Analysing India’s trade bottlenecks

On July 15, the India-U.K. trade deal came into force. That day, India banned the import of goods made using forced labour so as not to get an unfavourable treatment from the U.S. under Section 301. A day later came the news that a bipartisan Bill has been proposed by U.S. Senators to levy up to 100% tariff on India and others for buying Russian crude. One way or the other, India’s trade with the U.S. is being buffeted by bottlenecks.

China’s trade

In contrast, without a trade deal, China has become India’s largest trading partner. Imports from China in the first half of 2026 have shot up by 21.8% while exports have risen by 37.2%, though on a small base. The already-high trade deficit with China of $116 billion last year is likely to rise since it has already topped $67 billion in the first half of the current year. The imports from China are high- and low-tech items while exports are mostly low-value-added items.

India’s dependence on China is overwhelming. Factories and exports increasingly depend on China for machinery and intermediates. For instance, pharmaceuticals depend on imports of API from China. The average wage rates in key sectors such as automobiles and apparel are half to one-third of China’s. Yet, India is unable to outcompete China in global markets because of the huge technological advantage the latter has gained in the past 35 years.

While multinational companies (MNCs) have invested in China, as a share of total investment, it has been small. Further, to capture markets, China has been investing in other countries under the One Belt, One Road initiative. Thus, net foreign investment in China has been small. Finally, as Chinese companies have become big, they are outcompeting MNCs such as Tesla. And many U.S. companies have left China, including Amazon, Apple, Dell, IBM, and Uber.

India is unable to finalise a trade deal with the U.S. since at least July 2025, though Commerce Minister Piyush Goyal keeps assuring the nation that it is almost done. Last August, India’s exports were hit by a 50% tariff, leading to a decline in labour-intensive exports of apparel, shrimps, leather goods, and so on. The overall trade deficit increased in 2025 to $120 billion from $94 billion in 2024. China faced high US tariffs but by diversifying trade, it increased its trade surplus in 2025 to $1.19 trillion from $992 billion in 2024.

Technology and investment

The lesson is that technology is the key to trade in today’s globalised world. China is accused by the West of currency manipulation and massive government help to cheapen its exports. The implication is that China is draining its surplus to sell to the rest of the world. And, it is supposed to have been doing so for at least the past 35 years. Such trade over long periods of time should have been drained resources and suffered. Instead, the Chinese economy has boomed and become five times larger than India’s economy.

The reason is China’s high savings rate of above 35% of GDP since the 1980s and at times reaching close to 50%. This has been able to finance its huge investments of 40% and more and peaking at 47%. Its growth has not depended on foreign investment.

This massive investment has enabled China to invest in technology development and expand its industry. This has fuelled a rapid growth of the economy and the initial low consumption levels have risen rapidly as is visible in any modern Chinese city. The U.S. has tried to thwart Chinese advances in technology by putting restrictions but China has managed to circumvent that and continued to upgrade technology. So much so that the U.S. has come to depend on Chinese imports.

Since Trump has squeezed India, the latter has entered into trade agreements with important trade partners — the U.K., the European Union, the UAE, New Zealand, and so on. But, caution is required since the earlier trade agreements with Japan, Korea and Australia led to a larger trade deficit with them. India could not increase its exports as much as others could because of their technological advantage.

The advanced countries have not helped India with technological development. They want to export but not share technology. The United States Deputy Secretary of State said at the Raisina Dialogue in New Delhi that the U.S. made a major strategic and economic error roughly 20 years ago by giving China extensive access to American markets, technology, and capital. He said such mistake would not be made vis-a-vis India. The implication is that India has to develop its own technology otherwise it will lag behind the advanced countries and China.

Forced labour

By investigating India on “forced labour” under Section 301, the U.S. is seeking to create a bottleneck to extract concession. Forced labour implies coercion to work. Workers have no choice but to do the bidding of the employer because the option is hunger. Employers take advantage and pay low wages. This gives an exporter an advantage as its produce becomes cheaper. The U.S. says that is unfair to its producers.

But, wages in the developing world are much less than in the advanced nations. Does that mean that all production in the developing world is using forced labour? In India, unorganised labour receives low wages since it has little bargaining power to obtain decent wages. Thus, most of India’s production can be said to be based on forced labour. And, its imports from developing nations can be said to be based on forced labour. This is a non-tariff barrier that the U.S. wants to apply to India.

Another non-tariff barrier the U.S. is threatening to use is “surplus capacity” in steel, textiles, and so on. Any export by any country is over and above what it uses within its own territory. So, all export is based on surplus capacity. The U.S. has massive agricultural surplus which it wants to dump on India. Its companies provide massive amounts of defence armament to the rest of the world. Which country does not produce for export so that it can import what is needed by its economy? Entire trade depends on these surpluses based on “comparative advantage”. So, what is India being penalised for? Are these bargaining chips to extract concessions?

India’s trade with the U.S., till recently its largest trading partner, is being buffeted by vague arguments and challenges. Earlier it was the so called “reciprocal tariffs” and now, Russian crude purchases, “forced labour” and “surplus capacity”. This huge uncertainty is buffeting Indian exporters. Indian officials negotiating a trade deal with the U.S. were hoping for a favourable treatment but that seems unlikely.

Meanwhile, trade with China has boomed though there is no trade agreement with it. India avoided joining the RCEP in 2019 to stall Chinese dominance. Given U.S. coercive steps on trade, both India and China have diversified their trade with the rest of the world. That is the way to go. And, the lesson from China is that trade deals or not, India needs to upgrade its R&D to become globally competitive.

Arun Kumar is a former Professor of of economics at Jawaharlal Nehru University and author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead. 2020. The views expressed are personal