To understand India’s trade imbalance with China, look inside Indian factories.
Many of the big machines are Chinese, as are the electronic components and materials feeding them. An electric vehicle plant needs rare-earth magnets from China, while Indian drugmakers rely on Chinese pharmaceutical ingredients.
India has spent years trying to become less dependent on its giant neighbor. Instead, it has been buying more.
The total volume of goods exchanged between the two countries has nearly doubled over the past five years, to $151 billion a year. But the trade has become more unbalanced than ever. India now buys roughly seven times as much from China as it sells there.
That surge came even as relations between India and China went into a deep freeze. A bloody hand-to-hand skirmish at the Himalayan border in 2020 killed at least 24 soldiers and brought a run of high-level diplomacy to an abrupt halt. On Saturday, Xi Jinping, China’s top leader, will set foot in India for the first time in more than six years.
For India, the imbalance creates a difficult problem. Its industrial ambitions depend heavily on Chinese goods, even as that dependence exposes India to strategic risks and makes it harder for its companies to gain the scale needed to compete with Chinese rivals. Now, with the U.S.-Israeli war with Iran driving up energy costs, Chinese imports are widening India’s global trade deficit and weakening its currency.
India is not alone in struggling with a flood of low-cost Chinese goods. China’s record trade surplus reached nearly $1.2 trillion last year, deepening concerns among trading partners over the growing dominance of Chinese companies across industries.
Those tensions spilled into the open this month at a gathering of economic officials from the Group of 20 nations. The U.S. Treasury secretary, Scott Bessent, accused China of blocking a joint statement criticizing countries “with excessive and persistent external surpluses.”
As India hosts China at the BRICS summit this weekend, analysts expect trade to loom large as a source of tension, alongside the two countries’ disputed border.
Both sides seem to prefer quiet along the border for now. The harder problem may be their economic relationship.
For India, keeping Chinese goods out is not an option.
“We will need to engage with them,” said Shekhar Aiyar, director of the Indian Council for Research on International Economic Relations. India should “aggressively invite Chinese firms in — especially in critical sectors like green technology, semiconductors, manufacturing, where China is the world leader,” Mr. Aiyar said. In batteries and solar power alone, he estimated, China has a 30 percent cost advantage over any other exporter.
After the 2020 border clash, India took an aggressive posture toward China. In retaliation, it banned TikTok and dozens of other consumer-facing Chinese apps and restricted Chinese companies’ ability to invest in Indian start-ups.
At the time, multinational companies were looking to move some supply chains out of China, and India appeared well positioned to benefit. For a brief moment, India looked capable of challenging China’s status as the “factory to the world.”
That did not happen. Vietnam and other Southeast Asian countries captured much of the investment, while China remained at the center of most supply chains.
Santosh Pai, a lawyer in New Delhi who advises Chinese and Indian companies, said Vietnam had secured large-scale investments as a manufacturing alternative to China — even though it, like India, imports heavily from China for essential equipment and materials. Vietnam’s supply chain, he said, is more integrated with China and the country courts Chinese investment more aggressively.
Mr. Pai said India’s efforts to reduce its economic dependence on China had produced mixed results. Even imports ostensibly coming from elsewhere are often Chinese goods processed or repackaged in Southeast Asia.
“The trade measures are well intentioned, but they don’t all work the way we want,” he said. “There is a lot of excess supply in China and a lot of excess demand in India.”
That leaves room for dealmaking. India wants to have access to Chinese money and technology. China wants India’s potentially enormous market.
But neither is willing to end up on the losing side of that exchange. Chinese companies do not want to miss the chance to build their brands in fast-growing India, even if its average consumer still has relatively little to spend. India, meanwhile, wants to protect its companies from far more efficient competitors.
The tension is sharpest in high-value, high-tech manufacturing. India wants Chinese investments, but investment that helps build an Indian industrial base. Apple’s iPhone manufacturing, about a quarter of which has shifted to India, is a prime example.
China has an obvious interest in keeping its position as the world’s indispensable manufacturer, even if individual Chinese companies want to take advantage of India’s young work force and government subsidies. Some of its restrictions on trade with India appear intended to preserve that advantage.
The struggle extends even to the movement of people.
For much of the five years after the 2020 clash, travel was constrained by tit-for-tat restrictions, beginning with India’s blocking Chinese business and tourist visas and China’s responding in kind, with Covid-19 restrictions further complicating travel.
India began issuing visas more freely last year. But China has tightened its exit rules, preventing some Chinese citizens from traveling to places like India if it deems them a threat to national industrial or technological security.
Visas are among the practical disputes that Mr. Xi and India’s prime minister, Narendra Modi, could address at the summit, Mr. Pai said. “India will want some reassurances, both for business visas to China and engineers from China,” he said.
India has leverage, too. By working with companies like Taiwan’s Foxconn, one of Apple’s main contract manufacturers, it can gradually erode pieces of China’s industrial dominance. It can also restrict access to its domestic market of 1.4 billion people, a prize that will become more valuable as the average incomes in India rise.
But China has shown a willingness to use its dominance in strategic sectors as leverage. Rare-earth magnets, needed for electric cars and many other high-growth industries, are just one example. China has also gained enormous power over the production of many pharmaceutical ingredients, making India’s world-leading drug companies dependent on Chinese supplies.
Somnath Mukherjee, chief investment officer at ASK Wealth Advisors in Mumbai, worries about India’s global trade deficit.
It is “simple arithmetic,” he said, that the Indian rupee will remain under pressure as long as India buys more than it sells. The central bank can manage that, he said, even though higher oil prices and a flight to artificial intelligence stocks in the United States have made the task trickier.
“It is a fact that many countries, China and now the U.S. as well, have started weaponizing trade,” Mr. Mukherjee said. “China’s weaponized product access has become a source of massive concern.”
Keith Bradsher and Hari Kumar contributed reporting.
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