Nomura, which sees India benefiting from trade diversion and supply-chain shifts. It also utilizes a trilateral framework with Japan and Taiwan to diversify its supply chains.
India is in a prime geopolitical position. According to the International Monetary Fund, India is projected to become the world's third-largest economy by 2027, with a gross domestic product of $5 trillion. Additionally, it has the second-largest English-speaking population worldwide and places a strong emphasis on STEM education, producing over 2 million graduates annually. Its blend of a rapidly growing, well-educated workforce and its strategic location near the Middle East, Europe, West Africa, Southeast Asia, and East Asia — supported by established sea routes — makes it an ideal spot for business.
This could be a game-changer for India and its industry. Japan's advanced manufacturing complements India's labor pool, consumer base, low operating costs, and linkages to important international markets.
Furthermore, the National Policy on Electronics, established in 2019 to position India as a global hub for electronics, has promoted the development of core components, including semiconductor chips, graphics chips, motherboard chipsets, and other computing devices. This has improved the competitiveness of the electronics industry worldwide.
Similarly, there is the Indian government's Production Linked Incentive program. It pursues large-scale electronics manufacturing, provides financial incentives to boost domestic production, and attracts significant investments in electronic components and semiconductor packaging.
A Comprehensive Economic Partnership
India-Japan cooperation, through their Comprehensive Economic Partnership Agreement, Supply Chain Resilience Initiative, and semiconductor ties, can help both mitigate US tariff impacts by diversifying supply chains away from the constrained US market. This would enhance regional trade resilience and attract investment in high-tech manufacturing. Together, they can reduce dependency on the US, strengthen regional economic resilience, and promote Indo-Pacific cooperation amid shifting global trade dynamics.
Additionally, Japan faces a complex challenge in key sectors, such as the automobile industry, which is vital to its economy. Indian partnerships could also be utilized in this sector. Currently, Japan has a $4.6 billion trade deficit with India in the automotive trade, highlighting Japan's dominance in high-tech exports. However, India is closing the gap by increasing component manufacturing and collaborating on EV-related projects. By 2030, India and Japan aim to double bilateral automotive trade to $15 billion. This includes launching joint R&D projects in clean energy and smart mobility, as well as training 10,000 Indian engineers in Japanese manufacturing methods.
Potential for More
Nevertheless, India has been cautious in its participation in trade rulemaking, its strategies for market access, and supply chain diversification. This is reflected in its positions in multilateral forums and its approaches to industrial subsidies. All of these will play vital roles in shaping its future path in global trade.
India's call for fair trade negotiations must be accompanied by necessary domestic-level changes. That includes easing the business environment and relaxing government regulations to boost investor sentiment. This could ultimately benefit the Indian economy in the long run.
There is also a shift in trade patterns, prompting a rethink of production strategies that could lead to deeper economic integration. India could benefit from this shift, as well as from increased diversification in global supply chains. With competitive labor costs and a growing manufacturing sector, India may become a more attractive option for production. It is poised to become a reliable long-term partner for Japan, leveraging its youthful demographic, institutional reforms, infrastructure, growing geopolitical stature, and global partnerships to anchor resilient supply chains.
Conclusion
Japan should continue recalibrating in response to Trump's second-term trade policy within a multipolar Indo-Pacific framework. Strategic separation is necessary as Ishiba advocates for a shift toward formal, institutional diplomacy.
Meanwhile, Japan is taking on a larger share of regional security responsibilities in more dispersed, networked ways. Those include increased coordination between India and Japan, as well as triangulation with other partners. This approach offers new opportunities and an innovative framework for cooperation, including reliance on rule-based multilateralism. It is a well-timed approach aligned with the shared democratic values of both countries.
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Author: Varuna Shankar
