Why a trade war with China is a bad idea for India

Relations between the United States and China have sunk to such lows in recent years that it is now easy enough to imagine the two nations eventually going to war. Yet this month's deadly Himalayan skirmishes suggest China is far likelier to usher in a new era of military conflict with its neighbor India.

Both nations now face dilemmas as they seek to avoid that prospect, after their monthlong standoff degenerated into a bloody fracas in mid-June, leaving 20 Indian soldiers dead alongside an unknown number of Chinese. Deescalating the crisis will be hard enough. More important will be how each side rethinks the countries' long-term relationship as strategic competitors. Of the two, India faces tougher challenges: With limited military options, Prime Minister Narendra Modi is facing growing pressure to boycott Chinese goods as part of a more general turn toward self-reliance and protectionism—a strategy that would be precisely the wrong way to tackle the long-term threat of a rising China.

China's dilemma is simpler: namely, whether it is wise to antagonize all of its competitors at once. That Beijing is riling its neighborhood is obvious. Australia complains about Chinese cyberattacks, albeit without directly naming China. Japan is alarmed about Chinese patrols near the disputed Senkaku or Diaoyu islands. And now China is clashing with India, a country whose security establishment increasingly views its northern neighbor as a threat, and is currently puzzling through how to respond.

That marks a significant change. India has grown closer to the United States over recent decades, both militarily and politically. But it has stopped short of fully backing ideas like the U.S.-led "free and open Indo-Pacific," let alone becoming a full U.S. treaty ally. This is in part because Modi considers Donald Trump unreliable, having reportedly been shocked by the U.S. president's views in private meetings. One incident, recounted in the recent book A Very Stable Genius, tells of Modi's shock that Trump appeared not to know that India and China even shared a border: "This is not a serious man. I cannot count on this man as a partner," was Modi's impression of Trump, one presidential aide told the book's author. But just as important have been deep-seated worries that drawing too close to the United States would end up alienating China. Fears that ties with Beijing had grown too frayed led Modi to initiate a rapprochement after another border standoff in 2017, leading to a summit with Chinese President Xi Jinping the following year in Wuhan, China.

That earlier round of tensions was resolved with plenty of airy talk of a new and amicable "Wuhan spirit." The current clashes seem unlikely to end as neatly. "This is a very fundamental change," one senior former Indian security official told me earlier this month, referring to way the sharply negative change in India's views about its neighbor in the aftermath of recent events. "Our whole policy and discourse around China will have to change."

That leaves India with few good options. India might be able to hold its own along parts of its Himalayan border. But in general it remains by far the weaker power militarily. New Delhi has upped its armed forces spending of late to about $71.1 billion, the world's third-highest, after China and the United States. But its military is inefficient, underequipped, and dogged by procurement corruption scandals. Facing a dreadful coronavirus-driven recession, India's economic position over the coming few years is unlikely to be much stronger.

Any response Modi pursues will then be complicated by the decisive anti-Chinese turn in Indian public opinion. Bellicose television anchorsdemand action, while social media is filled with clips of angry men destroying Chinese-made televisions. In under a month, India is likely to have joined such countries as Japan and South Korea, and perhaps also the United States, as part of a select group of China's rivals nations whose publics also have sharply negative views of China itself.

Modi will be well aware that angry publics can create pressure for an unwise military repost, given this is at least part of the reason India was drawn into a disastrous losing war against China in 1962. So far, at least, Delhi has resisted this path, delivering a reasonably measured response, including calmly negotiating the release of 10 captured Indian soldiers. Escalating militarily would in any case be a hugely risky step, both given China's broad military superiority and the unforgiving Himalayan terrain the two nations are contesting. So with most military options mostly off the table, Modi is under greater pressure to escalate economically instead—and to do so in ways that could hurt India's own long-term interests.

As a #BoycottChina social media campaign gains speed, protesters smashing Chinese-made smartphones hint at larger frustrations over India's unbalanced trade relationship with China. India's trade deficit with China was roughly $57 billion last year, a giant figure when bilateral trade totals just $92.5 billion. About half of India's electronics imports come from China, as do two-thirds of the materials it needs to make drugs for its lucrative generic pharmaceuticals sector. In both cases the government will do its best to boost domestic production, although earlier efforts to achieve this goal have achieved little. It is also likely to join the United States and European Union in limiting Chinese investments, adding to existing curbs on Chinese funding of Indian tech start-ups brought in earlier this year. Delhi is now mulling banning the Chinese telecommunications giant Huawei, too—a significant step that would have been highly improbable prior to the crisis, given worries among cash-strapped Indian telecoms companies about the cost of non-Chinese equipment.

Some of these steps are appropriate, if targeted carefully. India should aspire to make more of its own electronics and drug ingredients and would be more secure if it could build 5G telecoms networks without Chinese parts. It also needs to be wary of the threat of Chinese future economic coercion if relations between the two powers worsen, for instance the risk that Beijing might in future limit exports of pharmaceutical inputs, just as it recently imposed punitive tariffs on Australian crop exports after a diplomatic spat.

Yet all these steps also come with costs, at a time when India's battered economy is already struggling. India's potentially vast consumer market is attractive to Chinese companies, and its tech sector has attracted funds from Chinese investors. But arbitrary import restrictions or consumer boycotts will be largely self-defeating.

And, crucially, they are unlikely to deter China from further aggressive military actions in future.

The real risks of launching a mini trade war against China are longer-term: It will encourage India to continue its slide toward the dead end of economic self-reliance. Under Modi it has already taken tentative steps down this path. Attempts to transform India into a manufacturing and exporting powerhouse have almost entirely failed. Modi passed on the chance to enter the Regional Comprehensive Economic Partnership, an Indo-Pacific trade pact. Powerful voices within his ruling Hindu nationalist party dislike trade and economic openness on principle, hankering for a return to an earlier era of hopeless economic isolation. Modi's political base among small-scale farmers and shopkeepers have long resisted greater economic openness, too.

All this would be a momentous mistake. India will struggle to compete militarily with China until it finds a way to rekindle an economy that was sputtering badly even before the calamity of COVID-19. Genuine security considerations might warrant some modest, carefully targeted restrictions on trade with China. But this means India will also need to work harder to build trading ties with other nations, and especially so elsewhere in Asia. Balancing China abroad and deterring it domestically is a long-term project, and one that needs money to fund military expansion at home. And if India is to develop a wider range of strategic relationships with nations like Australia, Japan, and South Korea as part of a plan to counter China, it will also need to be underpin these with stronger economic ties.

Over recent weeks, China's decision to pursue minor tactical advantages in the Himalayas has come at the huge strategic cost of transforming India from a skeptical neighbor into something much more clearly resembling a geopolitical adversary. Yet it is far from impossible to imagine that China's assertive military behavior might ultimately have the perverse effect of pushing India in an inward economic direction whose long-term beneficiary is China itself. India should avoid this path. As Modi weighs how to respond, he must recognize that India has scant ability to hurt China economically, but it has plenty of ability to hurt itself.

James Crabtree is an associate professor in practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore and the author of The Billionaire Raj. Twitter: @jamescrabtree

Disclaimer: This article first appeared on foreignpolicy.com, and is published by special syndication arrangement.