Broad-framing China + India

The demographic sequencing of their respective "rise" fates them together

Jim Nuttle illustration from “America’s New Map”

A solid piece from the Economist echoing a great deal of what I said yesterday to those Indian CEOs whom I briefed: the business imperative for trade and investment integration between China and India will inevitably overwhelms the natural rivalry.

Inconceivable, I know, and yet it will unfold.

Ask an Indian diplomat about relations with China and they will repeat a well-rehearsed mantra: there can be no return to normality until peace is restored on their disputed Himalayan border. That has been the official line for most of the time since 2020, when a deadly clash occurred there between Indian and Chinese troops. On the face of it, India’s stance is a rejection of China’s suggestion that the two countries should set aside the dispute, which has pushed India closer to America, and focus on areas of mutual interest.

The border controversy is a proxy, of course, for deeper Indian fears of Chinese encirclement through both Beijing’s “string of pearls” military-facility construction scheme and the broader Belt and Road Initiative.

Juraj Mihalik and Tom Zorc data visualization from “America’s New Map”

Juraj Mihalik and Tom Zorc data visualization from “America’s New Map”

If you’re sitting in the middle of all that activity, you’d feel surrounded too.

And so the two countries’ shared high-elevation border serves quite exquisitely as a venue for performative aggression. An endless and largely pointless slapping of faces with empty gloves, this phony conflict compels those natural forces of integration (respective business interests on both sides) into sort of an underground economic relationship.

Relations are indeed still far from their pre-2020 normality. And they are unlikely to return to it soon. Even so, there has been a quiet yet notable shift in recent months towards a new phase of relations defined by border stability and closer commercial ties. The shift reflects India’s urgent need for Chinese technology, investment and expertise to meet its immediate industrial needs. It is also based on China’s mounting concern about its own economy and escalating trade barriers worldwide.

This is the essence of the sequencing forced upon both giants through their demographic transitions (China’s now done, India’s just beginning). China, now risen, faces the trade barriers of a mature economy still addicted to export-driven growth and still wary of turning its middle class loose in mass consumption (why is a mystery). India, facing the tsunami-like impact of climate change upon its vast agriculture sector (45% of its labor!), needs to both urbanize and industrialize at a pace similar to China’s stunningly rapid ascent. That translates to infrastructure and manufacturing development at scale.

Thus, as China climbs the production ladder from low to high-tech goods (like the Tigers and Japan before it), it needs to avail itself of India’s vast demographic dividend and the relatively cheap labor it provides the world for a solid couple of decades. India, with a million souls entering the workforce EVERY MONTH, needs that rapid integration into global value chains already anchored by China, to include large-scale foreign direct investment flows that are, per Indian law, highly restricted.

So, it seems we have this inevitable stalemate, except we won’t:

The first sign of the shift came in November last year, when Indian restrictions on visas for Chinese professionals in some industries were relaxed. That was followed by a softening of rhetoric on China from Narendra Modi, the prime minister. In an interview with Newsweek magazine published on April 10th, weeks before the Indian election, Mr Modi described relations with China as “important and significant” and expressed hope that border stability could be restored … Then in May a new Chinese ambassador, Xu Feihong, arrived in Delhi after a hiatus of 18 months in which China’s embassy there operated without one. Mr Xu has since been on a charm offensive, meeting several members of the political elite.

Dial down the tough talk, dial down the performative military aggression.

But here is where the deeper, structural inevitability kicks in, once all the dust settles:

The other impetus for change is a recent surge of demand for Chinese technology in India, despite official efforts to reduce its economic dependence on its neighbour. After the clash in 2020, India’s government banned 320 Chinese apps, launched tax raids on Chinese companies and introduced new rules requiring government approval for any Chinese investment. Bilateral trade dropped, and Indian officials joined Western counterparts in trying to “de-risk” supply chains.

“De-risking” what needs to become India’s deep integration into global value chains now largely dominated by China … structurally, that’s a non-starter. If Washington talks New Delhi into that path, India is doomed. That is America’s fear driving India’s fear to the latter’s great disadvantage.