Amid US-China trade tensions and economic vulnerabilities, India must seize the 'China +1' opportunity, deepen reforms, secure FTAs, and globalise its firms for long-term growth, suggests Ajay Shah.
The global order, based on rules, is being systematically subverted by China.
Its State-led economic model relies on practices that contravene the principles of the World Trade Organization, including extensive industrial subsidies that create global overcapacity, pervasive non-tariff barriers, state-sponsored intellectual property theft, and forced technology transfer.
In the security domain, Beijing openly disregards international law, exemplified by its rejection of the 2016 Permanent Court of Arbitration's ruling on the South China Sea.
It undermines regional stability with military coercion against Taiwan and provides a crucial economic lifeline to Russia helping in the invasion of Ukraine.
In response, the new United States administration, under Donald Trump, has initiated a policy of imposing high, broadbased tariffs, aiming to force fundamental changes in China's behaviour.
This confrontation is a geopolitical game of chicken. The game theory model is simple: Two drivers accelerate towards each other on a single-lane road.
The first to swerve is the 'chicken'; if neither swerves, the result is a catastrophic collision.
The high-stakes standoff between Washington and Beijing is of this nature.
Each side is projecting strength, but a closer look reveals significant internal weaknesses that pressure both to find an off-ramp.
On the Chinese side, the economy is afflicted by severe structural weaknesses. The collapse of the over-leveraged property sector is the epicentre of the crisis.
This has triggered a solvency crisis for developers and for local governments that depend on land sales for a significant portion of their revenue.
The contagion has, in turn, placed the banking system under severe stress, given its exposure to both property developers and local government financing vehicles.
The government has ratcheted up economic nationalism, crushing private-sector confidence and fuelling record-high youth unemployment.
Decades of State-directed industrial policy have created chronic overcapacity in one industry after another, from steel to solar panels to electric vehicles.
These sectors now depend on exporting their surplus production to remain financially viable, making them acutely vulnerable to tariffs and trade barriers.
The combination of the failures of central planning, a collapsing property bubble, and a demographic decline invites a historical parallel with the Union of Soviet Socialist Republics (USSR) of the mid-1980s: A seemingly mighty, centrally planned economy quietly crumbling from within.
Beijing's dilemma is acute. In 2023, China's exports of goods to a broad bloc of advanced economies totalled approximately $1.85 trillion, of which the US was at $427 billion.
The Chinese government is torn between nationalist pride versus the pragmatic necessity of ending the trade war to stabilise its economy.
On the American side, for all the rhetoric about protectionism, the economic reality is also challenging.
Imposing high, broadbased tariffs is a self-defeating policy that inflicts significant harm on the domestic economy.
The tariffs disrupt supply chains, raise input costs for American manufacturers, and ultimately act as a tax on consumers.
Apart from a capital-investment boom in artificial intelligence, underlying American economic growth has stalled.
The tariffs are feeding inflationary pressures.
Reflecting a global retreat from American assets amid policy uncertainty, the dollar has weakened significantly; the dollar/euro exchange rate has dropped by approximately 11 per cent in 2025 alone.
Both protagonists are engaged in the high-stakes game of chicken from positions of surprising vulnerability.
There is tremendous pressure on both sides to step back from the brink.
Each leader wants to project strength and extract concessions, but each is captaining a ship that is listing badly.
Both would prefer to end the trade war and tend to their domestic problems.
This suggests that while the rhetoric will remain heated, the most extreme protectionist measures may prove temporary.
For Indian policymakers and firms, this volatile environment creates a strategic opportunity.
The optimal path is a strategy of deep and pragmatic global integration.
First, India must prioritise concluding a comprehensive trade and investment agreement with the United States.
Such a deal would stabilise a critical foreign policy relationship and unlock economic complementarities in technology, finance, and services.
Progress remains stalled by tariff and non-tariff barriers on both sides, from complex rules of origin to restrictions on services, capital flows, and government procurement.
Frictions over visas, tax complexities, and data localisation rules have also impeded progress.
Systematically dismantling these obstacles would deepen India's integration with the world's largest market and reinforce our participation in strategic frameworks like the Quad and the Initiative on Critical and Emerging Technologies.
Second, this alignment reinforces India's positioning as the natural "China +1" alternative.
Seizing this opportunity demands a renewed commitment to domestic structural reforms.
This requires a fundamental overhaul of regulation and the functioning of regulators.
It requires deepening indirect tax reforms and an orthodox goods and services tax.
It means tackling foundational problems like slow judicial enforcement, and restrictive labour and land laws.
The goal is to create an environment where foreign and domestic firms can operate with confidence, unlocking the private investment needed for sustained growth.
Third, India should accelerate its integration with other advanced economies through deep and comprehensive free-trade agreements (FTAs) with high-trust partners like the European Union, the United Kingdom, Japan, and Taiwan.
These FTAs are more than just trade documents; they are vehicles for institutional spillovers that can elevate the quality of domestic governance.
This outward orientation fundamentally alters firm-level incentives.
As economists Jagdish Bhagwati and Anne Krueger observed decades ago, firms that compete globally tend to rent-seek less and innovate more.
Finally, the strategic mandate for Indian firms is unambiguous: Globalise. The imperative is to learn at the global frontier.
As multinationals bring advanced technical and managerial know-how into India, domestic firms must engage deeply with foreign capital, technology, and skilled personnel.
A firm's degree of internationalisation serves as a powerful indicator of its quality.
Competing in global markets derisks firms from domestic business cycles and regulatory vagaries.
It forces a reliance on genuine competitiveness over state patronage.
In this new era, firms must be deliberate in choosing partners, favouring jurisdictions with low geopolitical and regulatory risk -- the high-trust liberal democracies.
Ajay Shah is a researcher at the XKDR Forum.
Feature Presentation: Aslam Hunani/Rediff
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