TheMarketForIdeas

This essay looks again at the Chinese and Indian “economic miracles”, not as events that cannot be explained, but as the results of institutional reform. It then asks where the rivalry between the two Asian giants is being fought today. The main argument is that the United States and the European Union are not the main actors in this story, but external arenas in which the competition between China and India is expressed and measured. By looking at the American side (tariffs and “de-risking”) and the European side (regulation, connectivity and trade agreements), the essay shows how China and India turn Western policy into strategic decisions aimed, in the end, at each other. The conclusion is that globalisation today has not removed the rivalry between states, but only moved it to a new place and that the result will depend on the quality of institutions rather than on the idea of a “miracle”.

Bringing the miracle back to earth

The word “miracle” is a convenient one. When it is applied to China after 1978 or to India after 1991, it does two things at the same time: it shows surprise at how much changed and it quietly saves us from having to explain it. A miracle, after all, has no mechanism; it simply is. But the closer we look at how these two economies actually grew (the end of collective agriculture in China, the removal of India’s License Raj, the special economic zones, the lower tariffs, the slow build-up of supplier network), the less it looks like a miracle and the easier it becomes to understand. What seemed from a distance to be something that could not be explained turns out, in each case, to be the normal result of removing constraints and letting prices, competition and entrepreneurship do their work (Naughton, 2007; Panagariya, 2008). To bring the miracles back to economic reality means simply to say that prosperity comes from institutions and not from some exception.

There is, however, a second way of looking at this and it is the more urgent one. For most of the last three decades, the interesting question about China and India was internal: which reforms unlocked their growth and why did the two countries specialise so differently: one becoming the workshop of the world and the other the back office. That question is largely settled by now. The question that matters in the 2020s is external and relational. It is no longer only how China and India grew, but where their rivalry is now being fought. The purpose of this essay is to argue that this rivalry is more and more being fought through the West and that this change is not a small detail but the main feature of the competition today.

Arenas, not protagonists

It is tempting to treat the United States and the European Union as the main actors in this story. This would be a mistake. It is both more accurate and more useful to treat them instead as arenas – external places in which the competition between Beijing and New Delhi is expressed and measured. The rivalry has a triangular form, but in essence it stays between two players. Washington and Brussels shape the external conditions; China and India then turn these conditions into strategic decisions that are, in the end, about each other (Baldwin, 2016; Rodrik, 2018).

This difference matters because it changes what we should look for. When the United States raises tariffs on China, the bilateral trade balance is the least interesting result. The more important effect is that companies start to include geopolitical risk in their long-term investment decisions and, once they do this, the relative attractiveness of other locations begins to change. India sees American pressure on China not as a neutral event, but as an opportunity. China, on its side, sees India’s growing closeness to Washington and more and more to Brussels, as an attempt to turn China’s own problems into someone else’s gain. Each country reads Western policy through its position compared to the other Asian giant. In this sense the West has not replaced the rivalry between China and India; it has become one of the main places where this rivalry is now taking place.

The American vector: tariffs, de-risking and the logic of diversification

The United States has become the most important external factor in this rivalry and not only because of the size of its market. Through tariffs, export controls, investment screening and the language of “trusted” supply chains, Washington has changed from being a large final market into an active player that shapes where production goes. In this situation, China is under pressure as the main manufacturing hub, while India presents itself as the preferred alternative and as the natural winner from this strategic diversification.

The trade war that started in 2018 was an important turning point. Its main effect was not the tariffs themselves, but the incentives they created inside the production systems of multinational companies. Once firms started to think that their access to the American market could be limited because of origin, political tension or the risk of sanctions, China’s position as the only assembly platform for export production became less certain. This did not lead to a sudden exit and it is important not to exaggerate here. What it created was something slower and more lasting: a search for parallel locations and for back-up options. India understood this change as an opening in the long race to reduce its industrial gap (Irwin, 2020; Baldwin, 2016).

