India at the crossroads navigating Global trade headwinds in tariff war

Latest WTO assessment suggests swift diversification of export basket

By T N Ashok

The World Trade Organization’s latest assessments paint an increasingly sombre picture of global commerce. After an unexpectedly robust first half of 2025—when merchandise trade volumes surged 4.9% year-on-year—the momentum has decisively shifted. The WTO’s November Goods Trade Barometer dropped to 101.8 from 102.2 in June, signalling a clear deceleration even as it remains marginally above the long-term trend of 100.

Behind these numbers lies a more troubling reality: the early-2025 surge was largely artificial, driven by front-loading of imports ahead of anticipated tariff increases and exceptional demand for AI-related goods like semiconductors and telecommunications equipment. Once these temporary factors fade, the underlying weakness becomes apparent. The WTO now projects merchandise trade growth of just 2.4% for 2025, plummeting to a mere 0.5% in 2026—a dramatic downgrade from earlier forecasts and a stark warning that the post-pandemic trade recovery is exhausting itself.

The culprit is clear: rising protectionism centred primarily on the United States, coupled with trade policy uncertainty that has metastasized across the global economy. Air freight and container shipping indices—traditionally early warning indicators—have weakened significantly, while agricultural raw materials already sit below trend at 98.0. As WTO Director-General Ngozi Okonjo-Iweala noted, the world faces a potential structural unwinding of globalization, with trade flows permanently rerouting toward countries with preferential agreements.

While the global trade system contracts, two Asian giants find themselves navigating parallel challenges that could reshape the world economy. China’s slowdown—GDP growth declining to 4.8% in the third quarter of 2025—stems from a debt-laden real estate sector, aging demographics, and reduced industrial activity. For an economy that has served as the world’s manufacturing hub and largest consumer of commodities, this deceleration reverberates globally.

India, despite posting robust 8.2% GDP growth in the July-September quarter, faces its own export crisis. The irony is sharp: while India’s domestic consumption-driven model has insulated it from some global shocks, its export sector—particularly to the United States—has been devastated by tariff escalation. This creates a paradox where India grows rapidly domestically while haemorrhaging export market share internationally.

The China-India dynamic matters profoundly because together these economies account for a substantial portion of global growth among emerging markets. China’s weakening demand affects commodity prices worldwide, while its manufacturers flooding global markets with discounted goods intensify competition for Indian exporters. India’s trade deficit with China reached a record $99.2 billion in FY2025, reflecting structural dependencies in electronics, machinery, and chemicals that make New Delhi simultaneously a competitor and a customer of Beijing.

The severity of India’s predicament crystallizes around a single number: $530 billion, the bilateral trade target that India and the United States set for 2030. That goal now appears increasingly fantastical. Between May and September 2025, Indian exports to the U.S. collapsed by 37.5%—from $8.8 billion to $5.5 billion—following Trump administration tariff escalations that began at 10% in April, doubled to 25% in early August, then surged to 50% by month’s end.

The ostensible trigger: India’s continued purchase of Russian oil. More than one-third of India’s crude imports come from Russia, a trade relationship that bilateral commerce reached $68.7 billion in the year ending March 2025—nearly six times pre-pandemic levels. The Trump administration framed the tariffs as punishment for “fuelling the war machine,” though India has consistently argued it was encouraged by Western powers to stabilize energy markets through these purchases.

Labour-intensive sectors bore the brunt: textiles, apparel, gems and jewellery, marine products, leather goods, and engineering goods—historically the backbone of India’s employment-heavy export basket. The Global Trade Research Initiative estimates that if these tariffs persist, Indian merchandise exports to the U.S. could slide from $86.5 billion in 2024-25 to roughly $60.6 billion in 2025-26, a nearly 30% contraction that threatens to unravel a decade of export gains.

India finds itself caught in a geopolitical vise. It cannot easily abandon Russian oil without alternative supply arrangements that maintain energy affordability—critical for an economy where household consumption drives growth. New Delhi’s October 2025 imports of U.S. crude reached their highest level since March 2021, and major refiners like Reliance Industries have reduced orders from sanctioned Russian companies Rosneft and Lukoil while increasing imports from Saudi Arabia and Iraq.

