India and Vietnam have long regarded each other as “all-weather friends,” or “most trusted partner and ally,” especially in their defense ties. Leaders of both countries have increasingly sought to extend this momentum to economic cooperation. Bilateral trade reached a record US$16.46 billion in 2025, yet Vietnam ranked only 19th among India’s trading partners in FY2025–26. 

This gap suggests there is still room for economic ties to catch up with those of defense. However, unlike defense relations wherein political commitment could deepen ties relatively directly, economic integration depends on existing industrial structures, firms’ commercial incentives and conflicting domestic agendas. Understanding this interplay is crucial in finding areas wherein both countries could deepen cooperation without sacrificing their own domestic development goals.

Established Supply Chains 

In the May 2026 joint statement, Vietnam explicitly committed to diversifying its supply sources with India to support domestic production and exports. This goal has been increasingly urgent for Vietnam when its reliance on Chinese imports for exports to the US has attracted scrutiny over transshipment and thus become the basis for high tariffs rates.

Vietnam's foreign direct investment (FDI)-led industrialisation, however, presents a structural obstacle to such diversification. Foreign-invested enterprises account for 77.3% and 69.8% of exports and imports respectively. When these companies invest in Vietnam, they often bring their own ecosystem of suppliers from their home country, limiting opportunities for alternative sourcing. 

According to the US Federal Reverse, newly established Chinese-owned manufacturers in Vietnam sourced around 71% of their imported inputs from China. Indian exporters must therefore compete not only on price but also against these procurement relationships, wherein suppliers already meet manufacturers' technical specifications and quality standards. Hence, although Hanoi wishes to diversify its suppliers toward India, much of its export-oriented manufacturing remains entrenched in procurement networks that cannot be easily redirected through diplomatic commitments alone.

Further, as the Vietnamese government recognizes this problem, they are pushing to develop their own domestic supporting industry instead of trading one dependence for another. Indian suppliers could then face disadvantages both against the FDI backyard network and domestic enterprises benefiting from industrial upgrading initiatives.

Competing Industrial Ambitions 

Beyond diversification of input sources, Vietnam-India trade sees structural competition in many of their dominant export products. Both countries maintain a high Revealed Comparative Advantage (RCA) index—a metric to calculate a country's relative trade advantage in a product—in many sectors like cotton, carpets and rugs, apparel, footwear and leather products, agricultural products and iron and steel. Such an overlap introduces a degree of structural competition, particularly in finished labour-intensive manufactures.

For example, Vietnam exported approximately US$39.6 billion in garments and US$24.2 billion in footwear worldwide, but only US$220 million and US$115 million respectively to India, less than 0.6% of either sector's global exports. This may partially reflect India's substantial domestic manufacturing base that leaves less room for Vietnamese imported products. Hence, even if both governments call for deepening trade, existing manufacturing and export structures could limit space for such expansion.

This tension has even translated into protectionism policies aimed against each other in the steel industry. India produced 164.9 million tonnes of crude steel in 2025, making it the world's second-largest producer. Vietnam's growing steel industry however has introduced additional competition in selected segments of the Indian market.

In August 2025, India imposed anti-dumping duties on certain hot-rolled steel imports from Vietnam following an investigation that found injury to domestic steel producers. Vietnamese reporting specified that certain producers faced a duty of $121.50 per tonne, with Hoa Phat exempted. Vietnam had similarly investigated certain hot-rolled steel imports from India and China, although it terminated the Indian investigation in July 2025 because the relevant import volume was insignificant. Policymakers then would need to consider these protective measures to prevent disruption to businesses.

Steel is not going to be the only area of friction, especially when India’s aims to localize the supply chain are expected to introduce competition to even more sectors. Through its Make in India initiative and Production-Linked Incentive schemes, India is seeking to expand domestic production of electronics. This is the exact sector where Vietnam has developed export advantages and one that dominated Vietnam’s export baskets to India.

