Trade versus territory: Can India and China reconcile competing priorities?

The Indian Foreign Secretary Vikram Misri, in a major statement on 21 October, confirmed that the disengagement between the Indian Army and the Chinese People’s Liberation Army at the Line of Actual Control (LAC) between India and China has been completed. The two powerful neighbours with nuclear capacity have been at loggerheads since June 2020 at the LAC, where a deadly military confrontation resulted in casualties on both sides, including 20 Indian soldiers. The Indian Foreign Minister S. Jaishankar has termed it a positive development resulting from very “patient and persevering diplomacy”. 

This is, so far, the most significant development in the bilateral ties that have remained frozen since the border conflict, with only diplomatic and military leaders engaging on both sides. The Chinese side, too, has confirmed the development, stating, “China and India have maintained close communication on relevant issues on the China-India border through diplomatic and military channels, and the two sides have now reached an agreement on relevant issues.” 

Both sides’ positive affirmation of the developments at the LAC comes just before Chinese President Xi Jinping and the Indian Prime Minister shook hands on the sidelines of the BRICS Summit in Kazan on 22-23 October 2024. But does this signal a return to normalcy between India and China, paving the way for a renewed spirit of “Hindi Chini Bhai Bhai (India and China are brothers)” — a slogan that emerged in the 1950s to promote friendship and cooperation between the two nations? 

The resolve to the border conflict does not entirely lie in the disengagement between the two militaries that moved out of their barracks and came face to face in June 2020 at the Galwan Valley in eastern Ladakh. For India, peace and tranquillity at the border can only be ensured once the border conflict is resolved in its entirety, which includes de-militarisation of the de-escalation, and the pre-June 2020 status quo ante is achieved.

Disengagement merely means that the two armies would go back to their respective barracks, and, as per the agreement reached, the two armies will conduct their regular patrolling activities as they did during the pre-Galwan standoff in June 2020.

Will this consensus be a marker for political dialogue to start? Going by the public sentiments in India, the answer may be a yes because the disengagement agreement is seen as a victory of India’s strong diplomatic and military stand against China. But the bigger picture remains with India’s long-standing position that the “state of the border will determine the state of the relationship”, and with just one component of the border conflict — disengagement — completed, India would be looking to achieve demilitarisation and de-escalation at the LAC, which Beijing finds problematic.

During the recent visit of an expert delegation from India to China for a series of Track II engagements of which I was a part, the officials at the Ministry of Foreign Affairs, scholars at the top Chinese think tanks and the universities in Beijing and Yunnan, conveyed a strong desire to resume normal ties without India making border the focal point in the discussion. To support this, the Chinese side referred to the rising trade between China and India despite the tensions at the LAC.

In the financial year 2023-24, bilateral trade between India and China accounted for US$118 billion, making China one of India’s top trading partners. In the last nine years alone, bilateral trade has grown 90%, with an average of 12.87% annual growth. Even when the militaries are face-to-face, bilateral trade crossed the US$100 billion mark.

While the ground emotions convey a quest for furthering deeper economic engagement, India argues strongly over the staggering US$100 billion trade deficit. For Delhi, a thoughtful and steady resolve to the existing trade asymmetry holds the key to the future of political and economic ties. 

On the investment front, the Chinese government and private sectors want India to open up. The military confrontation in June 2020 has again marred this. The Indian embassy in Beijing has acknowledged that “while both countries have emerged as top investment destinations for the rest of the world, mutual investment flows are yet to catch up”. For instance, “Chinese investments in India in the year 2021 were US$63.18 million, down by 68.3% year on year.” The visible downstream of Chinese FDI following India’s imposing restrictions has hurt Chinese businesses.

There is growing pressure from Chinese businesses on their government to resume dialogue with India, driven by the desire to access the vast Indian market. This pressure has been acknowledged in official discussions within Beijing, and the foreign direct investment (FDI) issue in India has gained traction in the Chinese media.

A recent editorial in the Global Times titled “India’s Scrutiny of Chinese Investments Hurts its Interests” noted: “The deep-rooted hostility toward China among some Indian elites, interest groups, and Western lobbyists continues to exploit the lack of mutual trust between China and India to influence decision-making in New Delhi.” 

Despite this, India’s economy relies significantly on Chinese inputs for local growth, and decoupling from China could be too risky, considering the sheer size of the Chinese economy and its manufacturing prowess.

Interestingly, while India plans to decouple from heavier Chinese investment, the 2023-24 Economic Survey of India, released annually by the Ministry of Finance, suggests benefiting from a popular “China plus one strategy” where major multinational companies, including Apple and others, looking to “de-risk” themselves from China, which was traditionally known as the “world’s factory”. India has made visible headways in this regard, and companies like Apple have already begun manufacturing operations in India. 

In addition to the challenges facing Chinese FDI in India, Beijing has advocated for improved air connectivity between the two countries. Currently, there are no direct flights between India and China, a stark contrast to the pre-Covid era when hundreds of flights connected various Indian and Chinese cities.

This lack of direct routes has negatively impacted airlines, businesses, and people-to-people ties, disrupting regular exchanges. Compounding these issues, India has tightened its visa issuance policies for Chinese nationals following the Galwan incident, further restricting travel and interaction between the two countries. However, according to recent media reports, direct flights between India and China may soon be realised. 

Additionally, significant concerns were raised in Beijing on the sharp downfall in public opinion towards China in India in the last four years, which has often been a critical factor in India’s official China policy. However, in democracies, policies often reflect public sentiment shaped by tangible outcomes. Without concrete progress on the border issue, the media and public in India are unlikely to shift their stance. 

The agreement on military disengagement at the LAC at the border between India and China conveys the mutual willingness for a fair and mutually acceptable resolution to the border dispute, which could catalyse easing tensions and create space for economic engagement. But the onus is not entirely on India because for any lasting improvement in ties, lasting peace must be achieved together. Beijing must demonstrate a commitment to peace and respect for territorial integrity — moves that would resonate with Indian public sentiment and rebuild trust.

A more responsible approach from China could alter perceptions and pave the way for renewed economic cooperation, benefiting both nations.

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