U.S. Tariff Stratification: The U.S.-India Deal And Its Structural Impact On China – Analysis

By Zhou Chao

On February 2 this year, Trump announced a landmark trade agreement with India that transcends simple tariff reductions, essentially a strategic "re-transaction" that tightly integrates trade, energy, and geopolitics. Under the deal, the U.S. will lower tariffs on Indian goods from 25% to 18% and scrap the 25% punitive duties previously imposed for purchasing Russian oil. In exchange, India has committed to halting Russian oil imports, lowering both tariff and non-tariff barriers for U.S. goods, and significantly scaling up its procurement of American energy, technology, and agricultural products.

While New Delhi has framed the deal as a win for exports and bilateral cooperation, deliberately downplaying the "Russia clause", the agreement is basically a structural exchange using tariffs as leverage and procurement as the price for a definitive political pivot. This breakthrough follows a period of deadlocked negotiations and the looming threat of the U.S. being sidelined by progress on the EU-India FTA. Meanwhile, India’s shift was already underway due to compliance pressures, with Russian oil imports dropping below 1 million barrels per day in December 2025 and hitting approximately 720,000 barrels by late January 2026. Ultimately, the pact serves as a mechanism for the U.S. to use tariff pressure to extract systemic concessions in energy and market access, further securing India’s strategic dependence on Washington.

However, the true structural significance of this development does not lie in how much tariff relief India obtained. Rather, it is about how the move further reshapes the “internal terrain” of the U.S. tariff structure. Once the U.S. substantially reduces tariffs for key partners such as India and institutionalizes their commitments to purchase from the U.S., in addition to complying with agreed rules through formal agreements, China will be further positioned as the global high ground within the U.S. tariff system. This shift constitutes the main axis of the spillover effects that are likely to follow.

China’s emergence as the “global high ground” of U.S. tariffs means that pressure on China is shifting from episodic “friction” to a form of long-term compression created by structural terrain advantage. After the U.S.–India agreement, a striking contrast has been firmly established. As of February 2, when Donald Trump announced that tariffs on India would be reduced to 18%, the only major economies still facing tariffs above 30% are China (47%), along with Myanmar and Laos (both at 40%). By contrast, U.S. tariffs on advanced economies generally remain in the 10–15% range. This structure, i.e., lower tariffs for allies and partners versus high tariffs for competitors, means that tariffs are no longer merely instruments aimed at specific industries or issues. Instead, they increasingly resemble an “institutional terrain” through which the U.S. stratifies and manages global trade relationships. The pressure mechanism embedded in such a structure should not be underestimated.

Tariff differentials systematically transfer relative cost advantages to countries that benefit from lower tariff rates. Even if companies do not fully relocate production out of China, as long as the end market is the U.S., the gap between 18% and 47% tariffs is itself sufficient to create sustained pressure for the reallocation of orders. This pressure pushes multinational firms to pursue, with stronger incentives to shift the final assembly abroad, or to fragment supply chains. More importantly, this pressure does not stem from the outcome of a single failed negotiation. Rather, it arises from an institutionalized tariff ladder. As long as this ladder exists, the market, guided by the logic of profit maximization, will automatically flow toward the lower end.

Furthermore, placing China in a high-tariff position strengthens the United States’ bargaining leverage with other economies. The tariff reductions granted to India are not unconditional; they are accompanied by reciprocal arrangements such as purchase commitments, market-access pledges, and alignment on energy policy. For other countries, this effectively demonstrates a pathway that if they make verifiable political and economic concessions on issues the U.S. prioritizes, they may obtain lower tariff rates and more stable access to the U.S. market. Conversely, failure to do so could push them into a higher tariff bracket. In this way, U.S. tariff policy is not directed solely at China, as it can also serve as an indirect instrument to encourage third countries to adopt a more cautious stance in their economic relations with China.

