India and China share a 3,488 km long contentious border over which they fought a brief war in 1962. Since then both sides were involved in several minor skirmishes at the border, but none of them have matured into a full-scale war. Though many rounds of talks were held between the two sides, a resolution to the border dispute remains out of reach. In the aftermath of the standoff at Doklam in 2017, which then marked a new low in their bilateral relations in decades, sincere efforts were taken by both sides to ‘reset’ their overall relations. The informal summits that were held at Wuhan in 2018 and Mahabalipuram in 2019 between President Xi Jinping and Prime Minister Narendra Modi were orchestrated towards this end. At a time when their bilateral relations have begun to show new promises, the recent incident at Galwan valley in Ladakh has posed a renewed challenge to the leaders of both the countries.
Asymmetry in Sino-Indian Bilateral Trade
Both India and China have a soaring economic relationship between them. The trade between the two countries amounted to $90 billion in 2019. Their bilateral trade is heavily skewed in favor of China, as it enjoyed a trade surplus of about $55 billion with India last year. In terms of percentage share, while China holds a 14% share in India’s total imports, the latter makes up for less than 1% of total Chinese imports. This asymmetry is also compounded by the nature of goods traded between the two countries. While India exports mostly primary goods, like cotton, copper, and precious stones, its imports from China comprise machinery, power-related equipment, telecom, organic chemicals, and fertilizers. Of the total Indian imports from China, electro-mechanical and chemical products make up for more than two-thirds of the import basket.
As India’s exports to China comprise mainly of primary goods, it would be easy for China to find a replacement. On the other hand, the economic cost involved in finding an alternative to cheap Chinese goods will be huge for India, as it would hurt the competitiveness of Indian exports. This is because of a major chunk of Chinese exports to India fall under the intermediate goods category, which are in turn used as inputs by key industrial sectors like automobiles, and pharmaceuticals. Thus, the current bilateral trade structure exposes the vulnerability dependence of India on imports from China. In this scenario, the Indian government’s recent announcement on national self-reliance is a step in the right direction. But at the present moment, the costs to India from any alternate policy would be unbearable. Therefore, the Indian government seems to have faced a serious dilemma as calls grew louder demanding a blanket ban on all Chinese imports.
Vulnerability Dependence and Conflict De-escalation
There is no dearth of liberal literature dwelling on the link between economic interdependence and the absence of war between dyads. They argue that the economic costs of war would act as a deterrent on both sides in a situation involving economic interdependence. In the case of India and China bilateral trade relations, we have already seen that the dependence is highly asymmetrical, which makes India vulnerable to Chinese economic statecraft. Therefore, in a situation involving conflict between the two countries, the economic cost will be borne disproportionately by the Indian side. Still, this country-level data does not capture a true picture of vulnerability, unless one looks at the effect of a ban on Chinese imports on the average Indian population.
It is well-known that China goods are known for their price competitiveness on the global stage. This is true in the case of electronic goods and also for a range of other consumer goods, which include bicycles, furniture, toys, shoes, and mattresses. Therefore, a blanket embargo on the Chinese imports would hurt the average Indian consumer, who could not afford an alternate product even at slightly increased prices. Hence, it would not be in the interests of the median Indian voter if the Indian government decides to impose embargoes on Chinese goods. Based on these political calculations, no rational government would be willing to slap higher tariffs, let alone a blanket ban on Chinese imports. Also, the interest groups associated with those industries benefiting from trade with China must have played a key role in moderating India’s response to any incident involving China. Therefore, despite having a menu of signaling options to choose from that includes costly ones like trade sanctions, the Indian government decided to impose a ban on 59 Chinese apps, thereby opting for a relatively milder option. Thus, vindicating the liberal arguments on the link between economic interdependence and conflict, the Galwan valley incident, despite being the deadliest in decades, has subsided without further escalation into a full-scale war.
Is Geopolitics behind China’s restraint?
Realists argue that under conditions of asymmetrical interdependence, while the weaker partner in a dyad would exercise restraint, it is unlikely that the stronger partner would be deterred. However, on the contrary, while the Indian government succumbed to surge in nationalism after the Galwan incident by imposing the mobile apps ban, the Chinese government is observed to have kept its nationalism under check and refrained from taking any retaliatory actions. This is in marked contrast to the CCP’s response to incidents involving Japan, during which it was often seen to have fanned Chinese nationalism. Also, China has once briefly banned the export of rare earth metals to Japan over an incident involving the disputed Senkaku islands. Likewise, China punished the Philippines by imposing restrictions on banana imports in retaliation over its maritime disputes in the South China Sea.
Even in its recent discomfiture over Australia’s decision to call for an independent investigation on the origin of the coronavirus pandemic, China has imposed 80% tariffs on Australian barley imports. But following the Indian government’s decision to ban Chinese apps, the latter is quite reluctant to flex its economic muscle and reserved its response to expressing strong concerns over the ban. In recent years, India is openly observed to be inching closer to the US, as the latter is keen to enlist India as a partner in its strategy to contain China. At a time when its relationship with the US has been deteriorating, China views any alliance between India and the US to be not in its interests.
Considering its proximity to China and its propensity for strategic autonomy, India has also been careful about maintaining a balance in its relations between China and the US. Therefore, given their soaring bilateral trade and investment ties, both India and China realized that it is in their mutual interests to reset their bilateral relations. Given this scenario, China is wary that the recent border skirmishes would further push India into the arms of the US. Therefore, despite being in a strong bargaining position vis-a-vis India, China has maintained a relative silence after the Galwan valley incident and agreed to rapid de-escalation to minimize the rupture in bilateral relations.
Originally published on www.moderndiplomacy.com