The resultant constraint is already visible in the smartphone industry. The rapid expansion of India's domestic smartphone industry has coincided with a dramatic decline in imported finished smartphones from Vietnam between 2022 and 2025. According to India's Ministry of Electronics and Information Technology, 99.2% of mobile phones used in India are now manufactured domestically. The ministry has ascribed this growth to major incentives like PLI Scheme for Large Scale Electronics Manufacturing, Electronics Component Manufacturing Scheme (ECMS), or Semicon India Programme. Although the decline in Vietnamese smartphone exports cannot be attributed solely to these policies, India's growing domestic production capacity could constrain market opportunities for Vietnamese finished electronics.

Competing Domestic Interests

These tensions are also reflected in the limited effectiveness of existing trade institutions. ASEAN–India Trade in Goods Agreement (AITIGA) is the only free trade bloc that Vietnam and India share, yet its utilization remains modest.

One explanation lies in the competing domestic interests that hamper further trade liberalisation. While India eliminated duties on 74.2% of tariff lines, Vietnam only made modest offers, at around 69.7%. Among all ASEAN members, Vietnam has the highest number of products—2057—that are exempted from tariff elimination. 

Other non-tariff barriers (NTBs) in ASEAN markets—ranging from burdensome product standards and certification requirements to restrictive sanitary and phytosanitary (SPS) norms—further affect key Indian sectors such as pharmaceuticals, agriculture, and processed foods.

Taken together, existing manufacturing structures, conflicts of interests with domestic agenda and lack of willingness for trade liberalization could impede the top down calls for economic cooperation.

Complementary Capabilities

This is not to say there is no space left for trade expansion. Research shows that India–Vietnam trade reveals vertical complementarities: India has strengths in upstream industrial inputs, pharmaceuticals, chemicals and knowledge-intensive services, while Vietnam has become a major centre for downstream manufacturing and assembly. Both governments should therefore identify and concentrate on sectors where these capabilities reinforce their domestic development objectives, instead of merely calling for expanding trade indiscriminately.

For India, while it may find difficulty in competing with their East Asian counterparts to supply electronic components, it could leverage its position as the world’s pharmaceuticals and chemicals powerhouse. In 2025, these categories already accounted for approximately 12.1% of Vietnam's merchandise imports from India. India should therefore build up on these comparative advantages and expand cooperation in generic medicines, active pharmaceutical ingredients, pharmaceutical production technology and selected industrial chemicals. Vietnam, on the other hand, should facilitate regulatory differences, drug registration and public procurement rules.

Services represent another opportunity. India’s export structure to Vietnam has increasingly shifted towards knowledge-intensive activities, including ICT. Unlike finished manufacturing products, cooperation in these knowledge-intensive services may encounter fewer conflicts with domestic industries. This move then not only supports Vietnam's digital transformation ambitions but also diversifies bilateral economic relations beyond merchandise trade, where Vietnam currently maintains a surplus.

More importantly, both governments should prioritise investment-led cooperation that establishes lasting production relationships. India's directly registered investment in Vietnam stood at approximately US$1.12 billion in 2025, while that from Vietnam was only US$87.3 million. These figures indicate that cross-border investment remains comparatively limited. 

One highlight is VinFast, Vietnam's electric vehicle producer, announcing an investment commitment of US$500 million for a manufacturing plant in Tamil Nadu in south India. The company has also engaged its Indian supply chain with more than 300 local suppliers, aligning with the host country’s domestic industrialization agenda.

On the other end, Vietnam should attract Indian investment into upstream and intermediate-input industries such as chemicals, pharmaceuticals, and supporting industries. Establishing such a manufacturing presence in Vietnam could help Indian enterprises overcome barriers created by existing East Asian procurement networks while supporting Hanoi's ambitions to strengthen its domestic industrial ecosystem.

All in all, India–Vietnam economic integration can be challenging when its outcomes depend on many factors whose commercial interests do not necessarily align with diplomatic objectives. The challenge is therefore not merely to reach the US$25 billion trade target, but to build commercial relationships that make deeper integration sustainable. By concentrating on complementary production activities, services and cross-border investment, India and Vietnam can accommodate their respective industrial priorities while expanding the economic foundations of their strategic partnership.

(The author is a double major in Economics and Data Science at Franklin and Marshall College, Pennsylvania, US. His work focuses on the political economy of development in Southeast and South Asia. The views expressed are personal. He can be contacted at kdang@fandm.edu )