With US Tariffs Looming, Will India Ease Trade Barriers With China?

With tensions between India and China along the border showing signs of easing, Indian policymakers are now considering ways to improve economic ties with Beijing. This shift is being viewed as a strategic move, particularly as the United States under President Joe Biden is pressuring India to lower tariffs and accept trade terms set by Washington.

Reviewing Trade and Investment Restrictions

According to sources familiar with the discussions, Indian authorities are exploring ways to relax or remove some of the trade and investment restrictions that were imposed five years ago following the Galwan Valley clashes in 2020. Several proposals are being considered, driven by industry demands. These include easing visa restrictions for Chinese personnel, lifting certain tariff and non-tariff barriers, and potentially allowing some banned Chinese apps to operate again in India.

Key Areas of Consideration

• Relaxation of Visa Policies: The Indian government is reviewing visa policies for Chinese workers, particularly those involved in infrastructure projects, installation of heavy machinery, and related operations.
• Reduction of Tariff and Non-Tariff Barriers: There is a growing push to ease restrictions on the import of Chinese goods, particularly those not produced at scale in India. The Ministry of Commerce is evaluating the removal of certain quality certification requirements under the Bureau of Indian Standards (BIS) that currently affect Chinese imports.
• Investment Policy Adjustments: India is considering modifications to its 2020 policy, which mandates government approval for investments from countries sharing a land border with India. This adjustment could facilitate investment flows from Chinese companies, potentially addressing India’s widening trade deficit with China.

Strategic Considerations for India

Insiders indicate that engaging in open economic discussions with China could serve as a strategic hedge against U.S. trade pressures. A recent presentation by the Finance Ministry reportedly highlighted the benefits of partially lifting restrictions on Chinese trade and investment. However, government departments, including the Ministry of Finance, Ministry of Commerce, and Ministry of External Affairs, have not yet provided an official response.

A government source explained, “Since we are already being compelled to lower tariffs due to U.S. pressure, it makes sense to ease some of the non-tariff barriers as well. Indian industry has been pushing for this change, particularly small and medium enterprises that rely on Chinese inputs.”

China’s Interest in Strengthening Trade Relations

China is also keen to restore business ties with India. In light of India’s growing trade deficit with China, Beijing has proposed increasing Chinese investments in Indian markets. Trade experts believe that by allowing Chinese companies to invest in Indian ventures, India could gain leverage in negotiating better market access for its own exports, especially in sectors like pharmaceuticals and agriculture, which currently face significant restrictions in China.

A source close to the negotiations remarked, “These talks have been ongoing for some time, and announcements on trade relaxations could be made in the coming weeks. This move would also send a message to the U.S. that India has alternative trade partners.”

Current Trade Landscape Between India and China

• Trade Volume: In the fiscal year 2023-24, bilateral trade between India and China reached $118.40 billion. China regained its position as India’s top trading partner, surpassing the U.S. after a two-year gap.
• Imports from China: China accounted for 15% of India’s total imports, with Indian imports from China amounting to $101.74 billion.
• Foreign Direct Investment (FDI): Despite the large trade volume, Chinese FDI in India remains relatively low. Between April 2000 and September 2024, China contributed just $2.5 billion in FDI, placing it 22nd on India’s list of foreign investors.
• Trade Deficit: India’s trade deficit with China reached a record $83 billion in 2023. This growing imbalance is due to India’s limited export basket, primarily consisting of raw materials, and China’s market restrictions on Indian goods like pharmaceuticals and IT services.

Challenges and Future Considerations

A recent working paper by the Economic Advisory Council to the Prime Minister (EAC-PM) pointed out that Indian exporters face several non-tariff barriers in China. Addressing these issues could improve India’s market access and balance trade relations.

China, meanwhile, is navigating economic challenges, including a domestic housing crisis and a shift in Western investment strategies under the ‘China Plus One’ policy. While India has positioned itself as an alternative manufacturing hub, complete economic decoupling from China remains difficult.

A senior Indian official noted, “There could be a gradual opening up to Chinese investments, primarily through joint ventures where Indian companies retain majority control.”

Government’s Evolving Stance

India’s Economic Survey 2023-24 recommended encouraging Chinese investment while discouraging imports of finished goods with minimal local value addition. A government official commented, “Where China floods our market with low-cost goods, we will impose anti-dumping duties to protect domestic industries. But for critical imports, we should ensure a steady supply.”

Recent shifts indicate that India is open to limited engagement with Chinese businesses. Notable developments include:

• SAIC Motor’s divestment in MG Motors: The Chinese automotive giant sold its controlling stake to Indian investors led by the JSW Group.
• Shein’s re-entry into India: The Chinese fashion brand, previously banned, is now operating under Reliance Retail’s management.

While tensions between India and China have softened, both nations are cautiously exploring ways to re-engage economically. India’s strategy appears to be balancing U.S. trade pressures with a pragmatic approach toward China, ensuring that any policy shifts protect national interests while fostering economic stability.