The most troubling China-India conflict is economic

What's worse than two populous, nuclear-armed countries killing each other's soldiers? Two populous, nuclear-armed countries letting their longer-term relationship wither.

Fighting along the Chinese-Indian border on the Tibetan plateau hasn't come out of the blue. Ties, never solid, are increasingly becoming a casualty of the way New Delhi is being drawn into the wider rivalry between Beijing and Washington. If trade and investment suffer as a result, the deteriorating relationship could lead to problems decades down the line.

"India has to review and reduce its current economic dependence on China," Gopalaswami Parthasarathy, a veteran diplomat, wrote this week in the Hindu BusinessLine.

He's pushing at an open door, because the relationship already looks to be on increasingly shaky ground. As my colleague Andy Mukherjee has written, economic nationalism is on the rise in India — and China looks to be the most visible loser.

Last year, the US overtook China to become India's largest trading partner. That could be a moment as significant as when the US moved ahead of Japan to become China's biggest partner, in 2004. In April, New Delhi tightened its foreign investment laws, a move widely interpreted as aimed at Beijing. It's looking at restricting share-based investments from China too, according to the Economic Times.

In November, India decided to walk away from the Regional Comprehensive Economic Partnership, a trade bloc backed by Beijing that will bind China to other major Asian economies. Despite the total value of India's exports growing by nearly half between 2010 and 2019, the sum going to China shrank 14% over the period, deepening a trade deficit that's fueling India's nationalistic turn.

All this is concerning, because trade relations can act as an important restraint on conflict. The immediate economic loss that would result from war with a major trading partner is one factor that can stop skirmishes from deteriorating into major battles.

One study of late 20th century conflicts by economists at Sorbonne University in 2008 found that while openness to trade doesn't automatically prevent war, there's a greater risk of conflict when countries grow less economically dependent on each other, as appears to now be happening with China and India. Paradoxically, that means globalization can make matters worse: Countries that become more integrated with the world economy are more able to endure the loss of commerce with a single nearby rival.

You can see this most obviously in two of Asia's most worrying military flashpoints. Trade between North Korea and South Korea approximates to zero, so it's hardly surprising that the demilitarized zone between them is the other spot in the region that's teetering on the brink of war.

More to the point, consider India's most difficult relationship. At the time of independence in the late 1940s, India took nearly a quarter of Pakistan's exports, which in turn bought about half of its imports from India. That trade rapidly evaporated through the 1950s, until war in 1965 closed off commerce altogether for nearly a decade. Relations never recovered. Just 1.8% of Pakistan's exports went to its eastern neighbor in 2018. India counts Nigeria, Belgium and Mexico as bigger export partners than the country with which it shares a 3,300-kilometer (2,000-mile) border.

There's no overarching reason for China and India to be rivals. Each has its own distinct regional sphere of influence, and a history of staying on the sidelines of grand strategic fights. The extent to which India is increasingly being drawn into Washington's orbit these days is in many ways a response to its nervousness about the rise of a more aggressive China.

A better policy would be for Beijing to recognize how its Belt and Road projects in Pakistan, Sri Lanka, Bangladesh and Myanmar have left India feeling encircled, quite like NATO's expansion into eastern Europe in the 1990s fostered lasting enmity in Russia. China's big infrastructure investments haven't performed well on their own terms in any case, leaving the subcontinent's smaller countries saddled with debts and, in many cases, a legacy of pollution. India itself would be a far better destination for Chinese outbound capital.

China should recognize how much it will benefit from India's development, just as richer countries gained from its own increasing wealth. That should mean opening up its domestic market to key Indian exports such as IT. Making the approval process for Indian generic pharmaceuticals easier, too, would help to lower China's sky-high drug prices. New rules were introduced on this front last year, but it's not clear they'll succeed: China's trifling pharmaceutical imports from India actually declined in 2019.

India would do well to apply its new foreign investment rules sparingly. While there's justifiable wariness about the involvement of state-owned Chinese companies in critical infrastructure, the investments that the likes of Alibaba Group Holding Ltd. and Tencent Holdings Ltd. have made in India's burgeoning e-commerce sector should be welcomed. This is especially true at a time that Covid-19 is likely to amplify long-standing problems attracting overseas capital.

Amid the sugar-rush of nationalism brought on by military hostilities, there's little sign right now that cooler heads will prevail. Still, a previous 2017 confrontation in the Himalaya didn't reverse the busy diplomatic relationship between the two countries. In smoothing over the current conflict, India and China must further deepen their economic and social links — otherwise, the next fight will be still more serious.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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