US-China trade war leaves India confronting three negative spillovers

India must be prepared to deal with any potential fallout, given that the decisions taken by these two countries have downstream implications for Indian industry and consumers.

Export controls have taken the centre stage in the US-China trade war. While the two countries continue to impose high tariffs on each other’s goods, it is the export controls and restrictions that have dominated the discussions. And while the two countries may have agreed to an “in principle” framework to ease export controls and speed up approvals and licensing requirements, US-China trade and technology frictions are here to stay.

In this context, India must be prepared to deal with any potential fallout, given that the decisions taken by these two countries have downstream implications for Indian industry and consumers.

Spillover effect of China’s rare earths restriction

In April 2025, in retaliation to Donald Trump’s announcement of Liberation Day tariffs, China imposed export restrictions on seven types of rare earths and their magnets. These are materials that are critical to the automotive and aviation industries. However, the policy had a spillover effect on the supplies of rare earths and magnets to China’s other customers, besides the US. The new licensing requirements applied to all entities and thereby brought supplies to an immediate halt. Resumption of supplies now requires importers to certify that the “magnets will not be used for defence purposes and re-exported to the US.”

In that sense, actors in India’s automotive sector were caught in the US-China cross-fire. Early estimates indicated that acquiring licenses would take at least 45 days. The biggest impact of this, of course, is likely to be felt by electric vehicles, hybrid vehicles and two-wheeler makers. Already reports inform of companies talking about production delays and deferring product launches. However, the story is not as straightforward.

Deliberate and discriminatory

It appears that Beijing is currently adopting a discriminatory policy designed to subvert and stall Indian enterprises and operations. Supplies from China have been hindered since April 4, when the restrictions were announced. Since then, even after receiving the endorsement of the Government of India, 30 applications from Indian auto manufacturers await approval from the authorities in China. Automotive enterprises have since reached out to the Indian government, seeking intervention to support the sector and smoothen out the process with Beijing.

At present, it appears that the Indian government is engaging with Chinese officials about the need to ensure “predictability in supply chain for trade”. Reports also inform that New Delhi is trying to facilitate a visit by industry players to engage directly with Chinese officials.

Contrast this to the several applications from auto companies outside India that have received Beijing’s clearance.Reports suggest that Beijing has already granted licenses to suppliers to America’s top three auto companies. Post the London negotiations, American automakers expect the licenses to further speed up. Furthermore, Beijing has assured Brussels of setting up a “Green Channel” to speed up approvals.

On the other hand, Bloomberg reports that at least two applications for India-bound shipments were rejected by Beijing. Furthermore, while at least 10 Indian automakers have received favourable endorsement from the Chinese embassy in India, the final decision rests with Beijing, which has been dragging its feet. In another case, while shipment to an Indian unit of a global firm was rejected, approvals were granted to shipments meant for the firm’s subsidiaries in the US and Germany.

Tackling the immediate crisis  

This is an important moment for the Indian government and industry as a whole to contemplate the implications of the emerging geoeconomic order. Trade is increasingly becoming securitised across the board. Such disruptions will, therefore, become much more frequent across different sectors. This will be the case, even if the actions taken by a particular state are not directed at India or Indian enterprises. Therefore, de-risking or resilience-based strategies are necessary.

The specific measures will have to be tailored sector-by-sector.  But in general, the mix will entail a certain degree of indigenisation or domestic capacity building, stockpiling or creation of strategic reserves, diversification of suppliers and markets, creation of secure supply chains with trusted partners, and investment in alternative materials or product categories. Each of these will take time and investment. The role of the government, in this regard, should largely be to nudge and facilitate through enabling policies.

At the same time, drawing lessons from this experience, in order to avoid getting caught in a similar situation in the future, it is time for India’s auto industry to increase the stockpile of items which exhibit significantly high dependence on China. Reports suggest that the automotive industry usually keeps stockpiles for four to six weeks currently. But given the difficult relations India shares with China, it would be better for industries vulnerable to supply shock from China to maintain larger inventories.

In the near-term however, the current challenge facing Indian automakers is fundamentally a political one, which will require political intervention from New Delhi. To begin with, the government needs to be more proactive in relaying the concerns of Indian businesses to their Chinese counterparts. It is a testament to the frayed official channels of communication between India and China that while American and European governments and businesses seemed to have managed some sort of deals with the Chinese, this has not been the case with India. This is evident in the fact that, reportedly the affected Indian companies themselves had to seek endorsements from the Chinese embassy and request a meeting with the Chinese Ministry of Commerce to secure approvals. While the Indian government is currently engaged, certainly, there is a case for it to have acted more proactively.