A tariff can close a border to a product. It cannot make the factory producing it disappear. Machines remain, workers need wages, lenders expect repayment, and producers search for another buyer. This is where the consequences of a trade war begin to travel beyond the countries fighting it.
For India, the tempting story is straightforward: if the United States buys less from China, Indian exporters will gain. That opportunity deserves attention. But it is only part of the story. The same Chinese producer losing access to an American customer may compete more aggressively with an Indian firm elsewhere. An exporter can gain an order in the United States while losing margin in another market.
One conflict, four different exposures. In The Remains of the Trade: The U.S.–China Trade War and Its Aftermath, Pol Antràs, Adrian Kulesza and Andrea F. Presbitero examine monthly trade flows and document Chinese exports shifting away from the United States towards third countries. Their September 2026 NBER working paper distinguishes four channels: export competition, import competition, consumer gains and sourcing gains. It also shows why simple comparisons of countries’ export baskets can misrepresent exposure: the scale of the trade shock, existing Chinese penetration and buyers’ ability to switch suppliers matter.
The practical implication is uncomfortable for national scorecards. A country can experience several of these effects simultaneously. Its consumers may benefit from cheaper goods while domestic manufacturers face stronger competition. Its factories may obtain cheaper inputs while its exporters encounter falling prices abroad. There is no single national experience of trade diversion.
The export opening carries a second competitive front. Consider an illustrative Indian engineering cluster. American buyers begin looking for alternatives to Chinese suppliers. Enquiries rise, samples are requested, and some firms secure trial orders. The cluster appears to be benefiting.
Meanwhile, Chinese suppliers seek customers in markets where those Indian firms already sell. Buyers there demand price reductions. The Indian firms now face two tasks: meeting demanding qualification requirements in a new market and defending margins in established ones.
An export strategy focused only on American enquiries would miss half the commercial problem. Every opportunity map should therefore be accompanied by a competition map.
Cheap inputs can strengthen one factory and weaken its neighbour. Trade diversion also creates tension within domestic production networks. An Indian manufacturer purchasing Chinese components or machinery may benefit from more competitive offers. Lower sourcing costs could support modernisation or improve export pricing.
But a nearby Indian enterprise making a competing component may face greater pressure. What looks like an efficiency gain to the buyer can look like a threat to the supplier.
Policy must examine these relationships before choosing a response. Broad protection can raise costs for downstream exporters. Uncritical dependence on low-priced imports can weaken capabilities that take years to rebuild. The relevant question is which production links improve competitiveness, which face temporary disruption, and which require a credible upgrading programme.
A tariff advantage is borrowed competitiveness. Historically, industrial development has required firms to turn market access into accumulated capability. A favourable tariff gap can help secure an introduction. It cannot guarantee consistent quality, reliable delivery, technical problem-solving or repeat business.
This distinction should guide investment. A factory expanded solely because a competitor faces higher tariffs becomes vulnerable when policy changes. Investment in process control, shorter production cycles, certification and engineering capability has a wider commercial life.
The useful test is simple: would the buyer remain if the tariff advantage narrowed? Firms cannot know the answer with certainty, but they should build their strategy around making it more likely.
Clusters need a commercial response, with clear deadlines. Cluster institutions should screen products simultaneously for substitution opportunities in the United States and stronger Chinese competition across other destinations. The assessment should reach below broad sector labels to specific products, buyer requirements and production capabilities.
Support should then address the barriers between an enquiry and a repeat order: testing, sample development, supplier qualification, production scheduling and working capital. Shared facilities can help smaller firms meet requirements that would be expensive to manage individually.
Public support should have review dates and measurable outcomes. A temporary market opening is a reason to accelerate qualification and productivity investment. It is a weak basis for an indefinite subsidy commitment.
Count what remains after the shipment. Rising exports alone cannot establish commercial success. More shipments may coexist with thinner margins, greater imported content or longer payment delays. The paper’s trade-flow findings should therefore inform strategy without being treated as proof of firm profitability or lasting industrial upgrading.
Indian cluster dashboards should track repeat buyers, domestic value added, realised margins, payment cycles and productivity alongside export growth. These measures reveal whether firms are building a stronger business or merely handling displaced orders.
The future belongs to producers who can survive the return of competition. India’s opportunity is to use a temporary opening to become a supplier buyers continue to choose. The lasting gain from the trade war will be the capability left behind when the tariff window closes.
Source: NBER Working Paper 35785, September 2026. The Indian cluster recommendations are the editorial interpretation developed here.
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