In addition, China’s higher ground status will fundamentally shift how global enterprises price risk. A universal tariff is not synonymous with the actual average effective tax rate collected by customs. Statistical data shows that the average effective tariff rate on U.S. imports from 2022 to January 2025 hovered around 3.1%, 2.6%, 2.5%, and 2.3%, respectively. Following Trump’s inauguration, the rate remained at 2.3% in February but climbed to 3.8% in March and 7.1% in April. From May to July, it rose to 8.8%, 9.1%, and 9.7%, eventually stabilizing between 10.5% and 11% after August. Regarding China specifically, the average effective tariff rate in January 2025 was approximately 10.6%. By June 2025, this figure surged to 47.8%, before dropping to roughly 37.4% in December 2025 following the suspension of a 10% fentanyl-related tariff. These figures illustrate that businesses are not facing a single, static rate, but rather a layered structure of "universal tariffs + industry-specific duties + exemptions and suspensions + compliance reviews". When China is locked into the highest bracket of universal tariffs, markets tend to factor this uncertainty into the risk premium of China-based supply chains. This raises the comprehensive costs of financing, inventory, delivery, and compliance. The result is often not a "sudden rupture", but a long-term, gradual, yet persistent erosion of market share.

Indeed, the U.S.-India agreement reveals a new American trade tactic, i.e., leveraging tariff concessions to secure commitments on rules and procurement. This effectively pushes China into a "passive control group" by comparison.

Simplifying the U.S.-India agreement as a "win for India and a loss for China" risks obscuring the actual transactional structure the U.S. is pursuing. The U.S. is not seeking high tariffs for all nations. Rather, it seeks to stratify global trade relations through tariff differentials, using these agreements to lock key nations into its own procurement and regulatory networks. Within this framework, India’s significance lies not only in its market size but also in its political legitimacy as a "partnership of democracies" that fits the U.S. narrative, its utility in pressuring Russia on energy issues, and its practical capacity to absorb manufacturing and supply chain shifts.

This also helps explain why an EU–India free trade agreement could act as a catalyst. A landmark deal between India and the EU would signal that India is not short of alternative external partnerships and can strengthen its negotiating leverage by aligning its rules with those of Europe. For the U.S., failing to offer timely incentives on tariffs and market access could mean losing the initiative in shaping India’s regulatory framework and supply-chain positioning. In other words, a U.S.–India agreement would not represent a “concession” by Washington, but rather a tactical acceleration in balancing great-power competition with alliance management, which are trading tariff concessions for deeper commitments from India, such as adjustments to its Russian energy ties, increased procurement from the U.S., and reduced barriers to U.S. firms. This is to draw India more firmly from a “swing trading partner” into the United States’ institutional orbit.

Yet, this model inherently requires a "control group" to maintain its incentive structure. By keeping China positioned at a chronically higher tariff tier, the U.S. effectively forces China into this role. For third-party nations, China’s high tariff rates are seen as more than just a bilateral issue. Instead, they are leveraged to reinforce the psychological expectation that aligning with the U.S. system yields guaranteed, tangible benefits. Consequently, the pressure China faces originates not only from the bilateral negotiating table with Washington but also from the calculated shift of third-party nations toward the "U.S. system" in their own risk-reward assessments.

At the same time, the changes in tariff rates on China also illustrate the flexibility of the United States’ policy toolkit. During the APEC Economic Leaders’ Meeting on October 30, 2025, China and the U.S. reached a one-year trade truce. Tariffs related to fentanyl, originally set at 20%, were partially suspended by 10% until November 2026. Based on this development, Penn Wharton Budget Model estimates that from December 2025 to November 2026, the overall tariff burden imposed by the U.S. on imports from China would decline from 57% to 47%. This suggests that the U.S. is not incapable of lowering tariffs, and it actually treats tariff reductions as a reversible incentive tied to specific issues. For China, the more institutionalized this incentive mechanism becomes, the more it implies that future U.S. tariffs on Chinese goods are unlikely to return to a “low and stable” normal. Instead, they are more likely to remain in a prolonged range of elevated volatility, shaped by political considerations and compliance-related issues.

The follow-on effects of the “tariff high-grounding” on China extend beyond exports; they are likely to spill over into supply chain organization, third-country markets, and broader geopolitical narratives. The implications of China becoming the United States’ “global tariff higher ground” cannot be assessed solely in terms of China’s exports to the U.S. More importantly, it may reshape how global supply chains are organized and alter the bargaining dynamics in third-country markets.

