India’s Trade Choices – China vs USA

Why in News?

PM Narendra Modi is set to visit Tianjin for the 2025 SCO Summit and will meet Chinese President Xi Jinping to discuss closer economic ties.

This comes at a time when US tariffs on Indian goods have sharply increased, straining India-US trade relations.

What is the Issue?

India is caught between two major powers — China (world’s largest manufacturer) and the US (world’s largest consumer market).

While the US is raising tariffs on Indian exports, India’s trade with China is already highly imbalanced.
Policymakers face the dilemma: Closer trade with China or the US?

The News

The US, under Trump’s tariff-first approach, has imposed up to 50% tariffs on Indian goods.
China is reaching out diplomatically to India, urging closer cooperation and opposing US tariffs.
However, experts caution that deepening trade with China poses greater long-term risks for India compared to dealing with the US.

Analysis India’s Deepening Trade Weakness with China:

Trade Imbalance: India has a $40 billion trade surplus with the US (exports exceed imports), but a nearly $100 billion trade deficit with China, with imports surging since 2014 despite anti-China rhetoric post-Galwan.
Import Dependence: Charts show India’s growing reliance on Chinese intermediates (e.g., electronics, machinery), undermining self-reliance goals like Atmanirbhar Bharat.
Impact of Liberalization: Increased trade with China risks widening this deficit, flooding Indian markets with low-cost goods, and stifling domestic industries, unlike the US where India holds a competitive edge.

China’s Tremendous Strength in Manufacturing:

Global Dominance: Economist Richard Baldwin calls China the “world’s sole manufacturing superpower,” akin to the US’s military dominance. Charts show China’s 35% share of global manufacturing output (2020), surpassing the next 10 countries combined.
Export Prowess: China’s share of global merchandise exports has spiked over 25 years, driven by state-led industrialization, scale, and supply chain efficiencies, enabling cheap, competitive exports.
Threat to India: Trade liberalization with China risks decimating Indian sectors like textiles and electronics, as feared during RCEP talks, where cheap imports could “swamp” markets.

India’s Growing Weakness in Manufacturing:

Stagnant Growth: India’s manufacturing GVA grew at a 4% CAGR since 2019-20, trailing agriculture’s 4.7%, highlighting the “Faltering Make in India” initiative.
Relative Disadvantage: In a “zero-sum” trade game, India’s lagging manufacturing cannot compete with China’s overcapacity, making it vulnerable to import surges.
Lost Opportunities: Post-Covid, India’s “China +1” pitch to Western firms (competing with Vietnam, Mexico) has seen limited success due to infrastructure, skill, and policy gaps, weakening its global positioning.

Impact on India’s “China +1” Claim:

Western Investor Concerns: As US allies like Mexico raise tariffs on Chinese goods (e.g., textiles, autos, per August 28 Bloomberg report), aligning with China could signal to Western businesses that India is not a true de-risking alternative.
US Pressure Risks: Anecdotal evidence suggests US influence on allies’ tariffs. If India aligns with China, it may face secondary US sanctions or exclusion from US-led supply chains, jeopardizing its $5 trillion economy goal.
Strategic Dilemma: Balancing China ties with Western investment appeal is critical, as India’s “China +1” pitch hinges on being a reliable, independent hub.

Dealing with China’s Rising Overcapacity:

Deflation Crisis: China faces deflation from overproduction, where falling prices deter consumption and production, risking economic stagnation.
Export Push: With US and allied markets (e.g., Mexico) imposing barriers, China seeks to offload excess capacity (e.g., steel, solar panels, EVs) to countries like India.
Risk for India: Closer ties could force India to absorb cheap Chinese goods, eroding domestic competitiveness, increasing deficits, and causing job losses in vulnerable sectors.

China Not a Natural Partner for India:

Governance Mismatch: India pursues a private sector-led, democratic market economy with transparent rules and free media, while China’s authoritarian model blurs state-private lines, complicating trust.
Geopolitical Tensions: China’s support for Pakistan, India’s adversary, includes military supplies (e.g., equipment used in the April Pahalgam attack). Persistent border disputes post-Galwan further strain relations.
Strategic Misalignment: China’s dominance in SCO and BRI often prioritizes its interests, making stable, equitable economic collaboration with India challenging.

Challenges & Limitations with China 1. Rising Trade Deficit – Import dependence growing despite political tensions.

2. Manufacturing Prowess of China – China is the world’s manufacturing superpower (35% of global output vs India’s 3%).

3. Weak Indian Manufacturing – India’s manufacturing growth is sluggish; “Make in India” hasn’t delivered expected results.

4. China +1 Strategy – Western firms seek alternatives to China; if India leans too close to Beijing, it risks losing foreign investment opportunities. 5. Overcapacity in China – Cheaper Chinese goods could flood Indian markets, hurting domestic producers.

6. Geopolitical Distrust – Border tensions (e.g., Galwan, 2020) and China’s support to Pakistan reduce trust.

Future Prospects for India

Diversify Trade Partners – Strengthen ties with EU, ASEAN, Japan to reduce dependence on both US & China.
Boost Manufacturing – Real reforms in labour, land, logistics, and infrastructure are critical.
Leverage India’s Strengths – Services exports, digital economy, pharmaceuticals, and green tech can balance deficits.
Strategic Autonomy – India must avoid overdependence on either China or US, keeping its trade and strategic options open.

Prelims Practice Question

Q. Consider the following statements about India’s trade relations: 1. India has a trade surplus with the United States.

2. India’s largest trade deficit is with China.

3. China accounts for over one-third of global manufacturing output. Which of the above statements is/are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (d) 1, 2 and 3