The complex relationship between India and China has a long history of geopolitical rivalry, deep distrust and economic cooperation. While a gradual thawing has been underway since the deadlock following the Galwan Valley clash in 2020, this is not a simple diplomatic shift. The rapprochement is a delicate balance, propelled by a convergence of shared interests, yet constantly challenged by a host of historical and strategic irritants. For business professionals and risk managers, understanding this nuanced dynamic is essential, as the stability of the Indo-Pacific region hinges on the ability of the “Elephant and the Dragon” to coexist.
The Slow Thaw After Galwan
The relationship between India and China turned frosty after the deadly clash between Chinese and Indian troops in 2020. This event led to a series of military standoffs, economic boycotts, and a general cooling of diplomatic ties. However, a gradual thawing has been underway since late 2024. A key turning point was the agreement on patrolling arrangements along the Line of Actual Control (LAC) in October 2024, which led to a disengagement of troops from all major friction points. This was followed by a meeting between Prime Minister Narendra Modi and Chinese President Xi Jinping on the sidelines of BRICS summit in Kazan, Russia, their first formal meeting in five years.
High-level engagements have since gained momentum. India’s External Affairs Minister S. Jaishankar’s visit to China in July 2025 for an SCO meeting marked his first trip to Beijing in five years. These exchanges signal a mutual desire to de-escalate tensions and seek common ground, a sentiment further reinforced by China’s public welcome of Prime Minister Modi’s expected visit for the SCO summit in Tianjin from August 31 to September 1. This pragmatic approach is a recognition by both nations that a prolonged state of confrontation serves neither’s long-term interest.
Strategic Autonomy: India’s Guiding Principle
A crucial element in understanding India’s actions is its long-standing foreign policy of strategic autonomy. This principle is about preserving decision-making independence in an era of great power competition. India’s engagement with multiple partners including the U.S. through the Quad, Russia through defence and energy ties, and China through SCO and BRICS is a deliberate strategy to maximize her national interests without being constrained by any single power.
The new U.S. tariff regime has inadvertently provided a powerful test case for this principle. The Trump administration’s decision to impose a 50% tariff on a broad range of Indian goods has delivered a direct economic shock, risking significant damage to India’s export-driven sectors. This external pressure has forced India to double down on its commitment to strategic autonomy. New Delhi’s stance is a calculated move to assert independence from what is being perceived as U.S. coercion. The tariffs are strengthening India’s resolve to chart its own course, which inevitably involves a more pragmatic engagement with major powers, including China.
Economic Imbalances and Irritants
While trade has long been a key aspect of the India-China relationship, it is also a significant source of friction. India’s widening trade deficit with China, which hit a record $99.2 billion in FY 2024-25, is a persistent cause of concern. India’s exports to China remain heavily concentrated in low-value, low-technology segments – primarily resource-based manufactures and primary agricultural products – while it imports high-tech goods, contributing to a structural imbalance. This has led to calls within India for a more concerted effort to diversify and expand its export basket to China.
Compounding these trade issues are China’s “all-weather friendship” with Pakistan and its continued military presence and infrastructure buildup along the Line of Actual Control (LAC). This relationship with Pakistan creates a two-front security challenge for India, while China’s development of military and dual-use infrastructure along the border poses a direct challenge to India’s sovereignty. These deep-seated irritants remain major obstacles to a full normalization of India-China relations, even as shared interests drive a cautious rapprochement.
The New Normal for Business
This complex geopolitical shift requires businesses to fundamentally rethink their risk models. The established wisdom of using India as a “China+1” supply chain alternative is now fraught with a new set of risks. The economic playing field is changing, and so are the rules of engagement.
- Supply Chain Recalibration: Companies must now map their supply chain exposure not just to tariffs, but to the shifting geopolitical alliances that underpin them. The incentive for diversifying away from China is complicated by the new tariff risks in India.
- Shifting Investment Flows: A reduction in U.S. investment in Indian manufacturing due to tariff uncertainty could be offset by new opportunities for Chinese or other Asian investment. Businesses should monitor these capital flows for signs of new partnerships and market access.
- Proactive Risk Management: The concept of “strategic autonomy” is now a key variable in risk analysis. Risk managers must assess how this principle will shape future trade and security policies, from new bilateral deals to regional economic blocs, and prepare for a future where traditional alliances are no longer a guarantee of economic stability.
The U.S. tariffs have, perhaps unintentionally, accelerated a new and pragmatic era in India-China relations. By pressuring India, the U.S. may be creating a vacuum that both India and China are strategically moving to fill. For businesses, the message is clear: the geopolitical map is being redrawn, and success will depend on the ability to navigate this new, complex terrain with agility and foresight.
Image Credit: Reuters