First, supply chain organizations will increasingly shift toward "origin engineering" and "segmented relocation." When a stable gap persists between a 47% and an 18% tariff, enterprises will be incentivized to move terminal assembly, high-value-added processes, or stages that most easily satisfy Rules of Origin (RoO) to lower-tariff countries. This presents two types of risks. One is that China may be forced to relinquish the "final assembly/system integration" stages in some parts of the chain, thereby impacting employment and foreign trade. The other, more subtle risk, is that when some key processes are relocated, the "learning effect" of technological iteration, process experience, and supply chain collaboration will also be transferred, potentially weakening China's competitive advantage in certain mid-to-high-end manufacturing segments in the long run.

Second, rules and standards in third-party markets are more susceptible to being reshaped by the U.S. through a "market access for procurement" strategy. In the arrangement made with India, Trump publicly referenced "reducing tariff and non-tariff barriers" in exchange for "increased purchases of U.S. energy, technology, agriculture, and coal". The essence of this narrative is the consolidation of trade surpluses, market access, industrial policy, and energy sourcing into a single, comprehensive package of negotiations. If this model is replicated across more countries, Chinese enterprises will face more than just price competition in third-party markets. Instead, they will encounter a "competition of regulatory thresholds" spanning compliance, standards, data, green energy, labor, and investment screening. In this environment, the "tariff higher ground" will further magnify the relative disadvantages of Chinese firms. This is because partner countries can simultaneously use "lower tariffs for the U.S." as a carrot and "stricter scrutiny for China" as a stick, effectively creating an exclusive policy space.

Third, in terms of geopolitical narrative, China is more easily portrayed as a “necessary target” for high tariffs. The clause in the U.S.–India agreement calling for a halt to purchases of Russian crude oil indicates that the U.S. is increasingly binding trade policy to the narratives of war, sanctions, and energy security. Once such linkages are established, China will face narrative pressures across a wide range of issues that are much harder to escape. The U.S. can frame high tariffs on China as necessary for “economic security”, “supply-chain security”, “geopolitical competition”, or the needs of a “values-based alliance”, while portraying any concession to China as a political outcome that must be exchanged for something in return. This dynamic will further raise the difficulty for China to ease tariff pressures through conventional commercial logic alone.

However, China is not without the strength or the means to counter these shifts. Whether it is the bargaining power derived from its massive market, the difficulty of finding substitutes for its comprehensive industrial system and supply chain resilience, or the use of its dominance in key product categories and critical nodes as negotiating leverage, China possesses the necessary conditions to internally absorb external shocks. Furthermore, by diversifying its market presence, aligning with international rules, and pursuing industrial upgrades, China can reduce its exposure to any single market. The crux of the matter is not "whether China can counter", but rather the need to fully confront the institutionalized trend behind China being permanently cast as the higher ground of U.S. global tariffs. This trend implies that external pressures will become more prolonged, structural, and increasingly tethered to non-trade issues. A more viable approach for China is to treat this as a long-term variable requiring a systematic response. Its preparations must be made simultaneously across three fronts, namely supply chain organization, market diversification, and regulatory maneuvering to avoid falling into a passive position with the current geopolitical terrain.

One point that should be emphasized is that the U.S. Supreme Court has already issued an unfavorable ruling regarding the Trump administration’s tariff policy, and recent reports even suggest that relevant U.S. tax authorities may be beginning preparations for potential tax refunds. However, it is also important to recognize that statements from Trump himself as well as other senior government officials indicate that the U.S. government still tends to adopt a range of measures to maintain, and even strengthen, the existing tariff regime. Given this situation, expectations and forecasts should not be overly optimistic.

Final analysis conclusion:

The significance of the U.S.-India trade agreement lies not in the mere reduction of tariff pressure on India, but in how it clarifies the "stratified structure" of the American trade system. On one hand, the U.S. uses these agreements to incorporate key nations into a lower-tier tariff bracket tied to specific procurement and market-access commitments. On the other, it maintains China’s position at a global peak in terms of universal tariffs, creating a form of long-term, systemic "topographic pressure". Under these conditions, the challenges facing China extend beyond direct export pressures. China must contend with a multifaceted "spillover impact" like the incentivized relocation of terminal supply chain segments, rising regulatory barriers in third-party markets, and the further institutionalization of a restrictive geopolitical narrative. It is crucial to emphasize that this pressure typically does not manifest as a sudden drop in trade volume. Instead, it is more likely to appear as a mid-to-long-term, structural, and persistent squeeze on market share alongside a rising risk premium for China-based operations.

• Zhou Chao is a Research Fellow for Geopolitical Strategy programme at ANBOUND, an independent think tank.