US-China détente: Double-edged sword for India’s economic and strategic future

💼 Key takeaways from the interview:

• How India benefited from the US-China trade war
• What happens if Trump removes tariffs on China
• The risk of India losing its global manufacturing and export share
• How India's Make in India plan could take a hit
• Policy gaps India needs to fix now
• Strategic implications for Asia’s supply chain

The following is The Squirrels' assessment of the situation:

As of May 2025, US-China relations have shown signs of stabilisation. A notable development was the bilateral meeting in Geneva on May 11, which resulted in a joint statement. The statement highlighted the importance of their economic and trade relationship and committed to actions such as modifying tariffs and other trade measures by May 14. This suggests a potential thawing of tensions, though volatility around tariffs remains.

The US-China relationship is complex, with ongoing strategic competition, but there is evidence of dialogue and cooperation, particularly on economic issues.

Current state of India-China relations

India-China relations have also seen significant improvement by 2025. In October 2024, India and China announced a border patrol agreement, signalling a thaw in border tensions that had persisted since 2020. By January 2025, further progress was made, with troops disengaging from disputed areas like Depsang and Demchok, and agreements on coordinated patrols.

Direct flights between India and China resumed in January 2025, and high-level meetings, such as the one between Xi Jinping and Narendra Modi at the BRICS Summit in October 2024, indicate a move toward normalisation.

Despite occasional setbacks, such as protests over a Chinese dam project, the overall trajectory is toward improved relations.

Current state of India-US relations

India has maintained strong ties with the US, particularly as a counterbalance to China, especially after the 2020 border clashes. This relationship has been bolstered by defence and technology partnerships, with the US viewing India as a key partner in the Indo-Pacific strategy.

However, with India-China relations improving, India’s strategic reliance on the US as a counterweight may have lessened, as noted in analyses of US views on India-China ties.

Probable impact of a US-China détente on India

If Trump and Xi were to "patch up," implying a significant improvement in US-China relations, the impact on India would be multifaceted, with both opportunities and challenges. The following sections break down the key areas of impact.

Geopolitical implications

A US-China détente could reduce the strategic tension between the two powers, which has historically provided India with leverage to balance its relations. India has often used its ties with the US to counterbalance China, particularly after incidents like the 2020 Galwan Valley clash. However, with US-China relations improving, India might find it harder to play off the two powers against each other. This is supported by expert analyses suggesting that a closer US-China relationship could reduce India’s strategic importance to the US.

Additionally, a détente could lead to shifts in regional dynamics. A more cooperative US-China relationship might reduce tensions in areas like the South China Sea or the Himalayas, potentially benefiting India by lowering the risk of proxy conflicts. However, it could also mean that India has less room to manoeuvre in its regional strategy, as the US and China might prioritise their bilateral interests over regional alliances. This is particularly relevant given China’s increasing influence in South Asia, as noted in discussions on China’s Belt and Road Initiative and its presence in countries like the Maldives and Sri Lanka.

India’s emphasis on strategic autonomy would be tested in this scenario. A US-China détente might allow India to maintain its non-aligned stance more comfortably, as it would not feel pressured to choose sides as much as it did during periods of heightened US-China tension. This is supported by expert views suggesting that India would need to focus on domestic capacity building and regional influence.

Economic implications

Economically, a US-China détente could lead to a more stable global trade environment, which would benefit India. The reduction in trade tensions could stabilise global supply chains, potentially benefiting India as a key player in manufacturing and services. For example, if US-China trade wars ease, China might focus more on its relations with other countries, including India, leading to increased trade and investment. This is supported by analyses suggesting that India could emerge as a reliable supply chain partner, especially given its domestic consumer market and manufacturing capabilities.

India has already seen improvements in its trade relations with China, with trade volumes increasing and disputes over tariffs easing. For instance, India’s trade deficit with China rose to USD 85 billion in 2023-24, but efforts to normalise trade relations, such as resuming direct flights, indicate a willingness to cooperate. A US-China détente could further enhance these opportunities, allowing India to benefit from better trade relations with both powers.
However, there are challenges.

Even if Trump and Xi "patch up," Trump’s protectionist policies could still pose hurdles for India. For example, Trump has imposed tariffs on Indian goods, such as a 26% reciprocal tariff in April 2025, forcing India into fraught negotiations to preserve access to the US market. A détente with China might reduce the likelihood of Trump escalating trade wars, but India would still need to navigate US trade policies carefully. Expert analyses suggest that India has leverage due to its consumer-led economy and diversified export destinations, but competing with other emerging markets like Vietnam could complicate negotiations.

Strategic and security implications

From a security perspective, a US-China détente might not drastically alter India’s improved relations with China, given the recent border agreements. However, if the US and China become too closely aligned, India might worry about being sidelined or losing its strategic importance to the US. This could affect India’s defence ties with the US, which have been crucial for countering China, particularly in areas like technology and military cooperation. Expert analyses suggest that the US has viewed India as a check against China’s rise, but a détente could lead to a reevaluation of this partnership.

On the other hand, a more cooperative US-China relationship could reduce the risk of proxy conflicts or great power competition in South Asia, which would be beneficial for India. For example, lower tensions could mean fewer incidents along the Line of Actual Control (LAC), allowing India to focus on domestic development. However, China’s increasing assertiveness in the region, such as through the Belt and Road Initiative, could still pose challenges, especially if China uses its improved relations with the US to exert more influence.

Risks and opportunities

The risks for India include marginalisation if the US and China prioritise their bilateral interests, potentially reducing India’s strategic importance. This could affect India’s ability to secure advanced technology, defence equipment, or economic concessions from the US.

Additionally, increased competition from China in global markets could challenge India’s economic ambitions, particularly in sectors like manufacturing and technology.

Opportunities include leveraging the stable global environment to strengthen its domestic economy and regional influence. For example, India could benefit from being a key player in global supply chains, especially if companies diversify away from China. Expert analyses suggest that India’s domestic consumer market and manufacturing capabilities could act as a buffer against external shocks, providing resilience in a volatile global environment.

Before and after possible détente

To illustrate the potential shifts, consider the following table comparing India’s position before and after a hypothetical US-China détente:

The table above highlights the shift from a high-tension environment to a potentially more cooperative one, with both opportunities and challenges for India.

The ultimate hypothesis

India would need to adopt a strategy focusing on strategic autonomy, economic diversification, domestic capacity building, and climate resilience to mitigate adverse effects. Oxford Economics notes that India’s domestically focused economy might be less impacted by US policies compared to China, providing some resilience. However, the unpredictability of Trump’s policies, even with a détente, remains a concern, as noted in discussions on tariffs and trade negotiations.

Ultimately, the impact on India would depend on how the détente unfolds and the specific policies implemented by both the US and China. If the détente leads to a stable and cooperative global environment, India could benefit economically and strategically. However, if tensions resurface or if India is sidelined, it would need to adjust its foreign policy to protect its interests.