By Farwa Aamer and Jane Mellsop
Editor’s Introduction: Hi there. In today’s Asia Policy Brief, Farwa Aamer, ASPI’s Director of South Asia Initiatives, and Jane Mellsop, ASPI’s Director of Trade, Investment, and Economic Security, assess recent developments in U.S.-India relations.
State of Affairs: From Trade Optimism to Tariff Shocks
Few bilateral relationships have drawn as much scrutiny in recent weeks as that between Washington and New Delhi. Right up until the end of July, optimism was high that a long-awaited U.S.-India trade deal was within reach. After five rounds of talks this year and the fanfare of the February Modi-Trump meeting in Washington that launched the “Mission 500” goal, both sides appeared ready to resolve long-standing trade issues as part of their rapidly expanding strategic partnership. Instead, hopes unraveled and the script was flipped. India now faces twin tariff shocks: 25% ‘reciprocal tariff’ after negotiations faltered and another 25% tariff ‘penalty’ tied to its continued importation of Russian oil. The next steps in the trade negotiations appear uncertain as the latest round of talks that were scheduled for August were deferred. This week, President Trump claimed that India had now offered “to cut their tariffs to nothing, but it’s getting late.”
The current breakdown in trade talks stems in part from U.S. frustration with India’s unwillingness to adequately lower high tariffs and address non-tariff barriers, despite India’s early movement on some tariffs such as for bourbon whiskey and motorcycles. Washington’s demands in domestically sensitive areas, particularly in agricultural market access, and data localization changes, further complicated the negotiations.
But the impasse also reflects the cumulative weight of broader geopolitical rifts. India’s refusal to back Washington’s account of the May ceasefire mediation with Pakistan rankled the White House. India had also expected that under President Trump, Russia would no longer be a point of friction. Instead, the U.S. President has treated India’s ties with Moscow as leverage in talks with Russia over the Ukraine conflict. Together, these cracks have stripped much of the shine from what recently was celebrated as a defining partnership that had been built through sustained engagement across multiple administrations.
Why It Matters: Geopolitics and the Test of Trust
The failure to reach a trade deal by the August 1 deadline, compounded by sharp rhetoric from Washington, has raised the stakes for U.S.-India ties. President Trump sharply called out New Delhi for its continued large volumes of Russian oil imports. Russian oil now accounts for almost 40% of India’s total oil imports, up from less than 1% before the war, in contrast with China, the largest importer of Russian oil, whose purchases rose to 21% of total crude imports in 2024.
India rejected the additional 25% penalty on Russian oil as unfair because other nations are also purchasing refined products and other energy products from Russia, and other sources of oil are also impacted by U.S. sanctions. Instead of immediate tariff retaliation and escalation, New Delhi has pivoted to deeper engagement with Moscow and Beijing. During his recent Moscow visit, Indian External Affairs Minister S.Jaishankar stressed the risks of overdependence on a few partners and underscored the need for diversified ties. The planned Putin-Modi summit later this year, despite Western unease, highlights this recalibration, with Prime Minister Modi also reiterating that India and Russia share a special relationship as they met in China this week.
India’s diversification strategy is also evident in its active free trade agreement (FTA) agenda. This year, India has signed an FTA with the UK and is also progressing its FTA negotiations with the European Union, Chile, and the Gulf countries, as well as upgrading its existing agreement with ASEAN. At the same time, there is renewed interest in the opportunities that the BRICS countries can offer, with Prime Minister Modi, who takes up the Chair of this bloc in 2026, emphasizing the important role of the group in the critical minerals supply chain.
However, this shifting landscape leaves India navigating a delicate balance. It cannot afford to alienate Washington, where cooperation still offers immense strategic and economic benefits—the United States is India’s largest trading partner, with bilateral goods trade of almost $130 billion in 2024. But domestic political pressures against yielding to Washington, India’s energy security needs, uncertainty in U.S. trade policy, and unease over America’s rapid re-engagement with Pakistan are all driving New Delhi to hedge more decisively and at speed.
The collapse of trade talks, coupled with tariffs now exceeding 50%—far steeper than most of its neighbors—places India at a competitive disadvantage in the U.S. market and weakens investor optimism about its role as a China alternative. The Section 232 tariffs on steel, as well as those threatened by President Trump for other sectors important to India—such as semiconductors and pharmaceuticals—will further strain trade relations.
The downturn in U.S.-India relations also carries real costs for Washington. India is important to U.S. supply chains, and its burgeoning defense and technology partnership with the United States has brought key gains to both sides. For years, a strong bilateral relationship has been a cornerstone of the U.S. Indo-Pacific strategy, with New Delhi cast as a critical counterweight to Beijing’s influence in the region. Yet Washington’s recent softer posture toward China and the prospect of a U.S.-China trade deal could suggest that counterbalancing Beijing may no longer be the administration’s immediate focus. New Delhi has taken note, even as it cautiously seeks to improve its own ties with Beijing. Over the weekend, Prime Minister Modi visited China for the first time in seven years for the Shanghai Cooperation Organization (SCO) leaders’ summit, meeting with President Xi and affirming that the two countries “were development partners and not rivals.” Prime Minister Modi’s trip followed closely on the heels of Foreign Minister Wang Yi’s trip to India, where he pledged that China would resume critical supplies of fertilizers, rare earths, and tunnel boring machines, alongside discussions on border stability.
What to Watch: Is a Thaw in the Tensions Coming?
What will it take for President Trump to lower the new tariffs on India? If a Russia-Ukraine peace deal is looking promising, how quickly will the United States rescind the 25% penalty for Russian oil imports? On the flip side, if the Ukraine war remains unresolved, could Washington resort to heavier ‘secondary sanctions’ on New Delhi to further tighten pressure on Moscow? How India manages its close ties with Russia, heavy energy dependence amid U.S. concerns, and positioning within BRICS (a grouping President Trump views as anti-West and has threatened with tariffs) will be critical in determining how well New Delhi can uphold its strategic autonomy.
Will the pressure of the 50% combined tariffs force Prime Minister Modi to make further concessions to secure the elusive trade deal with the United States and see the U.S. tariffs at par (or lower) than its Asian neighbors? Will the trade deal include any special treatment for India on the forthcoming Section 232 tariffs? For now, Prime Minister Modi has claimed that “India will never compromise with the interests of its farmers, herders, and fishermen,” acknowledging the challenges and the personal price he may have to pay. Trade negotiations would ideally resume soon, and it should be in the interest of both sides to move swiftly towards an outcome. Establishing a direct Modi-Trump channel could be helpful to move beyond the rhetoric. The 80th UN General Assembly (UNGA) or the Quad Summit (if the latter goes ahead) could be opportunities for a face-to-face meeting in the coming months.
Will the Supreme Court uphold the President’s ability to impose these tariffs under the International Emergency Economic Powers Act (IEEPA)? The U.S. Court of Appeals for the Federal Circuit ruled last week that IEEPA did not authorize President Trump’s tariffs, but the tariffs are still in effect pending the expected appeal to the Supreme Court.
Dive Deeper with ASPI
Read Wendy Cutler’s recent op-ed in the South China Morning Post, “U.S. Negotiators Face Tough Task to Secure Trade Deal with China.”
Read Farwa Aamer’s recent op-ed in 9DashLine, “The Indus Waters Treaty: South Asia’s Most Durable Accord Faces a Tough Test.”
Watch an ASPI webinar on “Tariffs and Textiles: Fashion Interrupted,” where panelists analyze the impacts of shifting U.S. trade policy on the global textile and apparel landscape, with particular focus on South Asia and Southeast Asia.