US midterm results may give India trade leverage, but tariff and AI risks remain

Before the US midterms, the central question for India was not who would win Congress, but whether the election would alter the forces shaping global capital, trade and energy markets. After the results, the question has become whether those forces have changed.

Markets appear to be interpreting the outcome as a setback for AI-linked investment, tariffs and executive unilateralism. It isn't. Investors may be overestimating implications of the 'Blue Wave' on geopolitics. The election does little to alter the strategic tensions that define the current equilibrium in West Asia.

Whether the region experiences renewed escalation will depend more on military and diplomatic calculations than congressional arithmetic. For India, consequences would be felt through higher oil prices, imported inflation and pressure on BoP. The more relevant questions for India, therefore, concern trade and capital flows.


A Democrat-loaded Congress may weaken the executive's negotiating position at the margin, giving India additional room in trade negotiations. The experience of February is instructive. Once US Supreme Court invalidated tariffs imposed under IEEPA, India's bargaining position improved. Balance of negotiating leverage shifted even though the underlying disagreements remained unchanged.

The same distinction applies today. Congress may increase oversight of executive action and challenge the broad use of tariffs against allies and trading partners. That may strengthen India's hand in ongoing negotiations. But it would be a mistake to assume that the tariff threat has disappeared.

Principal authorities used to impose tariffs, including Sections 232 of the Trade Expansion Act of 1962 and Section 301 of the Trade Act of 1974, remain within the executive's reach. Beyond those, Congress has granted executive authority that could be used to impose punitive tariffs of up to 100% on countries purchasing Russian crude oil. Whether that authority is deployed will depend on the direction of Washington's strategic priorities.

The election outcome opens two contradictory paths. If congressional Democrats prioritise repairing ties with allies and scrutinising unilateral trade actions, the practical impact on India may be limited. If, however, they prioritise increasing pressure on Russia and enforcing sanctions compliance, tariff risks for India could increase.

History offers another reason for caution. The assumption that one party is inherently less protectionist than the other has proved unreliable. The Biden administration not only retained many of Trump 1.0 tariffs but expanded industrial policy measures, including 100% tariffs on Chinese EVs. Tariffs have increasingly become a bipartisan feature of US industrial and trade policy.

Some investors appear tempted to interpret the result as a voter backlash against AI. Evidence suggests something more nuanced. In several constituencies, voters expressed concerns about rising electricity bills, pressure on local infra, water consumption and potential disruption to jobs.

Yet, AI remains one of the few strategic priorities that enjoys support across the US political spectrum. Competition with China, semiconductor leadership and belief that AI will underpin future economic growth, have created a durable bipartisan consensus in favour of continued investment. Policymakers now confront a different set of incentives from voters. The more likely outcome is adaptation rather than retrenchment.

So, the more important battleground may shift away from Washington and toward the states. Questions about who pays for grid expansion, transmission upgrades, water usage and power generation are increasingly being contested at the sub-national level. But even there, the outcome is more likely to involve a renegotiation of costs than abandonment of projects. That distinction matters for India.

Some investors may hope that regulatory friction in the US will free up capital for EMs. There's little evidence to support that assumption. If data centre projects slow in one state, capital can shift to transmission networks, semiconductor manufacturing, power infrastructure or other parts of the AI value chain. Competition for capital is, therefore, likely to remain predominantly within the US, rather than shift meaningfully towards EMs, India included.

For India, the challenge is not whether the US AI boom slows, but whether it can remain sufficiently attractive to global investors. The Blue Wave may alter political narratives but it does little to change that underlying reality.

The writer is senior vice-president, Business & Economic Research, Axis Bank