India-China: Friend in Foe: Civil Services Mentor Magazine August 2012

India-China: Friend in Foe

India and China agreed to increase their defense and security dialogue and work to take steps to ensure that the two countries achieve a 100 billion dollars trade target by 2015. The decision was taken on the sidelines of the Ri0+ 20 summit at Rio de Janeiro. India also raised the border issue during the talks. India and China agreed that they would continue political dialogue at the political level. India and China also decided that the special representatives would work for preparing the joint record of their work so far, which was already announced in January 2012 and give directions for the future co-ordination between the two countries. The special representatives of India and China would submit a report on the developments so far by January 2013. India would setup interministerial group on its side while China would have an official team that would periodically exchange views on maritime issues relating to trade and security.

It was trade that helped China and India to take their politicalmilitary relationships out of woods beginning with late eighties and enabled them to keep sweeping tensions under the friendship rug. In the process, the phenomenon debunked the traditional logic of ‘trade following the flag’ and the primacy of politics in bilateral and international relations. However, recently there have been frictions derailing the entire progress in the Sino – Indian relations.

The return of Hong Kong to China has strengthened the China link of India’s business community, many of whom have lived and thrived in Hong Kong for over one hundred years. Juxtaposed with China’s emergingprivate enterprises, these new trends have provided new momentum for China-India trade relations. It is especially this economic engagement between their nonstate sectors that has now begun to provide steam to the China-India political rapprochement, promising to gradually emerge as an important force in moulding the nature and magnitude of China- India trade relations. Nevertheless, given the multifaceted challenges for their economic engagement, the hope lies in the two being able to continuously innovative to strengthen and evolve their bilateral trade on the basis of mutual understanding and mutual confidence.

On the question of boundary dispute between the two countries, the two leaders said the Special Representatives of India and China  have been asked to prepare details of the joint work done so far. China also agreed to look into the issue balance of trade which is heavily in its favour. “The Prime Minister raised the issue of Indian trade deficit and the Chinese agreed to work with India in addressing the fact that India has a large trade deficit. They mentioned in fact specifically that they are arranging trade missions to India to improve access of Indian exports into the Chinese market. They are organizing commodity fairs. And they noted for example one of the changes which has happened recently is that rice exports from India to China will now be commencing, ”Mathai told the representatives of Indian media organisations covering the Rio+20 summits.

Now, Indian exporters can soon begin sending basmati rice to China after both countries agree on a mutually satisfactory quarantine protocol. China has already cleared Indian exports of basmati rice following six-year process during which many hurdles that bar the entry of Indian rice into the Chinese market were overcome. Negotiations on the issue of rice exports were on since 2006, when President Hu Jintao visited India. Finally, it was given a concrete shape during Hu’s visit to New Delhi for the BRICS summit in March.

China and India today represent Asia’s two largest and most dynamic societies which are emerging as new trend setters in international relations. Especially, with their annual GDP growth rates standing respectively at 9.1% and 8.5% for 2003 and at 9.5% and 6.9% for 2004, China and India have since come to be recognised as the fastest growing economies. According to World Bank estimates, and assessed on the basis of purchasing power parity, China and India have already become respectively the second andfourth largest economies of the world surpassing developed countries. This boom in trade has also introduced new trends. The two states are no longer only recipients on foreign direct investment but have entered into a new phase of being investors, both mutually as in other regions. In this new context, the increasing deficit in the energy sector and the competition to capture new markets present major challenges to sustaining this boom in their bilateral trade.

Viewed in the context of South Asia, China’s trade with India have witnessed impressive increases defying all suspicions about China’s special relationship with Pakistan or China’s encirclement of India. To highlight some other strong fundamentals that promise to sustain their current trade boom, while China continues to enjoy a huge favorable balance of trade visà- vis most other smaller states of the South Asian region, it is only the China- ndia trade that has remained to be China’s most balanced trade in South Asia and often the balance has been in favor of India. This clearly reflects strong mutual stakes which promise to sustain this trade boom at least in the short term. Indeed, the two seem to be becoming increasingly relaxed about their bilateral ties and are now thinking of building joint strategies towards their regional and global initiatives. Noonetoday talks of a China- ndia clash in South-East Asia where both have built flourishing engagement without any mutual friction or skepticism. While so far they have not allowed this to become a major stumbling block yet their intensifying search for energy sources abroad is lately seen as one area that could post a serious challenge for their economic engagement.

From the global perspective, China and India today represent two unique new players— presenting an extraordinary combination of a very large GDP and still with significant poverty and pockets of unrest and a very low per capita income and living standards. This unique combination raises several questions about their becoming major drivers in international economic trends. However, in the politico-strategic sphere, their recent economic success has resulted in both seeking an expanded space in regional as well as international decision-making, something that is becoming a matter for worldwide concern. China’s foreign trade stood at US $ 3.64 trillion for 2011. India’s foreign trade, by comparison, reached only about US $ 1 trillion for 2011.

