Over the past few weeks, multiple reports have emerged suggesting that Chinese companies are restricting export of vital advanced capital goods and machinery to India. Indian manufacturers of electronics, solar panels, and electronic vehicles are struggling to keep up with their production, given the shortage in supplies of key machinery. After decades of failed attempts at industrialization, India is finally turning a corner with the rapidly growing electronics manufacturing services. But the recent moves by China could effectively stymie India’s nascent industrialization journey.
At around $2,900 per capita income, India is still a lower-middle income economy, and needs a sizable manufacturing base to rise up the developmental ladder. China enjoys a position of dominance across most manufacturing sectors, and it is inconceivable to integrate with some of these production networks without having a deep trading relationship with China. If these de facto Chinese export restrictions are here to stay, it could amount to India’s gravest geoeconomic challenge since the sanctions imposed by the West following New Delhi’s successful nuclear test in 1998.
The current Chinese export restrictions come on the back of a recent diplomatic rapprochement between the two countries. In early 2020, when China’s People’s Liberation Army (PLA) made their way into Indian-controlled territory along the disputed border in the northern region of Ladakh, it eventually resulted in lethal skirmishes between the two armies. Since then, the territorial dispute has continued to plague the bilateral relationship and left the Line of Actual Control (LAC), the de facto border, heavily militarized.
During this period, India put in place an investment screening law for inbound investments from all countries India shares a border with – effectively targeting Chinese companies. Given India’s relative backwardness relative to China’s industrial capabilities, the investment screening measures, along with some import restrictions, were mostly symbolic rather than actual strategies to pressure China. Nevertheless, in both the economic and security spheres, the bilateral relationship had entered a phase of free-fall. In this context, the recent diplomatic thaw indicated a shift toward a less hostile relationship, if not a return to normalcy.
Given the emerging positive signals, it is curious why China would choose to block the exports of critical machinery to India right now and signal a return to the old normal. There could be three interrelated reasons for the recent Chinese actions.
First, Beijing could be weaponizing India’s dependence on China. In a landmark 2019 research paper, Henry Farell and Abraham L. Newman argued that we increasingly live in a world of weaponized interdependence. They wrote, “proper participation in the world economy requires access to global networks” – such as access to Chinese capital goods imports for India’s manufacturing firms. The issue is that such networks create asymmetric dependencies, primarily because these networks are quite centralized, and it is cumbersome to create new supply chains over short-to-medium term. For instance, it is inconceivable to overnight replace either the U.S. capital markets or the Chinese market for intermediate goods. In that sense, through its unspoken export controls China would be leveraging India’s asymmetric interdependence on Chinese goods and machinery.
Second, it is possible that China perceives India’s early industrialization success as a threat. Therefore, Beijing is counteracting that trend. In large part, India’s growing success in electronics exports – which now is its third highest export category – stems from anchor investments by OEMs such as Foxconn, Lenovo, BYD, and Wistron, among others, which have primarily responded to lucrative production linked incentives (PLI) by the Indian federal government. China might be trying to ensure that these companies struggle to expand their production in India, in turn, stunting New Delhi’s capacity to industrialize.
A country’s effort to industrialize is a way to accumulate enough wealth to buy or develop adequate hard power to deter its enemy. This is precisely the kind of inner balancing India might be trying to do vis-a-vis China. In turn, Chinese export curbs could be seen as Beijing’s act of external balancing against New Delhi’s moves.
Third, with the arrival of President Donald Trump in the United States, the global geopolitical market seems to have suddenly become quite illiquid, and Beijing might be picking up some early leverage against New Delhi. Over the past decade, Beijing has struggled to look at the China-India relationship beyond the shadow of the China-U.S. relationship. From Beijing’s perspective, India is a U.S. ally in all but name. Thus, assuming that the Sino-American relationship is likely to deteriorate over the next few years, it makes sense for Beijing to also take some early steps against India – one of the United States’ central bets against China.
Which of these three factors – or a combination of them – are responsible for the latest Chinese export curbs to India matters to the degree that it allows New Delhi to better interpret China’s perceptions of India. However, the unmissable underlying fact is that India will genuinely struggle to industrialize without some Chinese high-tech capital goods, and Beijing is looking to leverage that very critical dependency. This effectively leaves New Delhi with three options to resolve this geoeconomic conundrum.
First, it can look for alternative sources of capital goods, but this might be either expensive or impossible over the short-run. Second, India can reorient its strategic orientation by signaling a more neutral position vis-à-vis the China-U.S. bilateral relationship. However, this might call into question the very raison d’etre of India-U.S. ties. Finally, India might choose to completely give up the United States and move significantly closer to China. This might help New Delhi rapidly industrialize using Chinese goods and capital, but it might lose its much bigger market for IT services exports to the U.S.
India is unlikely to choose any one of these blunt options. It is more likely to try to find a middle path that will feature some stop-gap measures and diversification. Regardless, such geoeconomics challenges are likely to get more frequent as India industrializes further, and navigating them will require deft usage of statecraft.