Yet this pivot comes at significant cost. Sanctions imposed by the U.S. on Russian oil majors (effective November 21, 2025) precipitated an 8% increase in global Brent crude prices, projected to increase India’s annual oil import expenditure by $6-7 billion. Indian refineries’ operational costs are expected to spike by roughly 2%. The elimination of discounted Russian crude—which once provided a competitive advantage for Indian refiners—now becomes a fiscal burden.

The diplomatic calculus is equally fraught. Reducing Russian oil purchases risks antagonizing Moscow, a strategic partner since the 1970s that provides significant defense equipment. But maintaining current import levels keeps the 50% U.S. tariff regime in place, devastating export competitiveness. Recent signals suggest India may be negotiating a compromise—gradually winding down Russian oil imports in exchange for U.S. tariff reductions to 15-16%—but even this remains uncertain.

The WTO’s prescription for the global trade slowdown emphasizes multilateral cooperation and rules-based frameworks. The organization advocates for maintaining open and predictable trade policies, noting that the number of quantitative restrictions on AI-related goods has climbed from 130 in 2012 to nearly 500 in 2024. The report stresses that 87% of global merchandise trade occurs outside the United States, suggesting diversification away from bilateral dependencies.

For trade policy uncertainty, the WTO recommends that countries resist retaliatory measures and utilize existing dispute settlement mechanisms. The organization warns that spreading tariffs and uncertainty could turn 2025’s modest 2.4% growth into a 1.5% contraction if reciprocal tariffs multiply. Enhanced transparency in trade measures, adherence to WTO commitments, and investment in trade-enabling infrastructure form the core of its recommendations.

Critically, the WTO highlights opportunities in services trade and emerging technologies. AI could boost cross-border flows by nearly 40% by 2040 if policies bridge the digital divide and maintain open markets. This suggests that countries like India—with strong IT sectors and services capabilities—could partially offset merchandise trade losses through services expansion.

India has already begun implementing what the WTO prescribes. In the first half of FY 2025-26, exports to 24 countries spanning Africa, Latin America, Middle East, and parts of Europe and Asia registered positive growth, together accounting for $129.3 billion—roughly 59% of India’s exports. This diversification blunted some damage: despite the U.S. collapse, overall exports during April-September 2025 rose 3.0% year-on-year to $220.12 billion.

But diversification alone cannot solve India’s structural challenges. The country must accelerate domestic manufacturing through Production-Linked Incentive schemes, reduce dependency on Chinese inputs (particularly in electronics where components remain overwhelmingly Chinese-sourced), and upgrade export quality and innovation. Infrastructure investments—from industrial corridors to port facilities—are showing results, with manufacturing PMI reaching 59.2 in October 2025, indicating sharp expansion.

The trade deficit remains problematic. October 2025 saw a record $41.68 billion deficit as merchandise exports fell 11.8% while imports soared 16.6%. With foreign exchange reserves at $687 billion providing 11-month import cover, India has buffer capacity, but sustained deficits could pressure the rupee and stoke inflation, especially with energy imports remaining large.

India stands at a critical juncture. The WTO’s barometer suggests global trade headwinds will intensify through 2026, with protectionism showing no signs of abating. India’s unique position—a consumption-driven growth model combined with export vulnerabilities—means it experiences global slowdown differently than export-dependent economies like China or Vietnam.

The coming quarters will test whether India can successfully pivot from its traditional dependence on the U.S. market toward a more multipolar export strategy, upgrade its manufacturing capabilities to reduce Chinese dependencies, and navigate the treacherous waters of great power politics surrounding Russian energy imports. Success requires balancing immediate crisis management with long-term structural transformation—maintaining growth momentum while fundamentally rewiring trade relationships built over decades.

The stakes extend beyond economics. If India—with its diversified export base and growing manufacturing capability—struggles to weather this tariff-induced shock, smaller or less diversified exporters will fare worse. The fragmentation of global trade that the WTO warns about is not a distant threat but an unfolding reality. For India, adaptation is no longer optional; it is existential. (IPA Service)