New Delhi — India stands out among Asian economies for its resilience against the ongoing shifts in United States trade policy, according to a recent analysis by Morgan Stanley. The report, released on Friday, underscores that India and Japan are the least vulnerable to US-imposed tariffs due to the strength of their domestic demand and low dependence on goods exports relative to GDP.
At a time when trade protectionism is escalating, Morgan Stanley identifies “goods exports to GDP ratio” as a critical yardstick in evaluating an economy’s exposure to global trade risks. Countries with a higher export-to-GDP ratio face greater threats to economic stability when hit by tariff changes or trade restrictions from major trading partners like the US.
“The ratio of goods exports to GDP is the most important metric as it determines the extent of trade orientation of an economy. This allows global research firms to assess which economies will face greater downward pressure on growth,” the report stated.
India’s economy, which is largely driven by domestic consumption and services, emerges as a relatively insulated system amid rising global trade frictions. Morgan Stanley pointed out that robust domestic demand in India and Japan acts as a buffer against external shocks, allowing both countries to mitigate the negative impact of shrinking global trade opportunities.
This protective cushion is particularly significant in the current context, as the United States continues to escalate its trade measures under the pretext of achieving reciprocity. The US administration is expected to unveil a comprehensive plan on April 2 to address trade imbalances, with early signals indicating the possibility of new sectoral tariffs on goods such as energy, pharmaceuticals, semiconductors, agriculture, copper, and lumber.
Morgan Stanley warns that such developments will affect nearly every economy in Asia, albeit in varying degrees. “The potential implementation of these tariffs will directly impact almost all economies in Asia, either through country-specific tariffs or sectoral tariffs,” the report said.
However, the most pressing concern raised by the analysts is the heightened policy uncertainty, which they say could suppress capital expenditure and overall trade volumes, leading to a broader slowdown in the business cycle across Asia.
US Auto Tariffs Could Strain Japan, South Korea
While India’s reliance on goods exports remains low, Japan and South Korea may experience sharper tremors, especially from the US decision to impose a 25 percent tariff on automobile imports. This policy targets a key segment of exports for both countries. In Japan and South Korea, auto exports to the United States constitute around 7 percent of their total exports, making them particularly susceptible.
Morgan Stanley’s data shows that the US currently runs a massive combined trade deficit of $245 billion in passenger vehicles, commercial vehicles, and auto parts, which includes electric vehicle (EV) batteries. Of this, Asia accounts for $115 billion—or nearly 47 percent—of the deficit. Japan, South Korea, and China are the top contributors to this imbalance, ranking second, third, and fourth respectively on the list of countries with which the US has its largest auto trade deficits.
Japan and South Korea primarily export vehicles and non-battery auto parts, while China’s contribution stems largely from EV batteries. According to the report, a prolonged implementation of the 25 percent tariff could dent Japan’s GDP growth. Takeshi Yamaguchi, Morgan Stanley’s Chief Economist for Japan, estimates that if auto exports to the US fall by 15 to 30 percent, it could shave 0.2 to 0.3 percentage points off Japan’s GDP growth.
India’s Trade Composition Offers Resilience
India’s economic model, centered around domestic consumption, appears to be a strategic advantage in navigating turbulent trade environments. While its exports sector has grown in recent years, particularly in services like IT and software, goods exports remain a relatively small portion of the GDP. This structural feature has helped India stay largely immune to the economic consequences of protectionist trade moves by the US.
Moreover, India’s exports to the US are not heavily skewed towards vulnerable sectors like automobiles or EV batteries. Instead, its trade with the US spans across pharmaceuticals, textiles, IT services, and machinery, which are either less likely to be targeted or have more flexibility to pivot due to the presence of alternative global markets.
Even in areas like pharmaceuticals and semiconductors, which may come under scrutiny under new US tariffs, India’s competitive advantage in generic drug manufacturing and the early steps being taken to bolster its semiconductor ecosystem are viewed as strategic shields against over-dependence.
Policy Clarity and Long-Term Planning
While India may currently appear shielded from direct exposure, long-term implications of rising protectionism could still pose indirect challenges. For instance, global supply chain disruptions, weakening global growth, and reduced investment flows in Asia could trickle into India’s external environment.
Indian policymakers have been proactively pursuing trade diversification, evident from initiatives like the Production Linked Incentive (PLI) schemes, which aim to boost domestic manufacturing capacity across sectors like electronics, solar, textiles, and pharmaceuticals. These efforts, combined with bilateral and multilateral trade agreements under discussion with economies in Europe and the Indo-Pacific, indicate a strategic effort to strengthen India’s self-reliance while remaining globally integrated.
The Indian Ministry of Commerce and Industry, along with the Department for Promotion of Industry and Internal Trade (DPIIT), has also been monitoring global trade developments and adjusting India’s trade posture accordingly. Officials have repeatedly emphasized the need to avoid being caught in the crossfire of global trade conflicts, especially between the US and China, which have dominated the tariff war narrative in recent years.
Corporate and Market Responses
From a corporate standpoint, Indian companies are cautiously optimistic. Export-oriented firms are keeping a close eye on how new US tariffs evolve, particularly in pharmaceuticals and chemicals. At the same time, domestic-focused sectors like FMCG, retail, infrastructure, and energy remain largely unaffected, providing a stable investment environment for now.
Market analysts also note that the Indian Rupee’s relative stability, aided by strong foreign exchange reserves, gives the Reserve Bank of India (RBI) enough room to cushion external shocks through monetary tools, if required.
Strategic Outlook
As the global trade environment becomes more fractured and uncertain, economies like India that maintain a balanced external sector and vibrant internal demand are likely to weather policy disruptions more effectively. While no country is entirely immune to global economic tremors, India’s current trajectory suggests that its exposure to US tariff escalation remains low compared to its Asian peers.
At a time when capital flows and business sentiment are increasingly influenced by geopolitics, India’s focus on building domestic capacities, expanding consumer markets, and reforming industrial policy could help consolidate its position as a resilient and relatively insulated economy in a volatile global landscape.
