Ayesha Hassan
In 2024, the dynamic between China and India reflects both economic cooperation and underlying geopolitical tensions. While facing disagreements along their mutual border notably at the Line of Actual Control (LAC) due to increased tensions and military build-up on both sides, trade between these significant Asian nations has soared to remarkable heights.
According to the data released by the economic think tank, Global Trade Research Initiative (GTRI), the trade volume between China and India in 2024 is US$118.4 billion, surpassing the trade between the United States and India, which totals US$118.3 billion, making China India’s largest trade partner. However, India’s growing trade deficit with China has sparked significant concern within its decision-making circles, leading to the development of a de-risking policy.
This brings up a key question: Can the trade relationship between China and India withstand increasing regional tensions?
The Enigma of Economic Interdependence
China and India, as the world’s largest populations, share deep economic relations. Their trade has significantly increased in the last twenty years fueled by China’s manufacturing sector and India’s growing need for consumer products and industrial parts.
In 2024, China has strengthened its position in India’s import market by supplying a considerable amount of electronics, machinery, and chemical products. According to the GTRI report on India’s Growing Industrial Sector Imports from China, the former has increasingly depended on products from China such as telecommunications, machinery, and electronics. Beijing’s role as a supplier to New Delhi for these goods has expanded significantly, with Indian import of Chinese good’s rising from 21% to 30% in the last 15 years.
India exports materials, pharmaceuticals, and agricultural products to China. However, China holds an advantage, in trade leading to a trade deficit, for India. In 2024, India exported goods worth $16.67 billion, to China showing a decrease compared to the year 2019. The exports mainly consisted of materials and minerals. On the contrary imports from China rose from $70.3 billion in FY19 to $101.75 billion in FY24. India has faced a trade deficit with China amounting to over $387 billion, over the five years.
Despite India’s attempts to expand its sourcing networks through the Atmanirbhar Bharat campaign, an initiative aimed at making India self-reliant in various sectors of the economy, it is evident that cost-effective goods, from China, play a role in both Indian manufacturing and consumer industries. This serves as a double-edged sword for India. While it contributes to development and ensures accessibility to budget goods for consumers it also leaves India susceptible to risks during times of geopolitical or economic turmoil.
Regional Tensions
China and India are located in a geopolitically dynamic region where both regional and external powers compete for influence. The Indo-Pacific, previously known as the Asia-Pacific, has emerged as a focal point for strategic competition and geopolitical rivalry. Following President Obama’s Pivot to Asia policy, the Indo-Pacific has seen the formation of various alliances. Additionally, ongoing border disputes between China and India along the Line of Actual Control (LAC) have contributed to tensions. Together, these factors have strained China-India bilateral relations.
Dispute Along Line of Actual Control
The LAC separating China and India goes beyond geography; it represents the strategic competition between the two countries. Over the years the LAC has been a point of contention; the latest being the Galwan Valley conflict in 2020. The conflict followed after multiple breaches and illegal structures at the LAC which resulted in casualties on both sides. Not only this, negative impacts were observed on the bilateral trade amidst countrywide calls for boycott of Chinese goods.
Despite diplomatic efforts, the border dispute continues to be a significant point of contention as both states further militarized their respective borders. India is establishing infrastructure along and near the border areas such as tunnels, roads, and advanced landing grounds for high-level military operations. China is countering such efforts by making dual-purpose airports, helipads, and railways.
Observing China and India’s developments along their shared border, the probability of the border situation being neutralized remains low. Furthermore, any additional clashes or skirmishes will only add fuel to fury since tensions have already existed in the region historically. In such a case, the bilateral trade between the two Asian neighbors might deteriorate keeping in view the aforementioned calls of national boycott of Chinese goods during the Galwan Clash.
Indo-Pacific Alliances
Due to the meteoric rise of China in the recent decades, America’s influence in the region has been undermined. To keep her rise in check the USA has not only begun a trade war but also started initiatives such as Pivot to Asia and Indo-Pacific alliances such as QUAD, AUKUS and IPEF.
The Quadrilateral Security Dialogue also known as QUAD, is a security agreement between Australia, the US, India, and Japan. The purpose of QUAD is to bolster the efforts to keep the Indo-Pacific a stable, open, and prosperous region. Conversely, China views QUAD as an instrument to counter China by enclosing her home region. In response to the high-level QUAD meeting in 2023, Chinese Foreign Ministry spokesperson, Wang Yi perceived QUAD as “building small cliques and stoking bloc confrontation is the real threat to a peaceful, stable and cooperative maritime order.”
Other than QUAD, the IPEF (Indo-Pacific Economic Framework) is also a main component of US’ Indo-Pacific Strategy. IPEF was launched by the United States in May 2022. The framework includes 14 states and its aim is to advance resilience, economic growth, sustainability, economic fairness,and inclusiveness for member state’ economies. The initiative has four formational pillars: I- Trade, II- Supply Chain, III- Clean Energy and Infrastructure, & IV- Tax and Anti-Corruption. India has kept observer state status in Pillar-I and has knit itself to Pillars II to IV, yet India’s inclusion is being leveraged as a counterweight against China and has invited a barrage of skepticism from China.
When it comes to reshaping the supply chains the US has been boosting its industrial investments in India to enhance the appeal of IPEF aiming to encourage India to actively participate in IPEF and compete economically with China. This move opens up opportunities and room for India to collaborate in the industrial chain, paving the way for reducing its dependence on China’s supply chain and industrial network.
Consequently there has been a reduction in opportunities between China and India within the supply chain realms leading to increased barriers for future cooperation between the two countries.
IPEF has two major setbacks for China-India trade relations. First, it has further tapered the room of supply chains and industrial chain collaboration between India and China, and enhanced the chance for de-risking or decoupling in the areas of supply chain and industrial chain between the two nations. Second, the wide-ranging manufacturing of the supply chain and industrial chain has created an unnatural contest between the two neighbors. These developments have restricted the chances for cooperation in the zone of supply and industrial chain between the two states which will lead to economic disconnection between China and India.
Overall, the US’ Indo-Pacific strategy has negatively affected China-India trade relations. China’s view of QUAD as an anti-China “Clique” will further hamper any development of future China-India trade relations, keeping in view that Galwan Valley clash had already affected the bilateral trade once.
The future does not hold bright prospects for China-India trade relations. The ongoing regional conflicts, borders disputes, and the standoff at the Line of Actual Control (LAC) pose a risk to the already fragile bilateral relations between the two neighbors. India’s increasing strategic engagement in US Indo-Pacific strategy might escalate tensions in the relationship particularly if China views these partnerships as a significant challenge to its interests. With India being used as a counterweight against China in the South Asian region, the process of de-risking will continue. This will have both negative and lasting impacts on bilateral trade relations between both countries.
On the whole, the outlook for trade relations between China and India appears despondent. If trade relations are to continue, peace must prevail in the region. Bloc formation and hegemonic tendencies ruin the equilibrium of a region and so if trade and commerce between India and China is to continue, inclusivity must be ensured.
*The author is a research intern at The Diplomatic Insight.
**The opinions in this article are the author’s own and may not represent the views of The Diplomatic Insight. The organization does not endorse or assume responsibility for the content.
