China and India: Economic Ties and Strategic Rivalry (Part 1)


China and India: Economic Ties and Strategic Rivalry (Part 1)

How well do theories of economic interdependence and structural realism explain the India-China divergence between growing economic relations and continuing strategic mistrust? This article looks at the Indian side and argues that we need to go beyond economic and strategic factors, and brings in a more contingent approach based on domestic elite discourse and thinking. The article suggests that a more nuanced and complex debate on China is emerging in India than that posited by interdependence or realism, a debate that is framed by what I term nationalist, realist and globalist schools of thought, with the latter two groups currently holding the center of gravity.

For more than a decade, India-China economic relations have been on a fast track. While their bilateral trade crossed $10 billion in 2004, leaders of the two countries then declared their aim to reach the $100 billion mark by 2015. Against the backdrop of unresolved borders and political tension, it is important to consider what this means for their future prospects in both the economic and politico-strategic realms. Given the growing economic and political heft of India and China, we can assume that the nature of their relations will have considerable implications for the international relations of Asia, as well as for the role of the United States in Asia. Understanding the dimensions of the apparent anomaly or divergence between economic and strategic relations in the India-China relationship is thus essential.
Quite apart from the economic and strategic indicators and trends, I believe that elite discourse and thinking on this divergence is even more important. The perceptions and viewpoints of the political leadership, economic and business leaders, and strategic policymakers and analysts are even more important for policy
formulations and potential outcomes. This article focuses on the Indian side and looks at the interplay between economic and strategic relations of India and China, as well as their worldviews by addressing the following questions:

  • What does the literature tell us regarding the impact of economics and peaceful relations between rivals?
  • What do the economic trends between India and China suggest?
  • What do the politico-strategic trends between India and China suggest?
  • How are key Indian domestic actors (government leaders, business and economic elites, strategic and policy analysts, and public intellectuals and media responding to the “divergence”?

This article concludes by identifying what seems to be a more nuanced and complex Indian approach to China overall, one that cannot be explained without bringing in the growing economic factor. The theoretical and policy implication is that it is no longer possible (or desirable) to separate economic and strategic spheres and to privilege strategic variables as the dominant international relations theory of structural realism posits.[1]

Impact of Economics on Peaceful Relations between Rivals

Regarding the role of economics on political and security affairs, the most

significant difference is between those who believe that economic interdependence will lead to less conflicting relations, and those who argue that economic ties will not be able to overcome, what they view as, more fundamental strategic factors. These are essentially the ends of two well-known alternatives—economic interdependence and structural realism.[2] However, there is also a growing literature emphasizing the interconnectedness of economics and security.[3] The strongest proponents of economic interdependence make their argument using a fairly straightforward cost-benefit utility calculus. They focus on the opportunity costs that would result from conflict, as well as the reduction of benefits to be gained from conflict as economic interdependence increases. Given that economic logic is the underpinning of interdependence, the primary driver of relations is seen as material gains.[4]

Some recent literature interprets what the economic ties between India and China tell us. Among those who believe that the dramatic rise in economic

integration between the two countries is irreversible and is laying the groundwork for further improvement in the political environment is Jairam Ramesh, a leading political and media figure in the Congress Party. He even coined the term “Chindia” to capture the fundamental transformation in their relations toward a deep convergence.[5]

The argument of more realist thinkers is that while the growing economic

convergence between the two countries “provides a powerful incentive to set aside political differences and focus on strengthening economic ties, it is nevertheless important to note that the current Sino-Indian entente remains delicate and fragile and could quickly deteriorate.”[6] For realists, economic interdependence not only means cooperation, but potentially volatile trade disputes. While interdependence theorists focus on absolute gains and market mechanisms, the realists counter with an emphasis on relative gains and zero sum games. More realist-inclined scholars would argue that the change in political climate is what is leading to increased economic interaction, rather than the other way around. According to one expert, “The improvement in Sino-Indian relations has also resulted in growing economic linkages.”[7] In the case of China, they point to the fact that despite the close and long economic cooperation of China with Japan and Taiwan, these relationships continue to be the most antagonistic for China.

Economic Trends between India and China

Promising Trends. It is difficult not to be impressed by the exponential

growth of India’s trade with China since the late 1990s. India and China resumed trade, which had come to a halt after the 1962 war in 1978 and signed a Most Favored Nation Agreement in 1984. Trade however did not take off until much later, but when it did, it was in a stunning fashion. From a negligible level of $260 million in bilateral trade as late as 1991, it increased to $1.1 billion by 2003 and then exploded to $51.8 in 2008, with China overtaking the United States as India’s largest trading partner in goods.[8] Bilateral trade peaked in 2011 at $73.9 billion, but declined in 2012 by 10 percent reflecting in part the global slowdown.

