What's New

Unraveling The China-India Conflict Risk

By Erik French

India and China held their first joint military exercise along their contested border in Aksai Chin in early February. Is this a sign of warming ties? What are the prospects for international investors?

On February 6, China and India held a joint disaster relief exercise near their disputed border in Aksai Chin. Two 30-troop teams from each country’s military cooperated in disaster relief drills titled “Sino-Indian Cooperation 2016: Joint Tactical Exercise.”

Coming amid burgeoning Sino-Indian trade, some observers have taken this exercise as a signal of improving bilateral ties and decreasing geopolitical tensions between the historic rivals. Given recent developments, how optimistic should investors be about the future of Sino-Indian relations? What are the primary impediments to stronger bilateral commercial ties and diplomatic rapprochement?

The Ghosts of 1962 Still Linger

One of the principal obstacles to healthy Sino-Indian relations is the continued dispute over the two states’ borders in Aksai Chin and Arunachal Pradesh. These disagreements led to a brief Sino-Indian border war in 1962. The conflict resulted in a humiliating defeat for India that continues to color how Indian leaders see the bilateral relationship today. It also led to the suspension of Sino-Indian diplomatic and commercial ties until the late 1980s.

At first glance, it might seem that tensions over the border dispute are diminishing, given the Sino-Indian Border Defense Cooperation Agreement in 2013, the establishment of a hotline between local military commanders in 2015, and the recent Joint Tactical Exercise. These steps, however, have been accompanied by growing provocative military activity on both sides. 

In particular, both sides are beefing up infrastructure — both in the contested territory itself and nearby — in order to support their local military capabilities and legitimize their sovereignty claims. This has contributed to frequent standoffs and clashes between border forces.

Given this troubling context, measures like the recent Joint Tactical Exercise should be seen as an effort to prevent inadvertent crisis escalation rather than signals that relations are thawing or that the dispute is nearing a resolution.

While these arrangements may improve crisis stability, they do not herald a major shift in the tenor of Sino-Indian rivalry and they are unlikely to reduce the frequency of spats and stand-offs along the border. Investors should be aware that the border will be a source of competition and a major obstacle to closer commercial ties between the two economic powers for years to come.

Beyond the Border

The border dispute is not the source of tension in Sino-Indian relations.

Both states’ overall power and military capabilities are on the rise; this is generating a security dilemma between the two nuclear powers as both fear the other’s capacity to threaten their security and undermine their freedom of action. These concerns are particularly acute for India given that China’s military modernization is outpacing its own.

These worries will put a damper on opportunities to deepen and broaden commercial and diplomatic ties between the two Asian economies.

Chinese and Indian Military Expenditure

Source: SIPRI Military Expenditure Database

India’s budding cooperation with the US and Japan similarly strains India’s ties with China; China fears that the US and Japan may be drawing India into a counterbalancing coalition designed to contain Chinese growth.

India's Trade Deficit With China

Source: UN Comtrade

Finally, although commercial ties between the two countries have deepened significantly, India’s trade deficit with Beijing is broadening.

Many Indians therefore see the economic relationship as lopsided and are wary of growing dependence on China. This will likely to contribute to bilateral tensions and could fuel protectionist sentiment in Indian politics.

Outlook Warrants Cautious Optimism

All of these factors make it likely that India and China will continue to perceive one another as rivals for the foreseeable future.

But this does not mean that conflict risk between the two will rise unabated or that a repeat of the 1962 Sino-Indian War is likely. Mutual deterrence between the two nuclear powers is a powerful force for bilateral stability. Despite the trade imbalance and the animosity and protectionism it may fuel, in general growing economic ties will also reduce the likelihood that either state will risk open conflict.

Still, the fact that both countries’ capabilities are expanding while mutual perceptions remain very poor is a harbinger of long-term difficulties in the bilateral relationship. Political tensions between the two states will likely impede closer economic cooperation and could eventually undermine economic ties, creating a risk for companies involved in or affected by cross-border trade, investment, or tourism.


Courtesy of Global Risk Insights, ©2016 Global Risk Insights

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: