India-China: History of mistrust & Trade

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Dear Readers,

In today’s blog I want to take the liberty of venturing away from Pandemic and talk about a totally different subject – India- China relationship. The people of India woke up on June 16th 2020, to the disbelieving news of 20 Indian soldiers martyred by the Chinese troops. Indians never expected this from China whose companies such as Xiaomi, Huawei, Alibaba, Tik Tok etc are loved and admired in India. So what changed that made the dragon and the elephant gunning for each others blood at an altitude of 14000 feet?

In order to answer the above it would make sense to turn a few pages from the history books and understand the relationship between the two giants over various phases.

Pre-colonisation phase :

China and India are two of the most oldest civilization in the world. During ancient times they were the centers of knowledge and culture. There seems to have been references to trade between the Mauryan empire in India and the Tang emperor Tai-Tsung. During the later years the Silk Road was a crucial link between the two countries.

The Silk Road :

The Silk Road as the name suggests come from the lucrative trade in silk carried out along its length connecting China and the Far East with the Middle East and Europe established under the Han Dynasty in China officially opened trade with the West in 130 B.C. India was very much part of the trade route and the royal aristocracy managed to procure expensive materials through this route. It’s also widely believed that the spread of Buddhism from India to China happened through this route.

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Source: Encyclopedia Britannica

The islamic invasion of India between 12th and 16th century slowed the trade relations. The route remained in use until 1453 A.D., when the Ottoman Empire in the Middle East boycotted trade with China and closed them.

Colonization phase :

Under British colonization there was very limited trade relationship between the two countries. The invasion of China by Japan in 1941 was seen a pivotal moment when China started to look for partners in Asia. The India then under British rule dispatched a medical team under Dr. Kotnis to help in the treatment of soldiers. He died during the mission and became the common point of respect for both the countries. He is revered in China and every Chinese leader’s visit to India includes a trip to meet the family of Dr. Kotnis.

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Source : The Hindu (An Indian Newspaper)

Post Colonization Phase & 1962 War:

In 1947 India became independent from British rule. India established diplomatic relations with the then nationalist Kuomintang Chinese Government in 1948. The founding of the communist party and the People’s Republic of China on 1st Oct 1949 after the military defeat of the Kuomintang Government left no choice for India but to recognize the new regime as a legitimate ruling party of China.

China was not happy at India’s “Non-Alignment Policy” with Chairman Mao Zedong openly stating that one can either be towards imperialism or with socialism and the third route doesn’t exist. However, India’s first Prime Minister Nehru viewed Indian independence and Chinese revolution as expressions of resurgent Asian nationalism and wanted them to be friendly.

The main trouble started when China took the step towards bringing Tibet (a small region between India and China ) under its rule. In 1950 Chinese troops crossed the Sino-Tibetan boundary, and moved towards Lhasa the capital to occupy Tibet. India stressed on peaceful negotiation of Tibet problem and china dismissed Indian interference claiming Tibet as its internal affairs. In 1954 the then Chinese Prime Minister Zhou Enlai visited India and signed the “panchsheel” pact, the five principles of peaceful co-existence with Prime Minister Nehru following China and Tibet May 1951 treaty. This brief peace period came to a close in 1959, when the border dispute came to the fore and the Dalai Lama along with thousands fled Lhasa, Tibet, to take refuge in India. Prime Minister Zhou Enlai spelled out China’s claim over 40,000 sq miles of Indian territory in Ladakh and the North-East part of India and rejected the treaty signed by British India and China to accept the McMahon Line as the border. The border dispute led to a war in 1962. The war ended in Chinese victory but the Chinese were forced to withdraw under international pressure. The trust between the two nations seemed to have been buried in the battle field.

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Source: historyplex.com

Post 1962 period:

It took almost 15 years to establish diplomatic relations. During this period India fought wars with Pakistan in 1965 and 1971, both won by India and conducted the first nuclear tests in 1974 which was criticized by China. In this period there were also small skirmishes between Sino-Indian troops in Sikkim and Arunachal Pradesh, both ultimately became part of India under strong protest from China. China still claims the entire state of Arunachal Pradesh as its own.

As the last decade of the 20th century approached multiple visits of head of state of both countries happened and slowly border disputes were brushed under the carpet and trade started to take prominence.