Equally impressive is the priority that top leaders in each country have given to their economic interactions. Indeed, from their declarations, it would appear that they are placing an inordinate amount of hope and confidence on the economic front to bring their broader relations closer. Premier Zhu Rongji may have made the most audacious statement back in 2002, during a speech at the corporate headquarters of India's leading software company Infosys, when he said:

“ Infosys stands for advanced technology, outstanding talent, modern management and tremendous achievements. It is widely recognized around the world that India is number one in software exports and China is number one in hardware. Together we can become the world's number one.”[9]

President Hu Jintao’s visit in 2006 was the first by a Chinese head of state to India in ten years and economics was again the big story. Even with the downturn in trade during 2012 and 2013, Prime Minister Manmohan Singh remained bullish on deepening economic ties with China.[10]

A variety of mechanisms and arrangements were established to facilitate

global economic engagement since 1991 when India launched its new economic

policy—revamping it’s largely autarkic preferences in place since independence.

With China, border trade agreements were signed in 1991 and 2003, avoidance of a double taxation agreement completed in 1994, customs agreement in 2005 and a bilateral investment agreement in 2006.[11]  In 2006, Chinese companies doing business in India formed a Chamber of Chinese Enterprises in India (CCEI), aiming to represent the interests of Chinese companies, as well as to promote high-level business and political talks between the two sides.[12] The Chinese chamber was interpreted as a sign of growing importance of Chinese businesses in India. An India-China Strategic Economic Dialogue was set up in 2010 under which cooperation in fields, such as railways, high technology and energy is promoted.

An underlying premise for optimism on the economic partnership is the

assumption in conventional neo-classical economics that the complementary nature of Indian and Chinese economies will prove to be an impetus for further growth: China’s manufacturing base and India’s service base, India’s raw material exports and China’s manufacturing exports.[13] While this lack of value-added in India’s exports to China is creating trade imbalances, some see no reason for India to be worried. As one prominent commentator noted, “(…) it is wrong to aim for balanced trade with each trading partner.”[14] The point is that India should behave no differently with China than with any other competitive trading partner given China’s comparative advantage.

Trade has tended to flourish when political barriers to economic engagement have been dropped or modified by China and India. For instance, when the disputed Nathu La Pass, lying between Sikkim and Tibet, was finally reopened in 2006 (after China showed willingness to accept Sikkim as part of India), trade increased over 50 fold.[15]  Most of the trade is composed of imports of Indian goods into Tibet and the market is open for only six months of the year—between May and November. Although border trade between India and China is tiny at $14 million, during 2012, it grew by more than 20 percent, thus, bucking the downward slide elsewhere.

Among all of India’s policy innovations since the end of the Cold War, its

“Look East” approach generally rates among the best. Prime Minister Narasimha Rao’s launch of the Look East policy in 1992 (following the twin economic and political crisis of 1991)[16]  was explicitly designed to build economic bridges to Southeast Asia and jumpstart India’s economic integration into the dynamic nearneighborhood. India steadily has used its Look East policy since the early 1990s to re-enter Asia through multilateralism and key bilateral relationships, such as those with Singapore, Malaysia, South Korea, Japan—and China. Phase II of the Look East policy is geared toward deepening economic and, just as importantly but more tacitly, India’s political engagement in East Asia. The 2010 Free Trade Agreement with the Association of Southeast Asian Nations (ASEAN) was the crowning success—an agreement that had been beset with domestic political opposition and bureaucratic resistance for nearly seven years.[17]

(Deepa M. Ollapally)

[1] Structural realism, long dominant in international relations, gives primacy to international strategic environment and military capabilities. Kenneth N Waltz, Theory of International Politics (New York: Random House, 1979); and Charles L. Glaser, Rational Theory of International Politics: The Logic of Competition and Cooperation (Princeton, N.J.: Princeton University Press,2010).

[2] For interdependence arguments see the classic work by Robert O. Keohane and Joseph S. Nye, Power and Interdependence: World Politics in Transition (Boston: Little Brown, 1977); for an update on the literature, see Edward D. Mansfield and Brian M. Pollins, eds., Economic Interdependence and International Conflict: New Perspectives on an Enduring Debate (Ann Arbor, MI: University of Michigan Press, 2003).

[3] See for example, Avery Goldstein and Edward D. Mansfield, eds., The Nexus of Economics, Security and International Relations in East Asia (Stanford, CA: Stanford University Press, 2012).

[4] See for example, Solomon W. Polachek, “Conflict and Trade,” Journal of Conflict Resolution, vol. 24, 1980, pp.55-78.

[5] Jairam Ramesh and Strobe Talbott, Making Sense of Chindia: Reflections on China and India (New Delhi: India Research Press, 2005). See also Pete Engardio, ed., Chindia: How China and India Revolutionizing Global Business (New York: McGraw-Hill, 2007).

[6] Shalendra D. Sharma, China and India in the Age of Globalization (New York: Cambridge University Press, 2009 p. 165. See also Jean-Francois Huchet, “Between Geostrategic and Economic Competition: Emergence of a Pragmatic India-China Relationship,” China Perspectives, vol. 3, 2008, pp. 50–67.

[7] Sharma, China and India in the Age of Globalization, p. 165.

[8] Embassy of India, Beijing, China,

[9] Press Release, Infosys Technologies Ltd., January 17, 2002. During his visit, he granted permission to the company to open an office in China,

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