It is important to say that India’s appeal has never been based on being the easiest short-term substitute. On that point, Vietnam and Mexico were often better placed, with denser export zones and, in the case of Mexico, direct access to the American market. India’s strength is different. It is the most “strategically scalable” option in the long run: a combination of population size, domestic demand, political importance and the promise of a broad industrial base, not only a narrow niche platform. This is why India often looks more important in geopolitical strategy than in the immediate relocation numbers. Its attraction comes as much from its development potential as from its present capacity and the two should not be confused (Panagariya, 2008).

The electronics sector is the clearest example. By 2025, reports on Apple’s supply-chain diversification showed that iPhone assembly in India had reached around 22 billion dollars in the twelve months to March, an increase of almost 60 percent compared to the previous year, with the company planning to move an even larger share of US-bound assembly out of China (Bloomberg, 2025; IBEF, 2025). This should not be read as proof that India has replaced China in electronics, because the domestic value added is still limited and imported components still dominate. But it does show how tariff risk and geopolitical pressure can turn India into a place that receives strategically motivated investment which, before, would have gone almost automatically to China. Large anchor firms of this kind can, over time, help to build local ecosystems. China’s own export rise also often began with processing trade based on imported components, before local content became deeper (Koopman, Wang and Wei, 2014). India’s ambition is to repeat part of this path under new conditions, even if it does not have China’s original advantages of coastal infrastructure, labour-market flexibility and very dense supplier clusters.

None of this should be idealised and here the American factor shows its other side. American openness towards India is conditional. The 2025 USTR fact sheet on the bilateral trade agreement negotiations pointed to continuing concerns about India’s tariffs, its non-tariff barriers and its market-access restrictions, and mentioned a US goods-trade deficit with India of 45.7 billion dollars in 2024, together with India’s relatively high applied tariffs, especially in agriculture (USTR, 2025; The White House, 2026). In other words, Washington may support diversification towards India, but it still asks for reciprocity in return. India is useful as a counterweight to China, but it is not free from American pressure. This is the typical pattern of the American factor: it opens doors for India and, at the same time, brings India’s own protectionist habits under closer examination.

The European arena: regulation, connectivity and trust

If the United States is the geostrategic trigger of the change in supply chains, the European Union is the main regulatory and commercial arena in which China and India look for different forms of validation. Europe matters to both because it combines market size, purchasing power, demand for infrastructure, investment in the green transition, the capacity to set rules and a strong preference for standards-based commercial governance. It is not simply another export destination. It is a space in which access and legitimacy can be given or refused.

European power works differently from American power. It is less direct, but often more widespread in its commercial effects. It works through standards, product requirements, competition rules, sustainability obligations and negotiated legal frameworks. This matters for the comparison, because these instruments reward different qualities than tariffs do. China’s scale and low prices are still very strong, but regulatory friction can reduce these advantages when market access depends on transparency, subsidy treatment, data governance or industrial traceability. India also has its own compliance difficulties, but it can gain where Europe values gradual diversification and institutional reassurance as much as the immediate reduction of costs.

Two developments show this competition. The first is connectivity. China’s Belt and Road Initiative (BRI) tried to connect the infrastructure of Eurasian trade (ports, railways, logistics hubs) around Chinese capital and with it around China’s central position. The India–Middle East–Europe Economic Corridor (IMEC), announced in 2023, became important exactly as a counter-narrative: a connectivity model based on a coalition, which promises to spread influence across a group of states instead of centring it on one dominant sponsor (Atlantic Council, 2025). The contrast should be treated carefully, because it is easy to exaggerate. The BRI is an established, although mixed, network, with years of implementation behind it, while IMEC is still at an early stage. China can point to finished projects and working routes; India and its partners can, for now, mostly point to strategic intention and design. But Europe’s growing attention to the “governance” qualities of external infrastructure, and not only to its engineering, works in India’s favour. When the debate moves from who can build the fastest to which corridor model fits better with Europe’s preference for plural, rules-based connectivity, India has something to gain.

