India and China: the uneasy partnership between the Asian giants

In the summer of 2020, as Chinese forces killed 20 Indian troops during a clash along their unmarked border in the Galwan valley of the eastern Himalayas, some Indians retaliated by throwing out their Chinese-made television sets. A video that went viral showed men stomping on a TV screen and hitting it with sticks while chanting Bharat Mata ki Jay, or Hail Mother India. The attack on Chinese-made products was meant to symbolize striking China where it would hurt the most — its economic interests. Chinese-made products flood the Indian market each year and, for several years, China has been among India’s biggest trading partners.

For decades, India and China’s trade relationship has been independent of their fraught political ties. Despite the ups and downs, trade between the two prospered. However, the dramatic escalation in tensions since the deadly events of 2020, the nadir in India-China ties, challenged that notion.

 

An unequal partnership

One aspect of the trade relationship with China that has long irked India is that it is heavily lopsided. India’s imports from China far outweigh what it exports, with India’s trade deficit with China making up nearly 40% of its overall deficit. Prior to 1995, “trade volumes were relatively small and diversified and trade deficit was not a concern,” said Santosh Pai, a lawyer and a fellow at the Institute of Chinese Studies, a think tank in Delhi. At the time, India imported roughly $2 worth of products for every dollar it exported and the top categories in exports, on both sides, were mainly raw materials.

However, from the early 2000s, India-China trade, as well as India’s deficit, started growing rapidly. This was in part because of a shift in the type of goods being exported from China to India, explained Pai. Demand for consumer goods and machinery skyrocketed in India. In 2020, electronics and machinery – at 29.3% and 20.3% – were the top categories among India’s imports from China. But the nature of what India was exporting to China remained largely unchanged since 1995, with the top items being low-value raw materials like organic chemicals, iron, steel and cotton. By 2020, India was importing $3 worth of products for every dollar it was exporting to China. At the same time, India’s efforts to bridge the trade gap by increasing exports to China in areas like pharmaceuticals failed as China blocked market access, deeming Indian products uncompetitive. Still, growing trade was largely seen as “an insurance against volatile political ties,” said Pai. It was the strongest link in an otherwise strained relationship.

 

India’s wary stance after the Galwan clashes

The border scuffle of 2020 served as a wake-up call for India and since then, reducing dependency on Chinese imports has become a strategic objective. In the immediate aftermath of the clash, there was a groundswell of anger against Chinese businesses and an informal boycott of made-in-China products ensued. The Indian brand Hero Cycles pulled out of a $100 million deal with China and steel producer JSW announced it would stop importing raw materials from China for a few years. Days after the border clash, the Indian government announced that it was banning dozens of apps linked to China, including the popular social video app TikTok, citing national security. Since that initial ban, India has added over 300 mostly Chinese apps to the blacklist. The Indian government also mandated e-commerce websites to specify the country of origin for every product they sell in India. In addition, when it announced a list of companies that would be allowed to carry out 5G trials in India, China’s Huawei was missing from the list.

 

Read also: Read also: Why India and China are deadlocked in the Himalayas

 

In some ways, India’s skepticism of China’s economic interests predates the most recent border tensions. Three months before the Galwan valley incident, the Indian government announced tightened scrutiny of foreign direct investments from countries bordering India — a move to protect against opportunistic takeovers and acquisitions of Indian companies weakened by the pandemic. Even though the Indian government did not mention China specifically, analysts say the move was directed at China, whose investment in Indian firms had grown five-fold between 2014 and 2019.

 

Pai said India is now seeking to diversify sources of imports and investments in strategic sectors from friendly countries such as the United States, Germany, Japan, South Korea and Taiwan. New Delhi also launched the Production Linked Incentive scheme to boost domestic production across more than a dozen key manufacturing sectors. It has also signed or is negotiating bilateral trade deals, including with the United Arab Emirates, the UK and the European Union.

“It is too early to call these steps a success, but the COVID pandemic and the Ukraine war have heightened the need for diversified and resilient global supply chains,” said Pai. “And India is definitely going to benefit from the ‘China plus one strategy’.” That may be already happening. In October, Apple, whose manufacturing hub is China, announced that it would start making the latest version of its smartphone – iPhone 14 –in India. Five percent of iPhone 14’s production is expected to move to India this year, a significant milestone in the US plan to decouple from China.

 

Read also: How the Ukraine war has strengthened India’s digital sovereignty ambition

 

Tensions between the US and China also color India’s relationship with the latter. Through forums such as the QUAD, the US has been engaging with countries in the Indo Pacific, including India, which it sees as a bulwark against China’s meteoric rise. China sees India as one of the nations benefiting from the West’s move away from China. “India is being blamed for being ‘opportunistic’, for exploiting the West’s anxiety vis-à-vis China to further its own interest,” wrote Antara Singh Ghosal, a fellow at the New Delhi-based think tank Observer Research Foundation.

 

Despite tensions, trade flourishes

Following the Galwan clash, the spree of reactionary measures to tone down India’s dependence on China did little to affect bilateral trade in any significant way. In the last two years, India’s trade with China and its deficit, which currently stands at about $73 billion, have continued to balloon. Trade volume will exceed $100 billion for the second consecutive year and this July, China surpassed the United States to once again become India’s largest trading partner. “In my opinion border tensions have had no impact on trade. The strong interdependence between the two economies insulates them from political tensions,” said Nisha Taneja, a professor at the Indian Council for Research on International Economic Relations. The key reason, she said, is that trade is driven by private entities and is a business decision over which the government has no control.

Both Taneja and Pai agree that over-dependence on China is a cause of worry for New Delhi. “If China decides to weaponize trade ties with India there could be significant impact on Indian industry and consumers,” said Pai.

However, China being the world’s second largest economy, it is inevitable that India will continue to be dependent on it. On the one hand, “[the economic partnership] can become an asset if India develops a robust manufacturing sector that consumes inputs from China and exports to the rest of the world,” said Pai. “On the other hand, if India continues to import finished products from China then it will remain a liability.”

Meanwhile, both sides have been gradually pulling back troops from their Himalayan border and their military commanders have engaged in a series of talks on resolving the standoff. While trade has often suffered collateral damage due to political instability, analysts hope it can become a pillar of strength and provide a solid foundation for future ties. “Bilateral trade and investment have rarely been root causes of [India and China’s] existing disputes,” wrote Jingdong Yuan of the Italian Institute for International Political Studies, “and through careful nurturing and better management, they can actually contribute to building a stable bilateral relationship over the long run.” This is certainly in the interest of both countries, and indeed of global economic growth and international security.