Should India cooperate or defect strategically

The 'Trump tariffs' are in, and India now knows its gift: 26%. Its actual impact is unclear (will bourbon, on which India charges 100%, be charged only 26%?) Will heavy machinery, on which India charges about 7% be punished with a 400% premium? If so, how will India and other countries respond or retaliate?

In mathematical game theory, a prisoner’s dilemma speaks about how, in its simplest form, two partners in prison are told by the police that if they betray their partner (or “defect” to the police side), they will go free. At the same time, the other gets sentenced to three years. If both defect, then they each get sentenced to two years. If neither defects (and “cooperate” with their partner), they both get sentenced to only one year.  

In real-life trading strategies, these kinds of deals will happen repeatedly, so in the long run, the partners realise that they are best off cooperating. Expand this to a global multi-lateral system, and we quickly realise that zero tariffs are the best economic results for all countries in the long run. This is the kind of goal that WTO is based on. 

Of course, in real life, there are historical factors that need to be considered, in that India was exploited for centuries by the British, which made it impossible for it to compete with the free countries in the last two centuries. So, it is almost as if India, China, and other countries from the Global South were forced to “cooperate” by force of arms while the Western nations “defected”.

For example, during British colonial rule, India faced discriminatory tariff policies that favoured British goods and hindered the growth of Indian industries. These policies included high tariffs on Indian exports to Britain, while British goods were imported into India with low or no tariffs. (There are some other narratives but it is undeniable that India’s share of global GDP dropped from approximately 25% in 1700 (when Aurangzeb’s rule was close to its end) to less than 3% in 1947. Since then, it has tripled to almost 9.6% of the world's GDP in 2023 and is expected to rise by another 25% to 12% by 2030. 

Historical injustices apart, this shows in mathematical terms exactly how critical it is to “cooperate” or “defect” wisely. Fortunately, what we have in the real world are multiple partners and alliances where the cost of defection can be high, and the benefit of cooperation is maximised. That is because world trade consists not solely of the US and India but of over 150 other countries as well. The winners will not necessarily be the biggest or the brightest, but the ones with the most friends with whom they can cooperate.

Such a game of multi-player scenarios gets interesting in the electronics industry. India’s $11 billion exposure to the US in Electronics may appear to get hit hard if a 26% tariff is imposed. However, India’s main competitors, China and Vietnam, have been hit with 34% and 4,6%, so in theory, it would make sense for Apple and other major manufacturers to accelerate a move to India (even if Trump may have intended them to move to the US!)

So, the impact of such rules can be unpredictable. Most formerly subjugated countries, through their own hard work, as well as compensatory aid from the former colonial regimes, now compete on an equal footing in at least some areas. Some prominent examples are India and China, but even smaller countries like Vietnam (with its new VinFast EV) and Ghana (a healthcare and human development destination in Africa) are successful in specific niches.

So as the still Western-dominated global trading system adapts to protectionist shifts—most notably marked by US tariffs under President Trump—India needs to adjust its foreign trade strategy to deepen partnerships, reduce strategic vulnerabilities, and assert itself as a rules-based economic power. These shifts are not only reshaping India’s bilateral relations with the US and China but also reinforcing its leadership in building resilient supply chains and high-value free trade partnerships across the globe. 

India-US trade: From transactional to strategic partnership 

India’s trade engagement with the United States is undergoing a transformative shift. While US tariffs initially raised concern, they also opened a window for India to pursue a more balanced, reciprocal approach to market access, particularly for services and digital trade.

• Trade target: India and the US have committed to doubling their bilateral trade to $500 billion by 2030.
• Ongoing negotiations: A comprehensive bilateral trade agreement is under negotiation, focusing on reducing tariffs, easing regulatory barriers, and promoting mobility of professionals (visas for services)—an area where India has a natural comparative advantage.
• Strategic outcome: If successful, the agreement could lead to the largest-ever bilateral trade volume for India, positioning it as a preferred democratic trade partner for the US in the Indo-Pacific. 

The prisoner’s dilemma framework applies here: reciprocal tariffs risk mutual losses, but cooperation offers shared economic gains. India’s push for a win-win trade framework reflects this understanding.

India-China trade: Strategic decoupling with selective engagement

While China remains one of India’s largest trading partners, the bilateral relationship is strategically strained. Unlike with the West, the general feeling is that historical issues from the last century remain unresolved. Border tensions, trade imbalances, and the risks of over-dependence have prompted India to diversify away from Chinese supply chains. In this context, cooperation is risky, so a policy of strategic defection is the only way out unless China’s internal position changes drastically through internal democracy, greater transparency, or other means.

