Why India and China’s latest dispute could cost both sides greatly

Kinling Lo
·5-min read

The stand-off between Indian and Chinese troops in the Himalayas has cast a chill over relations between the two countries and threatens to undermine long-standing efforts to improve economic ties.

Chinese companies have been targeted by a series of measures following a deadly clash on June 15 in which 20 Indian troops died along with an undisclosed number of Chinese casualties.

The Indian government has banned 59 Chinese apps, including the popular short video platform TikTok, citing “sovereignty and security” concerns, while the Confederation of All India Traders, which represents 70 million traders and 40,000 trade associations, is leading a campaign to boycott Chinese goods.

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So far, China has not announced any retaliatory economic action, but it has warned India to rethink its decision and said its actions go against World Trade Organisation regulations.

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There is a lot at stake for both sides if this relationship unravels.

Chinese tech companies have splurged billions of investments into the emerging Indian market and four fifths of smart phone makers in India are Chinese, according calculations from tech research firm Counterpoint.

Du Youkang, a specialist in South Asia studies at Fudan University in Shanghai, said he did not expect there to be a lasting impact on economic relations because India relies heavily on Chinese imports.

“They can always find alternatives, but it will cost them quality and money,” Du said.

“There have been calls from India for a boycott of Chinese products in the past, but they were short-lived.”

But for years India has been trying to reduce its trade deficit with China, the largest it has with any country.

The latest figures from the Indian government show that gap fell from US$53.5 billion in 2018 to US$48.7 last year, but this drop came along with a reduction in the overall volume of trade.

Members of the Tibetan Youth Congress burn a cutout of Chinese President Xi Jinping during a street protest calling for the boycott Chinese goods in Dharmsala. Photo: AP
Members of the Tibetan Youth Congress burn a cutout of Chinese President Xi Jinping during a street protest calling for the boycott Chinese goods in Dharmsala. Photo: AP

The Indian department of commerce reported a 6 per cent decline in the latest bilateral trade with China, which was worth US$81.9 billion in the financial year that ended in March 2020.

While China is India’s second biggest trade partner after the US, India accounts for roughly 3 per cent of China’s total exports, according to Chinese government data.

“It is very difficult to identify the winners and losers in such strained economic relations. India is a massive market and China also has the best deals for Indian businesses,” Du said.

“That is why China and India have been really clear about the intention of boosting economic growth. “Now things might be on halt this year because of the political situation, but that will not change the mutual direction of that economic relationship.”

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Amitendu Palit, a senior research fellow who specialises in trade and economics at the National University of Singapore, said recent Indian policies would have a long-term impact even if the current political tensions do not cause a dramatic shift in their economic relationship.

“India’s decision to ban apps creates problems for Chinese software developers in accessing a rapidly growing digital market, where apps like TikTok had great appeal.

“At the same time, India’s digital content makers will also suffer from the lack of sufficient platforms and revenue opportunities,” Palit said.

Indian foreign policy think tank Gateway House also estimates that Chinese investors have poured some US$4 billion into Indian tech start-ups since 2015.

A mobile phone ship in Mumbai, where the name of the Chinese tech firm Xiaomi has been covered with a tarp. Photo: AFP
A mobile phone ship in Mumbai, where the name of the Chinese tech firm Xiaomi has been covered with a tarp. Photo: AFP

Before the border clashes, the Indian government had already stepped up its scrutiny of Chinese investment and had called for “self-reliance”.

A policy to tighten up the screening of foreign direct investment from countries that share a border with India was introduced in April, and was seen as targeting Chinese firms.

In March the research group Brookings calculated that existing and planned Chinese investment in India stood at US$26 billion – far more than other neighbours such as Pakistan or Bangladesh.

Other countries are also reassessing their trading relationship with China in the wake of the US trade war and growing concerns about Chinese tech products.

As a result, Chinese firms are trying to convince customers in India that their products have been locally produced.

At a product launch last month Xiaomi, one of China’s biggest tech firms, stressed that 99 per cent of its phones and most of its smart TVs were made in India.

Satellite images show Chinese troop withdrawal from front line with India

“China and India’s relations have always suffered from a deficit in trust. Today, the trust deficit is at record high,” Palit said.

“The economic relationship will remain, though they might find it difficult to expand into other areas, such as investment, tourism, higher education.

“It is very important for both countries to develop a bilateral mechanism for ensuring that they can do business with trust. It is more important for China to convince India in this regard.”

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