Cheap Chinese imports vs Make in India: The trade battle India may face next

That loop is coming apart and a new research note argued that India is standing directly in the path of what spills out.

A new report by Nuvama argued that structural shifts in the US economy, alongside higher trade barriers, could progressively reduce America’s ability and willingness to absorb Asia’s large trade surpluses. The immediate consequence would be that exporters, particularly China, have to find customers elsewhere.

India stands out as one of the most vulnerable destinations and the reason is straightforward. China remains overwhelmingly geared towards production rather than consumption. It accounted for about 28% of global manufacturing in 2024, but only 13% of global consumption, according to World Bank and Bloomberg data cited by Nuvama. That gap means a large part of what Chinese factories produce ultimately needs to be sold abroad.

Until recently, the US was a critical outlet. But Nuvama’s data already shows a sharp divergence. Nuvama’s tracking of Chinese export destinations shows Chinese shipments to the US falling to around 83 by July 2026, while shipments to the rest of the world climbed past 125 over the same period. The redirection is not a forecast. It is already in the trade data.

“China’s excess capacity is now being flooded in the rest of the world,” the report said, adding that this “is likely to continue” given the manufacturing-consumption gap.

The buyer of last resort is retiring

The change begins with the structure of the American economy. According to Nuvama, the US growth is increasingly being driven by business investment, particularly technology and artificial intelligence-related capital expenditure, rather than the household consumption and real estate boom that characterised the 2000s.

That distinction matters for trade. An economy driven heavily by household borrowing and consumption tends to import more. On the other hand, a business investment-led economy generally creates more domestic productive capacity and can run a smaller external deficit.

Nuvama points to the US experience in the 1990s, when strong corporate investment and productivity growth coincided with a relatively stable current account deficit. In the 2000s, the opposite happened: household consumption and property investment took the lead and the trade deficit widened sharply. The current cycle increasingly resembles the former, according to the report.

Two other forces reinforce that change. The US is now a net oil exporter, meaning higher oil prices no longer automatically widen its external deficit as they once did. At the same time, Washington is increasingly using tariffs to reshore industries and restrict imports.

Put together, Nuvama expects the US current account deficit to become structurally smaller. That leaves a simple question: if the US buys less from the rest of the world, where does Asia sell its excess production?

Increasingly, the answer is the rest of the world.

China is already redirecting its exports

China’s imbalance is particularly large. According to Nuvama estimates, China’s 2025 current account surplus is roughly $700 billion, compared with a US deficit of about $1.1 trillion. Germany and Japan also run large surpluses but neither comes close to China in manufacturing scale.

That makes redirection of Chinese exports one of the biggest potential trade shocks for emerging economies.

The report described the process bluntly: as the US stops absorbing Asian surpluses, China’s excess capacity is increasingly being “flooded” into the rest of the world.

For importing countries, there is an obvious short-term benefit. Cheap Chinese goods can lower costs for households and companies and restrain inflation.

But the longer-term problem is what those imports do to domestic manufacturing. Producers competing against Chinese firms with enormous scale, established supply chains and often lower costs can lose market share before they have reached sufficient scale themselves.

Nuvama draws a parallel with China’s integration into the world trading system after its WTO entry. American consumers received cheaper goods but the US trade deficit with China widened dramatically as Chinese exports expanded much faster than US sales to China.

India now faces a similar tension between the benefit of cheap imports and the objective of building a larger domestic industrial base.

Why India is the address on the parcel

Few large economies are as naturally positioned to absorb the redirected supply as India. India already runs the second-largest goods trade deficit in the world after the US, according to Bloomberg data compiled by Nuvama. On a 12-month basis through June 2026, India’s deficit was about $351 billion, compared with $1.05 trillion for the US.

China is a major part of that imbalance. In FY26, Chinese goods exports to India reached about $132 billion, while India’s exports to China were only around $19 billion, according to CMIE data. On those figures, India’s bilateral goods deficit with China was roughly $113 billion.

The imbalance has widened dramatically. In FY10, China exported around $31 billion of goods to India while buying about $12 billion.

Nuvama links that vulnerability to India’s domestic growth model. Over the past decade, borrowing has increasingly shifted towards households rather than businesses. Household leverage can support consumption, but it does not necessarily create the factories and productive capacity required to compete with imports.

“Not all credit is equal” in its economic impact, according to the Nuvama report. Consumption loans tend to have weaker economic spillovers than business investment, while corporate borrowing is more directly linked to capacity creation.

That leaves India with an uncomfortable combination: a huge consumer market, rapidly rising demand and an industrial base that is still trying to reach Chinese levels of scale.

If Chinese producers need to replace lost American demand, India becomes an obvious market.

FTAs alone may not solve the problem

The government’s principal answer to global trade turbulence has been market access — the recently signed agreements with the European Union and the United Kingdom, on top of the older deals with ASEAN, Japan and Korea.

Nuvama economists called the FTAs “welcome” but warned that history shows the gains are asymmetric, with production nations gaining while consumption nations see imports balloon. Its own data on India’s past deals is sobering.

After the Japan FTA signed in FY11, India’s goods exports to Japan went from about $4 billion in FY10 to $6 billion in FY26, while Japanese exports to India rose from $7 billion to $21 billion. After the Korea FTA of FY10, India’s exports moved from $4 billion to $6 billion while Korea’s went from $9 billion to $21 billion. With ASEAN, exports roughly doubled to $38 billion but imports more than tripled to $90 billion.

On the new deals, the report flagged an arithmetic problem: tariffs on Indian goods entering these markets were already low. Citing WTO data as of August 19, the EU’s trade-weighted average tariff on Indian exports was 2.3% against India’s 15.6% on EU goods; the UK’s was 1.9% against India’s 17.7%.

According to Nuvama, the FTAs will “produce winners and losers in the domestic economy but may not necessarily provide a big aggregate boost to the Indian manufacturing sector”.

Nuvama therefore argued that the central question is not simply whether India signs more FTAs but whether its economy is structured primarily to consume or to produce.

The warning also applies to India’s newer trade agreements with the UK and Europe. They broaden the addressable market for Indian exporters, especially when the US is raising tariffs but tariffs faced by Indian exports in those markets were already relatively low, limiting the potential aggregate boost to manufacturing, the report said.

Policy challenge: Build scale before the imports arrive

Nuvama’s prescription is a more aggressive industrial strategy. According to the report, India needs to shift from maximising near-term return on equity towards building manufacturing scale. That could require greater government and public-sector capital spending initially, particularly when private companies are reluctant to invest aggressively because of weak demand or global uncertainty.

It also recommended redirecting credit towards productive investment. Household borrowing has expanded for more than a decade, while corporate credit has stronger potential to create additional capacity, Nuvama said.

Production-linked incentives are another part of the proposed response. Nuvama estimated average PLI spending at about Rs 115 billion in FY25-FY26, placing it among the smaller major government schemes. The economists noted that the programme needs to be scaled up significantly if it is expected to create globally competitive manufacturing capacity.

None of this means a wave of Chinese imports is inevitable. Nuvama’s argument is a structural scenario built around a changing global trade and capital-flow regime.

But the direction of travel is already visible. America is putting up trade barriers. Its economy is becoming more investment-led. Chinese exports to the US are falling while shipments elsewhere are climbing. And India is already one of the world’s largest net importers.

If those trends continue, the next phase of the global trade confrontation may not be defined simply by what China can no longer sell to America.

It may increasingly be about where all those goods go instead.