India–Pakistan Conflict Exposes the Real Danger – China

Written by Stefan-Andrei-Elyn Dumitrache & Researched by Noor Ul Ain

Rising India–Pakistan Hostilities and Economic Fallout

The longstanding tensions between India and Pakistan have resurfaced, raising concerns about a potential wider regional economic crisis. Border skirmishes, political tensions, and contentious events like the possible collapse of the 1960 Indus Water Treaty are increasing the stakes. A significant flashpoint was the 2019 Pulwama terrorist incident, which led India to implement a drastic 200% tariff on imports from Pakistan, an early indication of how swiftly diplomatic tensions can turn into trade conflict.

Trade sanctions and water-sharing conflicts are presently employed as means of retribution, undermining established economic agreements and intensifying nationalist discourse. This is not just a bilateral crisis; it’s a regional problem that could disrupt significant infrastructure initiatives and destabilise South Asian economies. Central to this impending disruption is China’s substantial investment in Pakistan via the China–Pakistan Economic Corridor (CPEC), an essential component of its extensive Belt and Road Initiative (BRI). If conflicts intensify, it won’t just be India and Pakistan that face consequences; China's goals and significant investments could be directly threatened.

China’s Strategic Stakes in South Asia
China’s presence in South Asia has expanded over the last ten years, with CPEC becoming a key element of Beijing’s BRI initiative. Having invested more than $60 billion in highways, ports, and energy pipelines throughout Pakistan, China perceives this corridor as not merely an economic pathway but a geopolitical lifeline. The Observer Research Foundation (2024) states that CPEC is a key element of BRI, providing China with direct access to the Arabian Sea and avoiding critical chokepoints such as the Strait of Malacca.

Nevertheless, this strategic depth also represents a weakness. Should tensions between India and Pakistan escalate into outright conflict or prolonged economic hostility, the core structure of CPEC may be jeopardised. Trade routes may face disruptions, risks of sabotage, and hesitation from international investors could ensue. Additionally, China's hesitation to align itself in South Asian disputes may be challenged, particularly if its investments or staff face danger. Beijing could become caught in a crisis that it intended to shield itself from via economic diplomacy.

Geoeconomic Tools and Coercion in Asia
India and China have adopted geoeconomic strategies as a means of regional power. Trade restrictions, sanctions, foreign direct investment (FDI) regulations, and digital prohibitions have progressively integrated into their strategic frameworks.

China has historically leveraged market access and investment to sway smaller economies. However, India has also mastered the use of its economic strategies as weapons. After the fatal clash in Galwan Valley in 2020 with Chinese troops, India prohibited more than 200 Chinese applications, referencing national security issues, and implemented tighter FDI regulations mandating governmental approval for investments from nations with land borders, clearly targeting China.

This pattern shows the growing application of economic pressure in regional diplomatic relations. These strategies might prevent aggression in certain situations, but they could also counteract efforts by harming long-term regional trade integration. Moreover, the WTO's multilateral trade system is becoming more strained as nations turn to unilateral trade sanctions, exemplified by India's revocation of Most Favoured Nation (MFN) status for Pakistan.

Managed Rivalry and India–China Trade Strategy
Even with their political and military tensions, India and China uphold one of Asia's most intricate economic interactions. Bilateral trade exceeded $115 billion in FY2023, and India experienced an $83 billion trade deficit, highlighting that economic interdependence is still significant (USIP, 2025). The Indian Express (2024) characterizes this paradox as a “managed rivalry,” a tactic where strategic competition is counterbalanced by economic interaction.

This strategy has enabled India to take advantage of Chinese imports while protecting its strategic priorities. Nonetheless, as regional tensions escalate, especially those related to Pakistan, this fragile equilibrium could prove to be unmaintainable. Should China appear to be excessively backing Pakistan, or if Chinese projects in Pakistan turn into a burden for India, New Delhi might reevaluate the expenses of its economic involvement.

In this situation, retaliatory trade measures might intensify, mutual mistrust could grow, and opportunities for regional economic collaboration may diminish. The boundaries of managed rivalry would be clearly exposed, showing that even strong trade relationships cannot avert strategic decoupling when national security priorities clash.

Conclusion: A Regional Crisis in the Making
The intensifying conflict between India and Pakistan transcends a bilateral concern; it serves as a regional fault line that could disrupt trade, hinder infrastructure goals, and involve China in uncertain manners. CPEC's susceptibility highlights the fragility that can affect even well-financed megaprojects in unstable political environments.

China's aspirations through the BRI may encounter their greatest challenge in South Asia. A large-scale regional crisis would not only disturb supply chains and undermine investor confidence but could also lead to worldwide economic consequences, particularly considering South Asia’s rising significance in global trade and manufacturing systems.

India needs to balance its economic interactions with China while also gearing up for potential strategic situations. Geoeconomic instruments, though effective, are double-edged blades that can heighten tensions if not applied carefully and tactfully.

References

• Observer Research Foundation (2024). India–Pakistan Conflict Exposed the Real Danger – China. Available at: https://www.orfonline.org/research/india-pakistan-conflict-exposed-the-real-danger-china
• United States Institute of Peace (USIP) (2025). How Vulnerable Is India to Chinese Economic Coercion? Available at: https://www.usip.org/publications/2025/06/how-vulnerable-india-chinese-economic-coercion
• Indian Express (2024). India’s Trade Strategy with China Will Have to Rely on a Managed Rivalry. Available at: https://indianexpress.com/article/opinion/columns/indias-trade-strategy-with-china-will-have-to-rely-on-a-managed-rivalry-10097167
• Ministry of Commerce, India (2025). India–China Bilateral Trade Statistics – FY2023. Available at: https://tradestat.commerce.gov.in/eidb/