India’s growing trade deficit with China—an estimated $27 billion in 2011—has become a source of anguish in Indian policy circles. Bilateral trade between the two emerging giants grew to $73 billion in 2011, up from $63 billion in 2010 and less than $3 billion in 2000. The Indian side, though, is becoming increasingly alarmed over the growing trade balance in China’s favor, which amounted to a Chinese surplus of $23.9 billion last year. In December, India’s National Security Council Secretariat, the apex agency responsible for economic and strategic security, even circulated a note to various ministries detailing its concerns and backing a possible move by the country’s Department of Commerce to start restricting imports from China. Unfortunately, much of the public discussion on this subject has tended to be shallow. Few people seem to understand the trade deficit’s underlying causes, its implications for India’s economy, and what India should do to create a better balance.

There’s no question that India’s overall merchandise trade deficit is soaring, growing from $13 billion in 2000 to $103 billion in 2010 and an estimated $150 billion in 2011. At more than 6 percent of the GDP, India’s trade gap is huge. The trade deficit has grown even though India over the past 10 years has been the fastest-growing exporter among the world’s top 10 economies. From 2000 to 2010,  India’s exports grew at an annual rate of 19.3 percent—more than twice the rate of the 9 percent growth in world trade and about the same as the 20.1 percent average annual growth in China’s exports.  The opening of Nathu La in India’s Sikkim province for trade between the two countries has also not been a successful experiment so far, despite over five years of existence. The trade has been limited both in the number of items that can be cross-exchanged and the volume that is a forgettable figure in the overall bilateral trade. Apparently, the infrastructure bottlenecks are the main hurdle. Also, post-1962 period, the trajectory of the erstwhile trade through Nathu La has shifted to other routes and it is indeed a difficult task to reorient the same. Today, the pass that was once witness to a significant amount of Indo – Tibetan trade, is being increasingly doubted if it will ever regain its old posture and serve as an economic bridge between China and India.

Even if the trade deficit with China were magically to vanish, it would do little to address the country’s trade imbalance. The deficit with China accounts for less than 20 percent of the country’s total trade deficit, with India importing Made-in-China toys, consumer electronics, telecommunications gear, and power equipment. More damaging to India’s trade numbers, though, is the reliance on imported oil, gas, and coal from such places as Saudi Arabia, Iran, Australia, and Indonesia. Energy accounts for more than 65 percent of the trade deficit. In sum, the primary trade challenge for India is rooted in its rapidly growing need for energy coupled with the rapidly increasing price of energy resources.

Let’s now look at the underlying causes of India’s trade deficit with China. Children’s toys may be a highly visible symbol of China’s seeming invasion of India. They account for less than 1 percent, however, of India’s imports from China. Of China’s total 2010  exports of more than $40 billion to India, more than 60 percent came from capital goods, such as electrical machinery, nuclear reactors, boilers, iron and steel products, ships and boats, and project goods.

What would happen if the Indian government were to restrict imports of Chinese capital goods into the country? Yes, the trade deficit with China would come down, but the country’s overall trade deficit would become even bigger. To see why, look at the $8.29 billion order that India’s Reliance Power placed in 2010 with Shanghai Electric to supply equipment that would generate nearly 24 GW of electricity annually. (That’s equal to about a fifth of India’s total electricity production.) The agreement included a financing deal with a consortium of Chinese banks, such as Bank of China and China Development Bank, providing lowcost financing. If Reliance Power had purchased this equipment from non-Chinese suppliers, the price would have been a few billion dollars higher and the company would have faced difficulties figuring out how to pay for the purchase.

Starting in 2007, India’s political leaders finally began a serious effort to address the country’s massive infrastructure deficit. This has meant rapid growth in investment in sectors such as power, telecommunications, ports, roads and highways. Since India’s domestic producers have been unable to keep up with the growing need for machinery and other capital goods, the country has no choice but to import equipment. With prices 30 percent or more below those offered by suppliers in the U.S., Europe, or Japan, Chinese companies have been the natural beneficiaries of India’s growing appetite for capital goods. India does have some things that China wants: India is one of the world’s largest producers of iron ore and cotton, and China is a major customer. Not surprisingly, as the world’s largest cotton importer, China has complained about India’s recent moves to ban cotton exports. Given pressure also from India’s cotton farmers, the government has now decided partially to reverse the ban.

It can be said that the good thing about the entire Sino – Indian trade friction is that India is not the only country that is at the receiving end of Chinese export-oriented economic domination. Most countries that have vibrant trade relations with China are suffering trade deficits, including the US. Exports apart, China’s economic superiority would be complete in next 20-25 years and all countries would have to live in China’s shadow or make friends with it. The US has institutionalised an economic strategic dialogue to resolve its trade concerns with China and the two countries have made decent progress in talking out mutual trade concerns. Beijing is increasingly responsive to Washington’s allegation of ‘unfair trade practices’, primarily as a result of these talks.

As a neighbour with barrage of other frictional issues with China, India can ill-afford to let economic and trade relations slip beyond manageable limits and open another front for heated exchanges between the two countries. New Delhi can take lessons from the US – China example to avoid any future economic conflict with Beijing. The just-launched economic strategic dialogue should be exploited as a primary mechanism for resolving all outstanding trade concerns with China and explore bilateral cooperation in new areas. Concurrently, it must not shy away from implementing the proposed ‘strategic action plan’ for containing the trade deficit with China. However, New Delhi must consolidate its domestic manufacturing sector for resilience against Chinese imports. Then only India can negotiate from a position of strength in the future rounds of the economic strategic dialogue.

Amit Kumar