Trade Dynamics Between India and China

Our Chief Asia Economist Chetan Ahya discusses how the evolving trade relationship between India and China could redefine global supply chains and unlock new investment opportunities.

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Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. 

Today – one of the most important economic relationships of our time: India and China. And what the future may hold. 

It’s Thursday, September 11th at 2 pm in Hong Kong.

Trade dynamics between India and China are evolving rapidly. They are not just shaping their own futures. They are influencing global supply chains and investment flows. 

India’s trade with China has nearly doubled in the last decade. India’s bilateral trade deficit with China is its largest—currently at U.S. $120 billion. On the flip side, China’s trade surplus with India is the biggest among all Asian economies.  

We expect this trade relationship to deepen given economic imperatives. India needs support on tech know-how, capital goods and critical inputs; and China needs to capitalize on growth opportunities in the second largest and fastest growing EM. Let’s explore these issues in turn. 

India needs to integrate itself into the global value chain. And to do that, India needs Foreign Direct Investment from China, much like how China’s rise was fueled by Foreign Direct Investment from the U.S., Europe, Japan, and Korea, which brought the technology and expertise. For India, easing restrictions on Chinese FDI could be a game-changer, enabling the transfer of tech know-how and boosting manufacturing competitiveness. 

Now, China is the world’s manufacturing powerhouse. It accounts for more than 40 percent of the global value chain—far ahead of the U.S. at 13 percent and India at just 4 percent. The global goods trade is increasingly focused on products higher up the value chain—think semiconductors, EVs, EV batteries, and solar panels. And China is the top global exporter in six of eight key manufacturing sectors. To put it quite simply, any economy that is looking to increase its participation in global value chains will have to increase its trade with China. 

For India, this means that it must rely on Chinese imports to meet its increasing demand for capital goods as well as critical inputs that are necessary for its industrialization. In fact, this is already happening. More than half of India’s imports from China and Hong Kong are capital goods—i.e. machinery and equipment needed for manufacturing and infrastructure investment. Industrial supplies make [up] another third of the imports, highlighting India’s dependence on China for critical inputs. 

From China’s perspective, India is the second largest and fastest-growing emerging market. And with U.S.-China trade tensions persisting, China is diversifying its exports markets, and India represents a significant opportunity. One way Chinese companies can capture this growth opportunity is to invest in and serve the domestic market. Chinese mobile phone companies have already been doing this and whether this can broaden to other sectors will depend on the opening up of India’s markets. 

To sum up, India can leverage on China’s strengths in manufacturing and technology while China can utilize India’s vast market for exports and investment.

However, there’s a caveat: geopolitics. While economic imperatives point to deeper trade and investment ties, political developments could slow progress. Investors should watch this space closely and we will keep you updated on key developments. 

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