The second development is trade friction that becomes policy. In October 2024, the European Commission finished its anti-subsidy investigation into battery electric vehicles from China and imposed definitive countervailing duties for five years (17.0 percent on BYD, 18.8 percent on Geely and 35.3 percent on SAIC) on the argument that the Chinese electric-vehicle value chain had benefited from unfair subsidies and represented a threat of injury to EU producers (European Commission, 2024). The importance here is less the car sector itself and more what the case shows: that EU–China economic relations are more and more filtered through strategic concerns and not through a purely liberal logic of market integration. Against this background, the conclusion at negotiating level of the EU–India Free Trade Agreement in January 2026, presented by the Commission as the largest deal ever concluded by either side, brings India closer to Europe exactly at the moment when Europe’s relationship with China is complicated by subsidy disputes and by worries about industrial overcapacity (European Commission, 2026a).

The comparative lesson is that the two countries face different obstacles in Europe. China’s problem is political and regulatory: it has to reduce distrust even though its industrial base is strong. India’s problem is one of implementation and capacity: it has to prove that it can deliver, in order to turn political goodwill into a lasting commercial advantage. In other words, the rivalry moves forward through different obstacles: China trying to reduce suspicion, India trying to show that it can perform.

The factory, the office and a more diagonal contest

Behind the policy details there is a structural contrast that the well-known labels still describe quite well: China as the “factory of the world”, India as its “office”. China’s rise was based on goods exports (capital goods, electronics, machinery, chemicals and manufacturing ecosystems) that became more and more complex. India’s rise was based on information technology, business-process outsourcing, professional services, software and a few high-skill niches such as pharmaceuticals. These different profiles mean different levels of exposure to Western demand and Western protectionism. China is more exposed to tariffs, industrial investigations and technology restrictions, because its export structure is concentrated in the sectors that these measures target directly. India’s high-skill service exports depend much less on physical shipping and industrial supply chains, so they are somewhat less exposed to tariffs or port problems. This is a different kind of resilience, based on the portability and the networked character of services, rather than on industrial scale.

However, the old division is slowly disappearing from both sides. China is moving into design, software and advanced services; India is moving into electronics, production-linked incentives and supply-chain industrial policy. In this sense, the rivalry is becoming more diagonal: the two countries compete more and more from different sectoral bases, while each one tries to enter the other’s field. This matters in relation to the West, because Washington and Brussels no longer reward only cheap assembly or low-cost outsourcing. They reward mixed ecosystems that combine production, trusted governance, technological learning and services integration. The country that can put these elements together more effectively will have a more flexible form of power in a fragmented global economy.

Here a point from Hayek deserves attention, because it goes against the more dramatic stories about relocation. Some supply chains are much harder to move than others. Labour-intensive consumer goods and basic assembly can be moved when logistics, labour and incentives allow it. But sectors that depend on closely coordinated supplier ecosystems, on process-engineering experience and on tacit production knowledge (knowledge that, in Hayek’s sense, is local, dispersed and hard to codify) resist quick relocation (Hayek, 1945). China gains a lot from this difference. Even when its share of final assembly falls, it can keep its upstream strength in machinery, components, specialised inputs and process reliability. India’s challenge is therefore not only to receive relocated production, but to build enough complementary capacity so that relocation becomes cumulative and not superficial. Trust can move investor preferences at the margin, but it cannot create industrial depth overnight.

A contest of time horizons

The deepest asymmetry in this rivalry is about time. China’s advantage is strongest in the present: industrial depth, supplier density and export capacity are cumulative results that cannot be reproduced quickly. India’s advantage is more about “direction” – the fact that, if Western diversification continues and if India can reduce its own implementation problems, it may enjoy gains that add up over a longer period. China defends an established central position under growing distrust; India tries to turn geopolitical goodwill into future industrial weight before this goodwill disappears or changes. For this reason, the likely result is gradual rather than dramatic and it will be visible first at the edges of specific sectors, and only later at the macroeconomic level.

