How to Deal with India's Economic Reliance Upon China

A substantial trade deficit, yet manageable with strategic intervention.

- AJAY DUA

With its vast resource endowment and notable efficiencies in sourcing, production, distribution, and trade, China has accumulated trade surpluses with numerous countries. Through assiduous and methodical efforts in import substitution and export promotion, a handful of them may, over time, be able to reduce their trade deficits and possibly their dependence on inflows of investment and financial aid. However, their vulnerability to economic shocks and growth deceleration is likely to persist as long as China retains the ability to weaponize trade and financing. China has repeatedly demonstrated a willingness to deploy both tools liberally in pursuit of its geopolitical and strategic interests.

China's capability to undertake such strategic manipulations stems from its well-conceived and effectively executed policies aimed at exploiting economic dependencies. Since the early 1980s, when Deng Xiaoping made the deliberate decision to steer China away from a closed, state-run economy toward a market-based, yet state-controlled model, the country's financial and military capabilities have steadily expanded. Selectively letting in foreign capital, technology, and showing scant respect for the international regime of intellectual property rights came in handy to achieve all-round progress. By leveraging its huge population and market size, within just three decades of the policy shift, China had developed the biggest manufacturing base, accounting for 30% of global manufacturing, turned itself into the largest trading nation with 37% of GDP originating there, and emerged as the second-largest economy, next in size only to the USA, and way ahead of all others.