Recent geopolitical shifts and trade tensions between the US and China indicate a growing rapprochement between India and China, which could reshape Asia's trade landscape and impact US influence in the region. This rapprochement follows the Trump administration's imposition of tariffs on Indian goods, including a 50% duty on imports linked to India's purchase of Russian oil. This economic pressure, coupled with broader geopolitical changes, has led to a thaw in previously strained India-China relations, which culminated in deadly border clashes in 2020 and a ban on Chinese apps in India.

India and China have recently taken steps towards normalizing relations, including resuming direct flights, facilitating visa processes, and discussions on settling parts of their disputed border. India has also accepted an invitation to attend the summit of the Shanghai Cooperation Organisation (SCO), a China-led grouping. This development, which some analysts describe as a "Dragon-Elephant tango", signals a strategic shift. India's "multi-alignment" policy and its "cooperation-competition" approach with China suggest a pragmatic management of relations, driven partly by US trade policies that have alienated New Delhi. The US's imposition of tariffs, citing India's continued imports of Russian oil, contrasts with its approach towards China, a major buyer of Russian crude, potentially pushing India to reduce its adversaries.

Market Signals

Shifting Trade Dynamics: China surpassed the US as India's largest trading partner in FY 2023-24, with bilateral trade reaching $118.4 billion.
Sectoral Opportunities: Indian businesses in pharmaceuticals, electronics, and solar energy may benefit from improved supply chains and market access with China.
Competitor Positioning: US companies may face increased competition from a more integrated India-China economic bloc.

Winners & Losers

Indian businesses and Chinese companies could benefit from smoother trade operations and market access. US companies might lose market share in Asia due to increased competition. The Quad alliance could see its cohesion and purpose strained, though its strategic relevance in areas like supply chains and technology is expected to remain.

Action Timeline

Immediate: Assess the impact of renewed India-China trade facilitation on existing supply chains and explore opportunities for enhanced bilateral trade.
Short-term: Companies should consider diversifying supply chains and forging strategic partnerships in India to leverage its growing manufacturing base.
Long-term: Monitor the evolution of Asia-led trade blocs and their potential to challenge US economic influence.

Risk Assessment

Geopolitical Tensions: Core security issues and competition between India and China persist, posing a risk to sustained cooperation.
US Retaliation: Further US tariffs or diplomatic pressure could complicate India's balancing act.
Supply Chain Vulnerabilities: India's reliance on China for essential components in sectors like electronics and pharmaceuticals creates a significant vulnerability.

Key Indicators

India-China Trade Growth: Continued acceleration in bilateral trade could signal deeper economic integration.
Quad Dynamics: Any shifts in the Quad's focus or effectiveness in response to India-China bonhomie.
Chinese Investment in India: Monitoring any easing of curbs on Chinese investments in specific Indian sectors.

Regional Perspective

The US-led Indo-Pacific strategy, with India as a key pillar, faces a challenge as closer India-China ties could weaken the Quad's anti-China stance. China's outreach to India is seen as a strategic move to demonstrate its reliability as a partner, potentially diminishing US influence.

Immediate Implications

Trade Facilitation: Resumption of direct flights, easier visas, and border trade facilitation between India and China are expected to boost bilateral commerce.
US Policy Reassessment: The US may need to reassess its trade and geopolitical strategies in Asia in light of this rapprochement.
Market Entry Window: Potential easing of curbs on Chinese investments in non-sensitive sectors in India presents a window for strategic partnerships.

What to Watch

US-India Trade Negotiations: The outcome of ongoing trade talks will be crucial.
India-China Border Talks: Progress on the border dispute will indicate the stability of the relationship.
Quad Alliance Dynamics: How the Quad adapts to the changing regional landscape.

Analysis

The "Dragon-Elephant tango" signifies a pragmatic shift in India-China relations, driven by economic pressures from the US and a desire for regional stability. While competition and conflict may persist, the current thaw creates opportunities for increased bilateral trade and the potential emergence of Asia-led trade blocs. However, India's commitment to "strategic autonomy" and its "derisking" supply chain strategy present limitations to deep integration. The US faces a challenge in maintaining its influence in Asia as it navigates these evolving dynamics.