Source: FirstPost showing PM Rajiv Gandhi and Chaiman Deng Xiaoping handshake in 1988

21st Century & Trade:

China’s entry into WTO:

A crucial turning point in fostering relationship came in the year 2001 when China joined the World Trade Organization (WTO). China a country of 1 billion people in year 2000 was keen on entering the WTO to gain market access for its goods and was lobbying different nations including India for their support. Western democracies were hoping that a country of China’s size into the WTO fold would be beneficial for the world and everyone expected China to gradually evolve into a functioning democracy. The result after 18 years of China’s entry into WTO has been mixed to say in a milder tone.

Consumers globally benefited from cheaper goods.
Corporations benefited by reducing their costs and gaining access to a huge market.
Manufacturing job losses happened in the western industrialized nations as jobs were outsourced to cheaper locations in China.
China benefited from WTO membership immensely but refused to change their style of Governance. It remained a Communist nation with strict control on anything that is remotely critical of the Government.
Technology developing nations complained of China using unfair trade practices and some even complain of intellectual property theft.
China’s economy became number 2 in the world and it challenged the existing post World War II geopolitical order.

India in the meanwhile managed to become the third largest economy in Asia behind China and Japan.

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India-China bilateral trade:

As India and China grew large in size and economy, the trade between the two rose rapidly over the years. According to Embassy of India in Beijing report the bilateral trade volume has increased from $70.65 Billion in 2014 to $84.32 Billion in 2019 for the period January to November. The trade imbalance has also increased over the years indicating that India imports at least 4 times of what it exports.

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Source: Embassy of India in Beijing.

Chinese investment in Indian Startups:

Over the last decade as private capital became huge leading to the phenomena of Unicorns ( Private Firms valued over $1 Billion ), record funding of Indian startups from Chinese firms started to emerge. According to the Financial Times, Refinitiv data shows deals involving Chinese investors totaled $1.4 Billion in the last quarter of 2019. According to Tracxn Chinese funds have invested in 54 firms in 2019 compared with just 3 in 2003 and double of 2017. This has put Chinese investors in two-third of the major Unicorns of India.

Alibaba has invested in Paytm a Fintech firm and Zomato a food delivery company. Similarly Tencent another Chinese Internet firm has invested in ride sharing service Ola and edtech firm Byju.

Geopolitical Rivalry:

Over the years as Pakistan, India’s arch enemy became China’s best friend in town, India started getting awry of its large Northern neighbor. It slowly but steadily started to get itself aligned with countries forming alliances targeting China. U.S, India, Japan and Australia are the members of a Quad that keeps a hawk eye on the military activities of China in the Pacific and Indian Ocean region.

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Source: Japan-Forward.com

China on the other hand has actively tried to revive the ancient Silk road with its modern Belt and Road initiative. The new initiative involves creating a massive infrastructure of roads, railways, ports etc. The biggest investment of $60 Billion so far of the initiative has been in Pakistan to connect China to the Arabian Sea at the Gwadar Port. India had protested against it on security grounds as it passes through the Pakistan Occupied Kashmir region. Similar to its land projects, China also planned its maritime initiative better known as the 21st Century Maritime Silk road. The project prima facie looks like an infrastructure one but if one would analyze seriously its a good strategy to provide credit to less developed countries and bring them to its fold.

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Source: Council Foreign Relations

Ladakh Standoff & Future:

The Ladakh standoff assumes significance since its the first time in decades that there are casualties on both sides. India has openly announced that 20 of its soldiers were killed but China did not disclose the number of casualties. The big question everyone is asking is how did the relation at the ground level deteriorate to such an extent when there seemed to be a good understanding between the two heads of state PM Narendra Modi and President Xi Jinping. We all saw pictures of the bilateral visits to China by the Indian PM and the visit to India by the Chinese President. In fact both the leaders included a trip to their respective home states in the itinerary giving a personal touch to international diplomacy.

I am not an expert on India-China relationship and I know it could be dangerous to make predictions. Tempers are running high and it would take a herculean effort at the highest level to bring the relationship on track. It’s worth the effort given the things at stake.

In short term (Upto 2 years) there could be boycott of Chinese firms and products. This may not be sustainable given our deep economic engagement across sectors. India could use this opportunity to develop a robust supply chain with less influence of China and look for alternatives.

In the medium term (2-5 Years) India will overtake China in population and become the most populous nation. It will also reach 3rd in the economic ranking of nations after China and USA. This would change the skewed trade levels towards a more sustainable level.

In the long term (5+ Years) as India become number 3 in economic rankings after China and U.S the two giants would learn to live with each other and probably resolve all border disputes. I would rather shoot for the skies and reach the mountain top than sit on the ground and go nowhere.

Stay Safe and Healthy !

Material Sources:

Muses