After Years of Strain, an India-China Reset Could Reshape Trade Across Asian Economies

After years of strained relations following the 2020 Galwan Valley clashes, India and China are quietly orchestrating a diplomatic revival that could significantly transform Asia's economic landscape. The handshake between Prime Minister Narendra Modi and President Xi Jinping on the sidelines of the Shanghai Cooperation Organisation Summit in Tianjin on August 31, 2025 was more than a mere ceremonial gesture—it marked the onset of a pragmatic reset that industry analysts believe could redefine regional trade dynamics.

The backdrop to this India-China re-engagement is Donald Trump's return to the White House and his imposition of a punitive 50% tariff on India. This development has unsettled Indian exporters, particularly those in the textiles, footwear, gems, jewellery, seafood and other sectors. Consequently, New Delhi appears compelled to reassess its economic partnerships. For a long time, the US has been India's largest trade partner, with India enjoying a trade surplus of $86.51bn in the fiscal year 2024–25. US companies such as Meta, Google and OpenAI have established a substantial user base in India.

However, Trump's return and the 50% tariff have undoubtedly altered these dynamics. India's response was measured. It has sent a strong message that it can do business with any country if it suits its economic benefits, including the purchase of oil from Russia. However, Prime Minister Modi's visit to China appears more strategic than economically driven, laden with symbolism. This is because India's trade relationship with China is significantly imbalanced in favour of China. In 2024, the trade volume between the two countries reached $138.48bn, with China once again becoming India's leading trading partner. However, India faces a substantial trade deficit with China, which soared to an unprecedented $99bn in 2024. It will be intriguing to see how this renewed engagement between India and China influences regional trade dynamics.

Beyond Border Management

Foreign minister-level talks held in New Delhi in August 2025 yielded substantial outcomes that extended well beyond customary diplomatic formalities. The agreement to resume direct flights, reopen border trade routes and restore the Kailash Mansarovar Yatra signifies the systematic dismantling of previous barriers. More importantly, Beijing has pledged to resume the supply of critical commodities, including fertilizers, rare earth minerals and tunnel-boring machines, which are essential for India's agriculture and infrastructure sectors.

This commitment will strengthen India's manufacturing ambitions, which remain heavily reliant on Chinese supply chains, particularly in the electronics, pharmaceuticals and renewable energy sectors. Enhanced economic collaboration between India and China is expected to strengthen supply chain connections, with both nations likely boosting trade in intermediate goods, technology and investments.

This development could lead to the reconfiguration of regional supply chains centred on an India-China axis, potentially reducing the share of Southeast Asia and Korea in certain sectors and nurturing more triangular trade flows involving India, China and Asean. Nevertheless, these favourable outcomes depend on the strength of India-China bilateral relations, which have historically been less than ideal.

Managing the Balance

In response to decreasing trade with Western nations, China is strategically shifting its focus toward the Global South, anticipating a $1.25trn increase in trade with emerging markets by 2033. Asean, in particular, has become a major beneficiary of supply-chain diversification, with several member states experiencing rapid growth. China already enjoys favourable trade relations with countries such as Russia, Vietnam, Thailand, Malaysia and Pakistan. Additionally, tariffs on India have provided China with opportunities to strengthen its trade relations with India.

India has the potential to become an alternative economic hub in Asia, complementing China, particularly as global companies reevaluate their dependencies in the wake of Covid-19 and ongoing trade tensions. A positive India-China relationship could establish new standards, such as supply-chain management, digital regulations and green technology that prioritise Asian interests over Western models. Rejoining regional value chains could support India's manufacturing goals.

By partnering with Chinese companies, especially in sectors such as pharmaceuticals, electronic components, rare earths and fertilizers, India could reduce its trade deficit while enhancing its manufacturing capabilities. Additionally, this renewed collaboration offers Indian MSMEs the chance to become part of Chinese supply chains by providing raw materials and intermediates. Simplified rules of origin under agreements like the Regional Comprehensive Economic Partnership (RCEP)—which India chose not to join in 2019 but might reconsider—could ease this integration.

The Ultimate Perceived Benefit

Companies have begun implementing "China+1" strategies to reduce their dependence on single-source manufacturing. This shift has led to a significant restructuring of supply chains across many Asian countries. In the context of India, the country has gained from Apple's decision to move iPhone production from China to India for the US market. The renewed engagement between India and China could turn this competitive scenario into a complementary one.

By combining China's expertise in hardware manufacturing and green technology with India's strengths in software and services, integrated value chains can be established across both economies. Such collaboration would enhance the competitiveness of the combined entity against Western alternatives while lowering costs for global consumers. Additionally, the revival of border trade in locally produced goods could offer much-needed relief to frontier communities and create new economic opportunities for them. However, the integration of India and China carries certain inherent risks.

India is unlikely to open its key sectors to Chinese trade because of the associated risks. Indian manufacturers are concerned that China might inundate the Indian market with competitively priced goods or redirected inventories, putting immediate pressure on Indian SMEs. Additionally, China may discreetly enhance its access to Western markets, potentially undercutting Indian products. It could fill any export gaps left by India, leveraging its capacity and cost advantage to replace the sectors affected by tariffs.

Indian exporters could be pushed into more distant or less lucrative markets, diminishing their profits and their visibility. India can strategically mitigate these effects by diversifying its trade partners, advancing the "Make in India" initiative and exploring markets beyond the US while maintaining good trade relations with the US. Recent developments indicate that India is open to negotiations.

The US also has natural reasons to maintain ties with India, which could lead to a reduction in tariffs over time. However, India and China have longstanding issues, such as border disputes, China's relationship with Pakistan and geopolitical distrust. Increasing economic ties with China could jeopardise India's strategic independence by creating vulnerabilities that Beijing might exploit in future conflicts. 

The recent re-engagement between India and China signifies a larger shift towards practical geopolitics amid growing global divisions. Both nations understand that achieving their developmental goals necessitates stable economic collaboration that goes beyond short-term political conflicts. The US’s actions have merely spurred the two countries to resolve some key disagreements. For the wider Asian economy, effective cooperation between India and China could hasten the rise of what experts call an "Asian century."

The combined economic influence of these two nations, encompassing 2.8bn people and an increasingly significant portion of global GDP, lays the groundwork for alternative trade and financial systems that might lessen global reliance on Western institutions. For India, engaging with China at this juncture offers unique opportunities and considerable risks. India cannot overlook the US and its investments in its economy and bilateral relations.

Other partner countries for India, such as Japan, France, Germany and Australia, are also closely monitoring developments and hold somewhat sceptical views about China. The outcome of this reset will affect not only regional trade dynamics but also the broader path of global economic governance in coming years. For India, the ability to capitalise on this opportunity while maintaining strategic autonomy could determine its position in the emerging multipolar world order.

The writer is associate professor at Great Lakes Institute of Management, Gurgaon.