Redefining India’s Trade Policy for a New Global Era

The global trade environment is presently marked by deep uncertainty and rapid changes. Headlines range from new tariff threats launched under US President Donald Trump to announcements of opaque trade deals that can challenge overall transparency requirements and fairness of the old liberal trade order.

Geopolitics, foreign policy, and trade have become deeply intertwined, creating ripple effects that are complicating global supply chains and straining existing trade relationships. Countries are increasingly finding themselves at a crossroads – to retreat from international trade, which with certain countries is becoming an increasingly expensive pursuit, or to enter new trade alliances and deepen regional integration.

This choice has become even more critical for India as it becomes the latest country to come into the US line of tariff fire. After failed attempts by the US to wean India off Russian oil and secure a trade deal, Trump has threatened to double US tariffs on India, from 25 percent to 50 percent. This move would make India one of the most heavily taxed US trading partners, alongside Brazil.

However, while India finds itself at the same crossroads, it’s important to note that its inflection point comes with a rare opportunity of reviving its docile trade capacity.

India’s Trade Capacity

In a recent ECIPE paper, we found that in 2023, India had a GDP of USD 3.57 trillion with a growth rate of 8.2 percent. However, India’s trade sector has not seen the same growth as the general economy. Compared to similar economies, India’s trade contributions are comparatively low when measured as a percentage of the GDP. For instance, in 2023, India’s foreign trade only accounted for 31 percent of its GDP while countries like Mexico, South Africa, and Indonesia accounted for shares amounting to 67, 57, and 35 percent of their GDPs highlighting a significant gap.

This is also reflected in India’s performance in global exports. Despite being a large economy, in 2023, India was only the 12^th largest exporter of goods globally. Meanwhile, China was the largest exporter of goods, followed by the European Union and the United States.

However, there are a few key characteristics of India’s trade habits that provide it with the ability to exploit the current global context for its own growth.

First, India has a larger share of services’ exports compared to merchandise exports. In 2024, the services sector accounted for 55 percent of the total economy, much larger than both, agriculture and manufacturing combined. A quick look at the global economy also tells us that, although historically global trade was dominated by the exchange of tangible goods, it has increasingly shifted towards services. India’s strong footing in services trade can, therefore, ensure that India establishes itself as a primary supplier of services exports as global trade continues to evolve.

Moreover, today’s economy is characterised by a higher demand for trade in services in sectors such as information technology, software development, financial services, and creative industries. In India, exports of commercial services, followed by other business services and telecommunications, computer, and information services have accounted for the lion’s share of the total services exports. These categories of services are high value-added and in activities that usually come with many forward and backward linkages. Moreover, these services also act an interface for larger economic integration, building on intense integration in value chains with customers and other services suppliers. This points to India’s readiness to further integrate with the global value chain and benefit from the gains from trade.

Second, within trade in goods, similar to trade in services, India is increasingly trading in higher value-added exports. For instance, India has seen a rapid increase in the share of chemicals and machinery and electronics. This is in stark contrast to the steep decline in export shares of the textile and garment sector. Moreover, sectors such as chemicals and machinery and electronics are highly interactive sectors with large amounts of trade taking place in intermediaries instead of the final product. They also include high value-added activities, like research and development. This points to India’s increasing revealed comparative advantage in the international market for high value-added exports.

These characteristics are an indication that India is well prepared to take on the new era of global trade. It has the ability and comparative advantage to adapt to newer forms of trade and engage with the global economy.

So, What’s the Hold Up?

Historically, India has followed a state-led development model focused on domestic industrial growth, narrowly defined national interests, and cautious engagement with global markets.  It has taken defensive negotiation positions in international trade talks, reflecting a general hesitant approach to external trade and further exposing its economy to foreign competition. Under the GATT (General Agreement on Tariffs and Trade) and later the WTO (World Trade Organisation) framework, India claimed special and differential (S&D) treatment, allowing it to maintain a more protectionist stance while principally getting improved market access to other economies, an approach it is unwilling to relinquish.

India’s bilateral trade relationships established through regional and free trade agreements, paint a similar picture, where protecting domestic industries is prioritised. For instance, in the recent Free Trade Agreement (FTA) signed with the European Free Trade Association (EFTA) countries, India agreed to gradually reduce tariffs on certain high-end imported electric vehicles. This move is closely linked to efforts to attract investment from global players that have made tariff concessions a condition for setting up a manufacturing facility in India. India’s recent FTAs, therefore reflect a calculated, quid pro quo strategy where market access is leveraged to secure long-term industrial and investment gains.

Moreover, since 1996, big, developed economies such as the US, EU and the UK, have managed to maintain their foothold as the largest markets for India’s goods exports. In fact, the US has increased its share of India’s exports substantially since the beginning of the 2010s. However, the on-going possibility of India responding with counter-tariffs on select American goods, signal a shift in the bilateral relationship towards rising tensions. Similarly, New Delhi has also levied accusations on Europe of “double standards” over trade with Russian. These developments could push India to seek new trade partners and adopt a new approach toward longstanding allies such as Japan, South Korea, ASEAN, and others.

The Way Forward

India’s trade characteristics point to the need for a strategic policy that helps channel its trade capacity to yield economic growth. India should consider accelerating the volume of investment in high value-added sectors and increase margins and value added further. Likewise, India should focus on newer trade issues in trade agreements, including trade in services, digital trade, the conditions for cross-border integration of ideas, management, teams and other so-called intangible assets and modern factors of production.

In order to navigate the changing global trade dynamics of rising protectionism and demands for trade reciprocity, India needs to adopt a strategy that encourages flexible collaborations, allowing India to engage with a diverse range of global partners without being overly reliant on any single one. This flexibility can enhance India’s resilience against global trade shifts, political changes, or economic disruptions in major markets. It can also ensure that India is able to maintain strategic autonomy while still benefiting from global value chains, international investments, and emerging opportunities in innovative sectors.

India stands at the same crossroads as many other countries, But harnessing this opportunity demands a structural shift towards deeper integration models and a policy that gives priority to not just domestic industries, but those with strong competitive advantages.