India has been wary of China since at least 1962 while Chinese scholars lament how India seems more aligned with its colonial oppressors rather than its fellow Asian superpower. India fails to grasp the complexity of the Tibet-China history while China fails to understand how its pin-pricks through minor land transgressions paralyse the overall strategic relationship. Until those matters are resolved, the trade will expand, but the behaviour will continue to be transactional. There are many specific implications of this: 

• Trade controls: India has increased scrutiny of Chinese investments and imposed restrictions in key sectors, such as telecom and infrastructure.
• Import substitution: Policies like the Production Linked Incentive (PLI) schemes aim to reduce Chinese import dependency by boosting domestic manufacturing.
• Regional diplomacy: India’s outreach to Japan, South Korea, and ASEAN nations offers alternatives to Chinese-centric supply networks.
• Chinese 'sanctions': Fearing a reduction in its own manufacturing power, China has been subtly discouraging and throwing barriers at the growth of factories in India. 

India’s approach, however, is not isolationist—it is hedged. While trade with China continues, India is building alternative platforms to mitigate geopolitical risk and assert greater economic autonomy.

India’s expanding global trade footprint

India is also pursuing a dual-track trade strategy: consolidating relations with trusted partners through comprehensive trade agreements, while also building bridges with emerging regions for market diversification.

Free trade agreements already concluded: 

• India-UAE CEPA (2022): Covers goods, services, and investments—India’s most comprehensive West Asia deal to date.
• India-Australia ECTA (2022): Reduces tariffs on 90% of goods and builds strategic alignment in the Indo-Pacific.
• India-Mauritius CECPA (2021): Facilitates India’s Africa engagement.
• India-South Korea CEPA: Supports East Asia trade integration.
• India-ASEAN FTA: Operational since 2010 (goods) and 2014 (services), this remains India’s most significant multilateral regional pact.
• Mercosur PTA: Establishes a trade foothold in Latin America. 

These agreements signal India's willingness to liberalise trade on a mutually beneficial basis, particularly where rules-based engagement and regulatory alignment are possible. 

India’s active negotiations: US, UK, EU, New Zealand 

India is also negotiating a new set of high-value trade deals with key developed economies:

• United States: As detailed above, this would be the most economically and strategically significant bilateral agreement.
• United Kingdom: Talks resumed in 2025 and aim to finalise an FTA focused on services, mobility, and digital trade. 
• European Union: Negotiations are accelerating towards a landmark FTA. If concluded, this would be the world’s largest trade deal ever, encompassing sustainable development, data governance, and innovation partnerships.
• New Zealand: After a decade-long pause, FTA talks resumed in March 2025, with an emphasis on agricultural trade, education, and clean energy. 

These deals are designed to strengthen India’s integration into advanced economies while maintaining policy space for domestic development.

Strategic implications: India as balancing power 

India’s trade strategy reflects a broader geopolitical ambition: to become a trusted, non-aligned global partner that balances democratic alliances with economic pragmatism.

• With the US: India aims to deepen trust, expand technology, defend trade, and secure defence advantages.
• Against Chinese dominance: India is creating redundancy and resilience in trade architecture.
• For the Global South: India continues to promote South-South trade cooperation, particularly in Africa and Latin America. 

Rather than aligning entirely with any one bloc, India is positioning itself as a bridge between East and West, Global North and Global South.

Free trade on India’s terms 

India’s evolving trade policy is not reactive but strategically proactive. It is designed to

• maximise trade flows without compromising sovereignty,
• achieve greater global market access for services and skilled labour,
• reduce inflationary risks by ensuring stable supply chains and 
• build long-term coalitions that align with India’s geopolitical interests. 

By swiftly concluding ongoing negotiations and reducing barriers with friendly nations, India is laying the groundwork for a 21st-century free trade architecture that is inclusive, strategic, and sustainable.

In a world shaped by tariffs and tensions, India is not just adapting—it is leading.

India in a multiplayer game 

India’s evolving trade policy is not just a response to protectionism—it is a strategic blueprint for long-term global positioning. With multiple trade negotiations underway, India is shaping a new model of economic engagement that emphasises mutual benefit, strategic autonomy, and resilient supply chains.

This approach is again best understood through the lens of a multi-player prisoner’s dilemma. Each country—India, the US, China, the EU, and others—must independently decide whether to cooperate (lower tariffs, enhance access) or defect (raise trade barriers). While unilateral action may offer short-term gains, it often leads to worse outcomes for all players. Conversely, cooperation among many players creates the best result: shared growth, lower inflation, and stronger global trade networks. 

India recognises that the world is no longer operating in a simple bilateral trade model. Every action has ripple effects across alliances, supply chains, and elections. By prioritising early agreements with like-minded partners (e.g., the US, EU, UK, Japan, etc), India is not only securing economic advantages but also building trust in a system where defection by one can damage many. 

In this complex, interconnected game, India is positioning itself not as a follower but as a coordinator and catalyst for global cooperation. If executed carefully, India can help steer the system toward a cooperative equilibrium—one where free trade flourishes not by accident but by design.