This is also where a free-market caution should be repeated, since it is the perspective used here throughout. We should be careful with any narrative that suggests technological supremacy can simply be planned by the state. Both China and India work in policy environments where industrial ambition is strong, but the final test is still whether firms can innovate, learn and compete under conditions that reward efficient adaptation rather than bureaucratic favour. China’s risk is that a renewed recentralisation of the state will weaken the private dynamism that pushed its earlier modernisation (Lardy, 2019). India’s risk is that administrative complexity and uneven execution will waste the advantage that Western trust gives it today. In both cases, technological security depends not only on strategy, but also on the quality of institutions – which is another way of saying that the deep causes of success have not changed since the reform era, even if the geopolitical packaging has.

Conclusion: relocated, not resolved

Globalisation today has not removed the rivalry between states; it has reorganised it and moved it to a new place. China and India do not compete only in Asia or only through bilateral disputes. They compete through the preferences, the fears and the policy instruments of the West. The United States and the European Union are not outside the rivalry; they shape its structure of opportunities. And still the rivalry remains, in essence, between China and India, because each country reads Western policy more and more through its position compared to the other. The American and European factors matter not because they replace the pair, but because they show how this pair works today.

This brings us back to the beginning. The word “miracle” hid the mechanism of Chinese and Indian growth; the idea of a coming Indian “replacement” of China hides the mechanism of their present competition. In both cases the more sober reading is the more accurate one. India is not so much replacing China as accumulating relative gains under conditions of controlled diversification – which is, in the end, how industrial geography has always been remade, through repeated small reallocations rather than through one dramatic break. Whether this accumulation adds up to a real reordering will depend, as always, not on the mythology of the miracle, but on the much less glamorous quality of institutions: on which country can better combine openness with adaptability and turn the incentives created by others into capacities of its own.

References

Atlantic Council (2025) IMEC corridor assessment: unlocking the India–Middle East–Europe economic corridor. Washington, DC: Atlantic Council.

Baldwin, R. (2016) The Great Convergence: Information Technology and the New Globalization. Cambridge, MA: Harvard University Press.

Bloomberg (2025) Apple India produces $22 billion of iPhones in shift from China. 13 April.

European Commission (2024) EU imposes duties on unfairly subsidised electric vehicles from China while discussions on price undertakings continue. Brussels, 29 October.

European Commission (2026a) EU and India conclude landmark Free Trade Agreement. Brussels/New Delhi, 27 January.

Hayek, F.A. (1945) The use of knowledge in society. American Economic Review, 35(4), pp. 519–530.

IBEF (2025) Tata & Foxconn: the Made-in-India iPhone race that’s reshaping Apple’s global supply chain. India Brand Equity Foundation, 13 June.

Irwin, D.A. (2020) Free Trade under Fire. 5th edn. Princeton: Princeton University Press.

Koopman, R., Wang, Z. and Wei, S.-J. (2014) Tracing value-added and double counting in gross exports. American Economic Review, 104(2), pp. 459–494.

Lardy, N.R. (2019) The State Strikes Back: The End of Economic Reform in China? Washington, DC: Peterson Institute for International Economics.

Naughton, B. (2007) The Chinese Economy: Transitions and Growth. Cambridge, MA: MIT Press.

Panagariya, A. (2008) India: The Emerging Giant. Oxford: Oxford University Press.

Rodrik, D. (2018) New technologies, global value chains, and developing economies. NBER Working Paper No. 25164.

The White House (2026) United States–India Joint Statement. Washington, DC, 6 February.

USTR (2025) Fact Sheet: U.S.–India establish terms of reference on Bilateral Trade Agreement. Washington, DC: United States Trade Representative.

World Bank (2025a) Advancing reforms can enhance prospects: China Economic Update. Washington, DC: World Bank.

Photo source: BentheCM @ flickr.com.