How China’s COVID-19 Surge Shapes Trade With India

Welcome to Foreign Policy’s South Asia Brief.

The highlights this week: China’s COVID-19 surge has ripple effects in India, Pakistan secures $10 billion in new pledges for flood assistance, and India’s commerce secretary visits the United States.

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As COVID-19 cases continue to rise in China, India is taking protective measures that recall earlier phases of the pandemic. Travelers arriving in India from China—along with Hong Kong, Japan, South Korea, Singapore, and Thailand—must take a COVID-19 test, and those who test positive or exhibit symptoms face quarantine. Indian health officials have called for vigilance, but the more damaging impacts for India could be economic.

India has come a long way since its own catastrophic COVID-19 surge nearly two years ago. Nearly 70 percent of the population is fully vaccinated, significantly higher than the 46 percent figure of a year ago. Despite potentially ominous signs—less than 30 percent of Indians have received a booster, and studies have found vaccine hesitancy among older people—new case numbers have so far held steady amid China’s major wave. Still, Indian health officials are urging more masking and calling for more vigorous genome sequencing.

However, India’s more immediate concern may be the effects of China’s COVID-19 crisis on bilateral trade, which has remained robust despite serious border tensions. Since a deadly border clash in 2020 plunged India-China ties to their lowest level in decades, the two countries have actually increased their trade volume. In India’s 2022 fiscal year, trade with China was more than $115 billion—a nearly 35 percent increase from the previous year. Chinese exports to India are a major driver of this trend—and of a record-breaking Indian trade deficit with China.

This is why China’s COVID-19 surge has some Indian traders worried. India’s top imports from China include electronics, chemicals, and pharmaceuticals. Pandemic-related labor shortages, compounded by supply chain crunches, could hamper these Chinese exports. Although this could reduce India’s trade deficit, Indian exports might also fall due to China’s economic slowdown and reduced demand. Indian engineering products have already seen a significant decline. Indian exporters are now looking to redirect sales of some products, especially tea, to Russia.

However, China’s COVID-19 wave has some potential positive commercial implications for India. India’s drug industry has a major opportunity, although Indian media reports that surges in Chinese demand for COVID-19 medications have, in fact, led to cheap, counterfeit Indian drugs flooding Chinese markets. Another possible advantage is that Western technology firms, already exploring relocating some production from China to India due to Beijing’s policy environment, now have added incentive to focus on India.

So far, no South Asian country besides India has imposed new restrictions on travelers from China. But any supply chain shocks could also prove damaging for Pakistan, which relies heavily on China for economic aid and infrastructure assistance. Most countries in the region have received investments from China in recent years. Other South Asian states’ trade volume with China is lower than that of India and Pakistan, although some smaller countries depend on it heavily for trade. For example, China is Nepal’s second-largest trade partner.

India, which now has a positive macroeconomic outlook, can gain some strategic advantages amid China’s health crisis and economic strain. In its ever-intensifying strategic competition with Beijing, New Delhi can redouble efforts to increase investments around South Asia, from infrastructure to COVID-19 vaccines. In early 2021, before its own surge, India was a top supplier of COVID-19 shots across the region. Beijing then capitalized and increased its own vaccine delivery efforts.

Will Indian Prime Minister Narendra Modi donate COVID-19 vaccines to his Chinese rival? It’s unlikely, and Beijing would likely decline the offer as it has in the past with Washington. With nine state elections in India this year and national polls looming in 2024, it also may not be the moment to make a soft gesture toward China. But it can’t be ruled out for a leader known for bold and unexpected moves.

Pakistan secures new pledges for flood aid. This week, Pakistani Prime Minister Shehbaz Sharif and U.N. Secretary-General António Guterres hosted a donor conference in Geneva, where Pakistan received around $10 billion in pledges for food relief and recovery after devastating floods last year. Pakistan is still reeling from the disaster, which submerged one-third of the country and affected 33 million people.

According to UNICEF’s latest update, nearly 15 million people in Pakistan still need emergency food aid and 10 million children need immediate support. An estimated $40 billion in flood damages have contributed to an economic crisis that could bring Pakistan to the brink of a debt default. Most of the new pledges come from multilateral organizations, with the Islamic Development Bank, World Bank, Asian Development Bank, and Asian Infrastructure Investment Bank offering the most assistance.

