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China is one of India’s largest trading partners, despite ‘frosty’ relations

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China is one of India's largest trading partners, despite 'frosty' relations

Often what is left unsaid speaks louder than what is said. China remains one of India’s largest trading partners even while the message is loud and clear that trade relations between the two giants may touch new heights only once there is normalcy along the Line of Actual Control (LAC) in Eastern Ladakh.

India’s trade deficit with China increased to $48.53 billion in early 2023, despite a slight decline in exports. This highlights India’s challenges in maintaining a balanced trade relationship with China and calls for strategic measures to address the growing deficit. The second half of the fiscal year may see higher trade gaps due to global economic slowdown and geopolitical factors and may widen due to tensions raising on the LAC.

The domino effect of escalating India-China tensions on the LAC and the subsequent uncertainty in government’s policies for Chinese goods create trade tensions. These tensions pose a threat to supply chains, potentially causing delays, shortages, and heightened costs, particularly in crucial sectors like pharmaceuticals, electronics, and textiles. The ambiguity may deter Chinese investments in India, impacting overall economic growth. Anti-China sentiments and a pro-India stance could trigger consumer boycotts, further straining trade volumes. This disruption has the potential to create global ripples, affecting other countries and industries closely linked to these two major economies.

In terms of leadership relations, Chinese Premier Li Qiang attended the G20 Summit in September, followed by the Virtual Summit at India’s request in late ‘22. There was no bilateral meeting between Indian Prime Minister Narendra Modi and Chinese President Xi Jinping on the margins of the BRICS Summit in South Africa, which both attended in August of this year. Similarly, the hostilities on the LAC has a cascading effect on actual bilateral trade, significantly hampering trade relations for a long time. In several ways, the strained political atmosphere can erode the trust and cooperation needed for smooth trade relations. This can hamper negotiations on trade agreements, joint ventures, and other forms of economic cooperation. Tensions can lead to an increase in tariffs and non-tariff barriers by both sides, raising the cost of trade and making it less attractive for businesses.

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PM Modi expressed India’s concerns over unresolved issues along the LAC in the western sector of the India-China border areas and has emphasized on the importance of maintaining peace and tranquility in border areas. He directs China to respect the LAC for normalizing India-China relations, to which there was a positive signal from the Chinese Premier to instruct his authorities for rapid disengagement and de-escalation. Hoping the words are not hollow.

The difference between a critic and a starfish is that, a starfish can actually take something out of the water. In the parliament, the government is getting criticized for failing to de-escalate the LAC conflict, causing insecurity, hindering border dispute resolution, and negatively impacting trade. The argument is that the situation is more nuanced and attributed the decline solely to this factor. However, there are varied factors contributing into this perceived trade decline. The global economic slowdown, impacting both India and China, has dampened overall trade volumes, affecting their bilateral trade as well.  Also, both India and China have implemented policies aimed at boosting domestic markets and reducing dependence on imports, contributing to the trade decline.

India and China’s ties are strained by a loss of strategic trust, stemming from China’s tactical surprise in April-May 2020, impeding India’s patrolling along the agreed-upon line. China’s concerning actions include attempts to alter the status quo and exert control over disputed territories. India, rightfully, asserts its stance by insisting on rule-based standards in bilateral relations, highlighting the ongoing challenges and complexities in the region. The narrative highlights China’s mention of India’s special status and the division of the state following the repeal of Article 370.

For the PLA, which has taken an aggressive stance on perceived fronts where national sovereignty is at issue (Taiwan, the South China Sea, and the India-China border), the year 2027 is significant since it marks the 100th anniversary of its establishment. The PLA’s ambition to achieve regional dominance by 2027 and global dominance by 2035 adds significance to the ongoing standoff on the LAC. This intrusive interference in Indian territory further substantiates India’s claims and contributes to a loss of trust with  the neighboring country, like the others in the region showcases the complex dynamics in the region.

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India shares a symbiotic trade relationship with China. India is a vital source for China, and exports iron ore crucial for its steel industry, abundant cotton for textiles, organic chemicals for pharmaceuticals, and gems and jewelry. India’s electronics industry also contributes parts to China. Conversely, Indian markets are dominated by Chinese goods for electronic goods, machinery, chemicals, fertilizers, and steel products. This intricate trade web demonstrates mutual dependence, with each country playing a vital role in sustaining the other’s economic needs and industries.

The LAC skirmishes have undoubtedly strained India-China relations, yet attributing the decline in trade solely to these conflicts is an oversimplification. Broader factors, such as global economic conditions and domestic policy choices, play pivotal roles. A strategic approach involves diversifying trade partnerships within the Indo-Pacific region, reducing reliance on China, and fostering domestic market growth. In light of the LAC tensions, both India must explore alternative trade options. India can turn to Southeast Asia for electronics and machinery, tap into Africa for agricultural products, pharmaceuticals, and target Europe and North America for high-value exports like gems and jewelry. However, executing these strategies poses challenges given China’s substantial trade partner status and potential economic repercussions of abrupt decoupling.

Also Read: Malacca Strait – a pain in China’s neck

As Marcus Aurelius said, “The impediment to action advances action. What stands in the way becomes the way.” India should adopt assertive economic strategies to counter Chinese actions at the Line of Actual Control (LAC) and safeguard its economic interests effectively.

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Strengthening domestic manufacturing, especially in sectors like pharmaceuticals, electronics, and renewable energy, is crucial to reduce reliance on Chinese imports. Initiatives like “Make in India” should incentivize domestic production and attract foreign investment, emphasizing skill development and technology transfer. Diversifying trade partnerships to include Southeast Asia, Africa, and Latin America can lessen dependence on China. Leveraging strategic trade tools such as anti-dumping measures and import controls can address unfair practices. Promoting India’s strengths, including a vast consumer market, IT services, and stable business environment, will attract global investments.

The delicate task of balancing economic interests with national security requires nuanced political decisions. The future hinges on managing border disputes, enhancing diplomatic communication, and navigating the intricate global economic landscape through a multifaceted strategy to safeguard India’s strategic interests.

India strategically navigates the complex terrain of balancing national security and sovereignty with economic ties to China. Prioritizing strategic autonomy and diversification, India seeks mutual benefit while addressing concerns over China’s strategic behavior. A nuanced and well-balanced approach allows India to express its reservations and implement punitive measures without compromising its own economic stability.

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Vipul Tamhane
Vipul Tamhane
Vipul Tamhane is an Anti-Money Laundering and Combating Terrorist Financing (AML/CFT) specialist with expertise in international business, and Commercial Law. He is a visiting faculty at Pune University's Department of Defence and Strategic Studies, where he teaches Counter Terrorism to Masters and Postgraduate Diploma students. He is the Founder and Editor-in-Chief of Diplomacy Direct, an upcoming national-interest think tank dealing with counter-terrorism, national security, geopolitics, and international diplomacy.


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