Why a China-US thaw may not be in India’s economic interests

For anyone observing the simmering tensions in United States-China relations, the recent meeting between US National Security Advisor Jake Sullivan and Chinese Foreign Minister Wang Yi would have gone exactly as expected.

The readouts published by both sides suggest that the meeting was merely a reiteration of the red lines each side must not cross. To an international audience closely following the development, these readouts confirm that US-China competition is here to stay, with little chance of a thaw. But, as the White House readout suggests, the two sides can still attempt to “manage the relationship responsibly.” 

An emerging feature of this competition has been the steady elevation of India’s position in the US strategy to counter China. In fact, just before his visit to Beijing, Sullivan also hosted Indian defence minister Rajnath Singh in the US for a series of discussions on strengthening India-US ties, especially in the fields of defence and critical technologies.

Their mutual competition with China has hence opened doors for collaboration in economic, military, and technological domains. In this regard, a thaw in US-China relations may not be in India’s economic interests.

As the two largest economic powers of the world, the US and China are expected to manage differences in a manner that does not destabilise the security of global value chains.

However, as evident from the discussions at the Wang-Sullivan meeting, the two sides continue to compete in the trade and critical technologies domains. As Sullivan reiterated, the US has adopted a firm stance on limiting the export of American critical technological talent, investments, and materials to China, while China has responded by calling such restrictions unfair.

China is also making grand investments in indigenous technological capabilities and has no intention to give up its export dominance in vital domains such as solar photovoltaic cells, strategic electronic components, and New Electric Vehicles (NEVs), all of which are facing heavy import tariffs in Western markets due to the Chinese State’s market- and price-distorting subsidies.

Countries around the world are hence attempting to build cadence with the US’ secondary sanction and tariff regimes, balancing such attempts with the low cost advantages imports from China offer. And even US allies are not exempt—the Netherlands-based firm ASML, for example, had to agree not to renew licences to service equipment or provide spare parts to China for semiconductor production, despite the fact that China accounted for nearly half of the firm’s revenues in Q2 of 2024.

The growing sentiment in the West to de-risk certain value chains from China has created opportunities for countries like India, which has the potential to compete with China in production costs, standards, and backward supply chain linkages. In this strategy, commonly referred to as ‘China+1’, India has frequently emerged as an alternative destination and has sought to position itself as the US’ new hub for production and investment.

But this effort has its challenges. Strict regulatory restrictions, a lack of openness to business, and robust tariff and non-tariff barriers have led India to lose out in certain sectors to Vietnam, Thailand, and Mexico. Nonetheless, there is optimism about India’s potential to emerge as a viable ‘China+1’ alternative, especially as a recent report by Rhodium Group ranks India fifth among the top 10 countries with the highest diversification attractiveness. 

India’s Choices

India now finds itself in a unique position, with the ability to leverage its relationship with the US to seek concessions. Recently, the US, Canada, and the EU imposed import tariffs of 30 -100 per cent on imports of electric vehicles made in China. This includes EVs manufactured by the Texas-headquartered Tesla, shipped from its factory in Shanghai (the EU, however, has granted a 9 per cent concession on tariffs to Tesla in August).

This highlights the discontent surrounding the supply glut created by Chinese overcapacity, which has even led Western firms to face the wrath of their governments for producing in or supplying to China, significantly undercutting their cost and revenue advantages.

In this regard, India has a significant opportunity to take a nuanced and clear-eyed approach to four crucial factors: inviting private sector investment from US firms, opening up to imports of critical components, implementing regulatory changes to create an uncomplicated business environment, and conducting economic diplomacy with the US.

The goal of these efforts should be for India to emerge as a whitelisted destination of imports for US and other Western markets, even if Chinese components are involved in its production processes.

To achieve this, India must not only clear restrictions on imports from China to develop robust supply linkages in the assembly process but also negotiate with the US to ease potential rules of origin-related restrictions on imports from India based on mutual interests and friendly relations. 

Though not exactly similar in nature, there exists some precedent to the extension of such goodwill. In June 2023, for example, following continued bilateral exchanges to strengthen the India-US trade relationship, India agreed to roll back its retaliatory import tariffs against the US and terminate six WTO disputes with it.

If India can successfully make the case that Tesla can similarly produce in and export from India without facing import tariffs from the US, not only will India witness some progress in its China+1 ambitions, but also create room for Western economies to seek the right alternative without hampering business sentiment.

Till such a time as India can find its own alternatives for imports of strategic components, however, it must rely on cost effective methods of procurement, even if they involve China.

(The writer is a Staff Research Analyst (China) with the Indo-Pacific Studies Programme, The Takshashila Institution, Bengaluru)