Key details about the pledges are not yet public, including how funding will be delivered and which government entities will oversee it. It will also take time for the funds to reach Pakistan. On Wednesday, Pakistani Finance Minister Ishaq Dar acknowledged that nearly 90 percent of the pledges will be loans. With this new support, Islamabad can’t afford to be complacent. Yet the government, distracted by an economic crisis, terrorist threats, and its spat with opposition leader Imran Khan, shows little sign it will make flood relief a sustained priority.

Indian commerce minister visits U.S. Piyush Goyal, India’s commerce minister, visited New York and Washington this week, where he met with U.S. Treasury Secretary Gina Raimondo and U.S. Trade Representative Katherine Tai and participated in the 13th India-U.S. Trade Policy Forum. In New York, Goyal met with top U.S. business leaders. In line with growth in bilateral relations, U.S.-India trade volume has recently reached new heights, setting a record of $113 billion in 2021.

But trade has also been a tension point for India and the United States. Disagreements over tariffs nearly produced a trade war during the Trump administration, and these issues remain unresolved. Despite frequent engagements between business leaders on both sides, some U.S. financiers continue to worry about problematic taxation policies, overregulation, and other features of India’s investment environment.

Aid leader calls for West to increase Taliban engagement. The head of the Norwegian Refugee Council, Jan Egeland, is in Kabul this week to press Taliban leaders to reverse their ban on women’s employment with nongovernmental organizations. Even while lambasting the Taliban’s move, he has called on Western states to send diplomats back to Kabul for the sake of the Afghan people. A top U.N. official, Markus Potzel, made a similar comment last month when he advised Western countries to reopen their Kabul embassies.

At first glance, such a policy may appear likely to do little but reward the Taliban. Many officials, including in Washington, are currently considering punitive moves that include new sanctions on Taliban leaders and even cuts to humanitarian aid. But there may be another motivation for calling on Western diplomats to return to Kabul: It would enable possible channels of communication with Mullah Hibatullah Akhundzada, the Taliban supreme leader who has authorized the group’s recent draconian moves.

Foreign diplomats meet often with Taliban leaders in Qatar, where most personnel from shuttered embassies in Kabul are now based. But these leaders tend to be from the Taliban’s more moderate faction, some of whom disagree with Akhundzada’s moves. Akhundzada is hunkered down in the city of Kandahar and isn’t known to travel. Foreign diplomats likely wouldn’t succeed in meeting with him, but they wouldn’t know unless they tried.

Nepali politician Pushpa Kamal Dahal leaves the president’s office to claim a majority for his appointment as the new prime minister in Bhaktapur, Nepal, on Dec. 25, 2022.DIPESH SHRESTHA/AFP via Getty Images

On Tuesday, the Nepali Army announced the start of joint military exercises with the United States that will run through Feb. 3. Thirty-five Nepali officers will participate with 19 U.S. personnel in activities related to search-and-rescue operations after natural disasters. This year marks the 12th iteration of these exercises, but the timing of this year’s event is notable. The exercises began the day that Pushpa Kamal Dahal secured a vote of confidence in parliament, paving the way for him to become Nepal’s next prime minister after elections last November.

Dahal, a former Maoist fighter still known by his wartime moniker Prachanda, has formed a new alliance with his longtime rival, former Prime Minister K.P. Sharma Oli—who oversaw an improvement in relations with China. Dahal’s alliance with Oli, coupled with his ideological similarities with China, have some Indian commentators concerned that he may bring Kathmandu closer to Beijing’s orbit. However, Dahal says he wants good relations with both China and India, in line with Nepal’s longstanding official position.

The U.S.-Nepal military exercises can be read as a reflection of that policy, showing that Nepal’s new leadership may seek warmer ties with China—but that won’t stop it from conducting activities that fit with India’s interests, too.

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Analyst Aneela Shahzad, writing in the Express Tribune, warns of the growing strength of the Islamic State terror group in Afghanistan and the implications for neighboring Pakistan. “What we in Pakistan and the region must embrace is an incoming onslaught of ISIS and the likes, in Afghanistan,” she writes.

A Dhaka Tribune editorial laments how the country’s demand for more arts offerings goes unmet, noting the high turnout for the recent Dhaka Literature Festival. “Clearly a renewed focus on the arts is the order of the day, not only in terms of meeting local demands but also in terms of adding a new dimension to how we showcase and export our culture and ideals,” it argues.

In the Print, journalist Dilip Mandal describes demographic changes among Indian cricketers, which he attributes to changes in the game of cricket itself: “Now we see more and more cricketers from farming and cattle-rearing communities,” he writes. “Domination of Mumbai, Chennai, and Delhi is also receding. More and more players are coming from small towns.”