China-India relations and their impact on Europe

Publishing date
14 December 2022
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 As the two most populous countries in the world with distinctly different civilisations, India and China are incredibly important economies for Europe and the world. India and China’s bilateral relations with other countries will affect the distribution of power worldwide and could dictate whether there will be a bipolar or multipolar international system in years to come. 

In terms of economic size, the European Union is larger than India. However, there are signs that India’s contribution to global growth will soon outpace that of the EU. If there is a country that can determine the future of a multipolar world, rather than a bipolar world, it will be India. The same could be said about the EU bloc in terms of strategic importance for a multipolar world. Because of their similar level of importance, Europe must focus more closely on India’s relations with China.

Turbulent China-India relations

Economic relations between China and India have never been easy. India attempted to reform and open the economy in 1991 but the process was not as successful as China’s attempt. India’s opening-up was discontinued on several occasions and as a result, India’s growth continued to trail below that of China until quite recently. One of the key differences between the two economies was their level of savings. 

China’s higher savings threshold allowed the country to self-finance a massive upgrade in logical and transport infrastructure. This supported the development of manufacturing by foreign direct investment to become the export engine of the world. India, instead, has only recently - especially since President Modi was re-elected - stepped up its efforts to attract foreign direct investment in the manufacturing and infrastructure sector. 

India’s quest for foreign investment is happening at a time when China has become the largest provider of infrastructure in emerging countries. China’s strategy - under the mantra of the Belt and Road initiative (BRI) – has so far been shunned by India’s government. In fact, India is one of the key emerging economies which has preferred to stay away from the BRI and has expressed serious doubts about the project. 

For example, India criticised China’s support to Pakistan in areas where there are still territorial disputes between India and Pakistan. Amid heightened security concerns after a border crisis in 2020, India has also kept Huawei out of 5G trials, banned hundreds of Chinese apps and even stopped several Chinese companies from investing in India. India, which also long avoided regional trade agreements, recently decided to join the US-led Indo-Pacific Economic Framework (IPEF), sending a clear signal to China on their intentions. 

Despite the Mody administration’s efforts to stem off Chinese influence on the Indian economy, the reality is that India’s dependence on Chinese imports is only increasing, while Indian exports to China remain stagnant. India’s ballooning trade deficit with China, which reached US$64.5 billion in 2021, has increased even more in 2022. Bilateral trade between the two is not only unbalanced because of this growing deficit but also because of sector specialisation, and Chinese FDI in technology. India’s meagre exports are concentrated in food and primary goods while China exports manufactured goods with an increasing value add: phones, machinery, solar panels and electric vehicles are all prevalent products exported. 

Growth opportunities for India

Due to the ongoing reshuffling of the global supply chain pushed by geopolitical tensions, zero-covid policies in China and a rationale of diversification needs, India is emerging as a relevant global manufacturing alternative. Its population size and labour pool could allow for large economies of scale, if improvements in infrastructure and a more accommodating environment for FDI are established. There is a growing interest from companies such as Apple and Foxconn to diversify and many are therefore keen to explore India’s manufacturing future. 

India’s own industrial policy strategy is another important development, both because it could bring memories of the country’s past unsuccessful attempts to develop through inward looking policies, but also because they could be mirroring China’s own industrial policies.

In a nutshell, China-India economic relations have two main axes. First, the increasingly unbalanced trade relation in China’s favour and second, India’s economic model becoming too close to that of China, at least as far as industrial policy is concerned. 

Against such a backdrop, it is important to note that India is becoming increasingly relevant for the EU, not only as a potentially relevant trading partner, but also as a key force in shaping a more multipolar world. With China as a global power, the relations between India and China are very important for Europe, especially since they are neither stable nor very clear. Developments such as India’s reactions to China’s BRI, as well as the border skirmish in 2020 reflect this. 

Both countries also share a seemingly aligned position on Russia’s invasion of Ukraine in so far as both countries have remained neutral. Unpredictability in relations between India and China make it difficult for Europe to assess ongoing tensions. Therefore, they should not only pay closer attention to India’s potential as an economic power, but to how India’s relations with China could influence Europe and the world as a whole. 

ZhōngHuá Mundus is a newsletter by Bruegel, bringing you monthly analysis of China in the world, as seen from Europe.

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This is an output of China Horizons, Bruegel's contribution in the project Dealing with a resurgent China (DWARC). This project has received funding from the European Union’s HORIZON Research and Innovation Actions under grant agreement No. 101061700.

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About the authors

  • Alicia García-Herrero

    Alicia García Herrero is a Senior fellow at Bruegel.

    She is the Chief Economist for Asia Pacific at French investment bank Natixis, based in Hong Kong and is an independent Board Member of AGEAS insurance group. Alicia also serves as a non-resident Senior fellow at the East Asian Institute (EAI) of the National University Singapore (NUS). Alicia is also Adjunct Professor at the Hong Kong University of Science and Technology (HKUST). Finally, Alicia is a Member of the Council of the Focused Ultrasound Foundation (FUF), a Member of the Board of the Center for Asia-Pacific Resilience and Innovation (CAPRI), a member of the Council of Advisors on Economic Affairs to the Spanish Government, a member of the Advisory Board of the Berlin-based Mercator Institute for China Studies (MERICS) and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR).

    In previous years, Alicia held the following positions: Chief Economist for Emerging Markets at Banco Bilbao Vizcaya Argentaria (BBVA), Member of the Asian Research Program at the Bank of International Settlements (BIS), Head of the International Economy Division of the Bank of Spain, Member of the Counsel to the Executive Board of the European Central Bank, Head of Emerging Economies at the Research Department at Banco Santander, and Economist at the International Monetary Fund. As regards her academic career, Alicia has served as visiting Professor at John Hopkins University (SAIS program), China Europe International Business School (CEIBS) and Carlos III University. 

    Alicia holds a PhD in Economics from George Washington University and has published extensively in refereed journals and books (see her publications in ResearchGate, Google Scholar, SSRN or REPEC). Alicia is very active in international media (such as BBC, Bloomberg, CNBC  and CNN) as well as social media (LinkedIn and Twitter). As a recognition of her thought leadership, Alicia was included in the TOP Voices in Economy and Finance by LinkedIn in 2017 and #6 Top Social Media leader by Refinitiv in 2020.

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