Game Theory Insights: Navigating India-China EV Partnerships Amid US Tariffs

In the rapidly evolving world of EVs, geopolitical shifts play a pivotal role. With recent 50% US tariffs on Indian exports, the strain on India-US relations could open doors for closer collaboration between India and China. As an economics enthusiast, I've developed a game theory model to explore potential negotiations over China's ongoing export curbs on rare earth magnets, essential components for EV motors. This isn't a definitive forecast but a structured way to think about strategic outcomes, drawing on my background in economics.

The model uses subjective weights and scores (0-10) to evaluate payoffs for both nations, focusing on factors like growth speed and supply security for India, and revenue and market access for China. It's framed as a sequential game: China decides first whether to ease or maintain the curbs, and India responds. Let's examine the key scenarios and implications.

Context: US Tariffs and the Push for Partnerships

The US tariffs, effective from August 2025, have escalated to as high as 50% on certain Indian goods, impacting exports and potentially slowing India's economic momentum. These may rise further due to the uncertainty. This comes amid China's dominance in rare earth magnets (over 80% of global supply) and its export restrictions for national security reasons. With India's EV sector aiming for rapid expansion, these curbs pose risks of supply shortages. However, the US-India friction might encourage New Delhi and Beijing to negotiate, perhaps leading to eased restrictions in exchange for mutual benefits like joint ventures (JVs) or market access.

In the model:

• China's Moves: Export (E) – ease curbs for smoother supply; Restrict (R) – maintain tight controls.
• India's Responses:
  • Accept (A): Embrace available supplies without conditions, focusing on immediate cost savings and faster EV deployment, though it heightens dependency.
  • Conditional (C): Permit imports but require localization, tech transfers, or JVs—similar to the JSW Group and Chery Auto partnership, where shared manufacturing could build local expertise.
  • Diversify (D): Prioritize domestic development or alternative sourcing, such as investing in Indian rare earth projects or alliances with countries like Australia, to enhance long-term security.

Understanding the Weights

The weights in this model are subjective and based on my understanding of the priorities in the EV sector. For India, I placed higher emphasis on growth speed; 35% due to the urgency of accelerating EV adoption for environmental and economic goals. Cost advantage and supply security each at 25% highlight the balance needed between affordability and reducing vulnerabilities. Jobs and tech development are weighted at 15%, recognizing their importance for long-term sustainability but lesser immediacy. On China's side, revenue takes 40% as exports drive much of their strategy, with leverage at 35% for geopolitical influence, and market access at 25%. These choices reflect current trends but could shift with new developments.

Key Scenarios and Outcomes

Here are the six combinations, with brief notes on India's response and approximate payoffs (higher numbers indicate better results for each side):

1. Export + Accept (E+A): China eases curbs; India accepts freely. This enables quick, affordable imports but risks over-reliance. India payoff: 6.6; China: 8.4.
2. Export + Conditional (E+C): China exports; India demands conditions like JVs. China might push for OEMs such as BYD to establish operations in India, fostering tech sharing. India payoff: 7.6; China: 7.55.
3. Export + Diversify (E+D): China eases; India still invests in alternatives. This balances imports with self-reliance efforts. India payoff: 6.55; China: 5.55.
4. Restrict + Accept (R+A): China restricts; India copes without pushback. Supply shocks could derail EV plans. India payoff: 2.5; China: 8.1.
5. Restrict + Conditional (R+C): China restricts; India negotiates limited deals, like small-scale JVs. Outcomes remain modest. India payoff: 5; China: 5.25.
6. Restrict + Diversify (R+D): China restricts; India accelerates domestic capacity. This aligns with India's self-reliance goals but may delay growth. India payoff: 6.7; China: 3.9.

Strategic Implications

In a best-response sequence, if China eases curbs, India's optimal move is Conditional, yielding strong payoffs for both (India 7.6, China 7.55). If restrictions persist, India might Diversify, benefiting itself (6.7) while pressuring China (3.9). Overall, the model suggests negotiations could favor collaborative paths like E+C, where India gains tech and security, and China secures market footholds—potentially offsetting US tariff pressures on both sides.

Real-world examples, such as potential expansions of JSW-Chery or BYD's Indian ventures, illustrate how such deals could materialize. Yet, variables like ongoing trade tensions add complexity.

Final Thoughts

This analysis underscores the value of strategic partnerships in the EV space, especially as US tariffs prompt India to explore new alliances. One way or the other, India must think medium and long term for sustainable growth in the EV sector. We reached record number of sales in July 2025, which shows the perception towards EVs in India is improving. Removing any uncertainty on rare earth magnets will help solidify the trust of the public in the products they purchase.

For more engaging explorations of EV trends and economics, stay connected with ElecTree We'd love to hear your views—share in the comments below!

Note: The main image of the blog is AI generated.