Improved India-China trade ties could challenge US influence in Asia amid shifting geopolitical dynamics. India and China, Asia’s economic giants, are warming ties after years of tension, with bilateral trade reaching USD 118.4 billion in FY24, prompting questions about its impact on US influence in Asia. On Wednesday, August 20, 2025, China’s Foreign Minister Wang Yi’s visit to New Delhi signalled a thaw, driven by mutual economic interests and US trade pressures. This shift raises concerns about reshaping regional trade dynamics.
Why This Matters in South Asia
The burgeoning India-China trade relationship is pivotal for South Asia, where economic stability influences regional power dynamics. A stronger economic partnership could bolster India’s growth while challenging US-led initiatives like the Indo-Pacific strategy, potentially altering alliances and investment flows across the region, including in Pakistan, Bangladesh, and Sri Lanka.
A Thaw in India-China Relations
The recent improvement in India-China relations follows a turbulent period marked by the 2020 Galwan Valley clash, which killed 20 Indian soldiers. Diplomatic efforts, including the October 2024 agreement on patrolling along the Line of Actual Control (LAC), have eased border tensions.
On Tuesday, October 22, 2024, Prime Minister Narendra Modi met Chinese President Xi Jinping on the sidelines of the BRICS summit in Kazan, Russia, agreeing to resume direct flights and reopen pilgrimage sites in Tibet, according to a Ministry of External Affairs statement. Wang Yi’s visit on Monday, August 18, 2025—the first by a Chinese foreign minister in three years—further solidified commitments to enhance trade and investment, as reported by India’s Ministry of External Affairs on X.
Trade Growth and Imbalances
Bilateral trade between India and China has surged, reaching USD 118.4 billion in FY24, a 4% increase from USD 113.83 billion in FY23, according to the Global Trade Research Initiative (GTRI). China regained its position as India’s top trading partner, surpassing the US, with imports from China at USD 101.74 billion and exports at USD 16.67 billion.
Major Indian exports include iron ore (USD 3.63 billion), engineering goods (USD 2.65 billion), and marine products (USD 1.37 billion), while China supplies electronics, machinery, and chemicals. However, India’s trade deficit with China widened to USD 85.06 billion in FY24, driven by reliance on Chinese inputs for electronics and electric vehicles (EVs), such as lithium-ion batteries (USD 2.2 billion), per GTRI data.
US Trade Pressures and Strategic Shifts
US President Donald Trump’s imposition of a 50% tariff because of India’s Russian oil imports has pushed India closer to China. Milan Vaishnav, senior fellow at the Carnegie Endowment for International Peace, noted that India’s economic slowdown and declining foreign direct investment (FDI) make Chinese investment attractive. China’s FDI in India, though only USD 2.5 billion since 2000 (0.37% of total FDI), is poised to grow, especially in manufacturing and renewables, as per the Economic Survey 2024-25.
India’s “China Plus One” strategy, encouraging diversification of supply chains, has seen limited success, with companies like SAIC Motors divesting from MG Motors and Shein re-entering via Reliance Retail, indicating a cautious opening to Chinese investment.
Impact on US Influence in Asia
The strengthening of India-China trade ties could challenge the US’s Indo-Pacific strategy, which relies on India as a counterweight to China. India’s dependence on Chinese imports for critical sectors like telecommunications and pharmaceuticals (e.g., active pharmaceutical ingredients) creates vulnerabilities, potentially limiting India’s alignment with US-led initiatives.
A Brookings podcast on Wednesday, November 15, 2023, highlighted that India’s USD 3.5 billion in Chinese investments in unicorns by 2020 underscores deep economic integration. The US Institute of Peace, in a June 2025 report, warned that India’s trade reliance on China could constrain its support for US policies if economic retaliation is feared.
Regional Implications
India’s warming ties with China could shift South Asian dynamics. Neighbouring countries like Nepal, Bangladesh, and Sri Lanka, where China’s Belt and Road Initiative (BRI) has significant influence, may see India adopting a more competitive stance. India’s initiatives, such as BIMSTEC and SAGAR, aim to counter China’s regional outreach, but increased trade cooperation could lead to joint ventures, as seen in the 2014 India-China MoU on audio-visual co-production, which led to films like “Xuan Zang” and “Kungfu Yoga.”
The Carnegie Endowment suggests that Chinese investment in India’s infrastructure and renewables could reduce the trade deficit while enhancing India’s global value chain (GVC) participation, which rose from 35.1% in 2019 to 40.3% in 2022.
Background
India and China established diplomatic relations on Saturday, April 1, 1950, with a history of cooperation under the Panchsheel Agreement of 1954. Trade has grown from USD 3 billion in 2001 to over USD 100 billion in FY24, despite border disputes. The 2005 Strategic and Cooperative Partnership and 2014 investment commitments during Xi Jinping’s visit to India laid the groundwork for economic ties, though geopolitical tensions, including the 2020 Galwan clash, led to Indian restrictions on Chinese apps and investments.
What’s Next
As India-China trade ties deepen, India must balance economic benefits with strategic autonomy to mitigate risks of over-reliance on China. Easing trade barriers, as discussed in Wang Yi’s visit, and encouraging Chinese FDI in joint ventures could address the trade deficit while enhancing India’s manufacturing. However, India’s alignment with the US and QUAD partners will be crucial to maintain its regional influence, ensuring that India-China trade bonhomie does not undermine broader geopolitical goals.
Published in SouthAsianDesk, August 23rd, 2025
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