Narendra Modi with Donald Trump
File image of US President Donald Trump (R) with PM Narendra Modi (L) in the Oval Office,White House | Win McNamee/Pool via Bloomberg
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New Delhi needs to seize the opportunity for a win-win scenario.

It could set China back 10 years,” a Chinese executive told me with a shake of the head, over a recent lunch in Beijing. China’s trade war with the United States, now more than 90 days old, has been the hottest topic of conversation in recent weeks in the Chinese capital.

And in contrast from the public posture of calm and confidence exuded by the Xi Jinping government, there is, among executives and scholars, growing unease.

Initially, Beijing brushed off Trump as a temporary nuisance.

Officials said privately they could “manage” him, seeing him as a transactional real estate tycoon who could be bought with one or two big-ticket deals, and a few large doses of flattery. When Trump visited Beijing in November, Xi broke protocol for what his advisers called a first-ever “state visit-plus”opening up an inner sanctum of the Forbidden City for a lavish dinner. Trump became the first foreign leader to dine there, an experience he later described as one of his life’s greatest memories. Mission accomplished – or so Xi’s advisers thought.

Also read: India may raise duties on aluminium imports as US-China trade war sparks dumping fear

Nearly a year later, those expectations have been belied. Since then, we’ve seen tariffs targeting Chinese imports worth $250 billion. Most worryingly for China, they are targeting high-tech sectors where China is still reliant on US technology, even as the Xi government speeds up its ambitious ‘Made in China 2025’ plan to make China self-sufficient in these sectors. But underlining how far it has to go, Trump’s sanctions temporarily brought one of China’s biggest tech companies, ZTE, to its knees.

Now, Xi may find himself in the unusual position of coming under fire for underestimating the Trump threat. Even if dissent can’t be public in Xi’s China, privately, many in China Inc. are far from happy. Their worst fears were confirmed in US Vice President Mike Pence’s 4 October speech at the Hudson Institute that, for the first time, laid out in detail the Trump administration’s China policy. Pence’s speech didn’t receive much attention in India, but merits it.

He outlined a drastically different approach to China – and a sharp break from the China policy that was generally followed, albeit with some shifts, from the Clinton administration’s time. That approach to China was based on one large bet: that integrating China into the global system, starting with its accession to the World Trade Organisation (WTO), would ultimately foster economic liberalisation — that would benefit Western companies and open China’s market — and political liberalisation, with the Communist Party being forced to cede space to the new middle class that would grow as a result of the reforms.

Increasingly, it’s clear that both these expectations have, to varying degrees, been misplaced. Many US companies are increasingly counting the costs of doing business there, from forced technology transfers to what they see as a worsening business environment. On the political front, Xi’s rise has only underlined how American thinking has been drastically wrong on the Communist Party’s appetite for reform. For Xi, “reform” doesn’t mean political liberalisation in the Western sense, but is merely aimed at strengthening party control. Under Barack Obama, the US policy of supporting China’s rise went even further, with Beijing famously dubbed a “responsible stakeholder” in the global system.

Now, as Pence puts it in his 4 October speech, the US has “adopted a new approach to China”. In short, this sees China unequivocally as a competitor and threat to American interests. It is, what some strategists are calling, a “decoupling” to disentangle what had become an increasingly interconnected relationship, especially on the economic front. “Previous administrations made this choice in the hope that freedom in China would expand in all forms… but that hope has gone unfulfilled,” Pence said. Previous administrations, he continued, “all but ignored China’s actions – and in many cases, they abetted them”. “But those days,” he warned, “are over”.

Also read: Farm exports to China can help India cut its current account deficit

What will the new approach entail? The first element is overhauling a trade relationship, which now sees an annual $375 billion surplus in China’s favour. Trump has placed tariffs on more than $250 billion worth of Chinese imports. The second and next step – which Beijing is more concerned about – is targeting China’s high-tech industries and the ‘Made in China 2025’ plan. It will also be aimed at cracking down on Chinese trade theft. On 9 October, the US for the first time extradited from Belgium a Chinese spy alleged to have targeted aviation companies, leaving Beijing seething.

The third element – which has particular significance for India – is a more robust effort to respond to China in the Indo-Pacific region.

Here, the Trump administration has made the right noises, from vocally criticising China’s Belt and Road Initiative to devoting more naval resources to its renamed Indo-Pacific Command. Pence specifically highlighted the example of Sri Lanka which, he noted, “took on massive debt to let Chinese state companies build a port with questionable commercial value”.

But there are serious questions on whether Washington will walk the talk. Trump’s unpredictability will give Delhi pause for thought. As will the likelihood, however remote, of a grand deal with Beijing.

The American pledges to come up with an alternative to the Belt and Road haven’t materialised, particularly at a time when Trump is talking about scaling back American financial commitments overseas. Uncertainty notwithstanding, what is clear is that the US-China relationship is undergoing a profound change. “The gloves are off,” as one Western diplomat in Beijing put it. So far, India has navigated this flux carefully, particular to stress its “strategic autonomy” in its relations with China and Russia. Yet, this balancing act is set to come under greater strain. With Russia, the US has threatened India with sanctions for its S-400 missile defence system deal.

With China, the balancing act may be even more challenging. India has moved cautiously despite the American eagerness to elevate the quadrilateral dialogue with Japan and Australia, currently at the low level of joint secretaries. India has also said it isn’t in favour of Australian participation in the Malabar exercise with the US and Japan, keeping Chinese sensitivities in mind. Chinese officials say that Beijing’s outreach to India, evinced in the Wuhan summit and the recent cooling of border tensions post-Doklam, is part of a wider effort in dealing with the Trump threat, seen also in its courting of Europe and Japan.

Also read: As China cancer film hails Indian drugs, New Delhi & Beijing plan big pharma trade push

In a rare statement last week, the Chinese Embassy in Delhi said it wanted India’s support amid the trade war, saying both needed to “deepen their cooperation” as they faced “unilateralism and bullying activities”. Beijing has now said it wants to step up imports of agricultural commodities from Delhi, (which it, rather ironically, denied stubbornly for a decade despite a long-persisting Indian effort) including rapeseed and soybean, to offset retaliatory tariffs it placed on US exports.

Delhi, meanwhile, only stands to gain from the US pressure aimed at forcing China to play fair and open up its market, especially in services, where Indian IT and pharma companies have long struggled to make inroads. For India, this emerging US-China ‘decoupling’ could yield dividends. Delhi, for its part, needs to seize the opportunity for it to end up, as the Chinese like to say, as a real “win-win”.

The author is a Visiting Fellow at Brookings India, and was previously China correspondent for India Today and The Hindu.

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