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China and India: Economic Ties and Strategic Rivalry (Part 2)

02/10/2015


China and India: Economic Ties and Strategic Rivalry (Part 2)

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.


Questionable Trends. While there is no doubt about the marked improvement in India’s economic ties with China, there are also trends which could prove hazardous to further economic expansion. Chief among them are: India’s ballooning trade deficit with China; overcoming mistrust for more open economic engagement; and the potentially volatile competition for energy resources. India’s trade deficit with China was more than $27 billion in 2011 rising to $29 billion in 2012. India’s deficit with China was close to a record $30 billion for 2013, and the numbers underline a sharp decline in once-burgeoning trade. While a combination of factors such as bans on iron ore mining in India (due to corruption scandals), coupled with the global slowdown, contributed to this outcome, the ambitious goal of reaching $100 billion in trade between India and China is more elusive than ever. However, during this same time period, China’s trade with the rest of Asia, as well as with its major western trading partners, picked up, while trade with India remained in a slump. This suggests that the causes for the reduced trade with India were more structural rather than just a reflection of global trends.[1]

Foreign trade experts project that if a Free Trade Agreement (FTA) were to be executed between India and China to lift trade (something China has sought), the latter will gain the most. Without a major improvement in the competitiveness of Indian goods, any mutual reduction in tariffs by China and India would result in a much higher increase in Chinese exports to India than Indian exports to China.[2] As even Prime Minister Singh, an economist by training, noted regarding a free trade or regional trade agreement, “I must be honest that there is a great deal of concern in our industry, given the large and growing deficit in our trade with China. When conditions are more propitious and trade is more even, we will find it more feasible to discuss an RTA or an FTA between our countries.”[3]

Other avenues for addressing the trade imbalance also face challenges—in India and China. Indian leaders have argued that the deficit is partly due to restricted market access in China. Two sectors where India is viewed as competitive globally—information technology (IT) services and pharmaceuticals—have not made much dent in the Chinese market.[4] Both are affected by non-tariff trade barriers on China’s part such as prolonged approval times for Indian drugs, and in IT, burdensome security clearances. Stepped up Chinese foreign direct investments (FDI) in India could allay the huge trade imbalance. This seems to be the latest measure that the two countries are discussing. China has suggested the creation of a Chinese Industrial Park in India where companies from China could operate from together. China ranks 31st in terms of FDI investments in to India, which is considered unsatisfactory—especially given the trade volumes. At the same time, Chinese entry into certain sectors in India is also viewed as sensitive in political terms—most notably the telecommunications area. There is also resistance to giving Chinese firms a large physical presence in India. Long-standing mistrust between the two countries is continuing to prove difficult to overcome fully.

In 2012, India was China’s 15th largest trading partner with a share of 1.72 percent, 7th largest export destination for China and 19th among the countries exporting to China, comprising 1.1 percent of total Chinese imports.[5] In the same year, China was India’s 2nd largest trading partner with a share of 8.31 percent, 4th largest export destination for India and 1st among the countries exporting to India, comprising 8.32 percent of total Indian imports.[6]

Apart from the trade and investment arenas, the potential for more serious resource competition between China and India is a looming threat. For both India and China, energy shortfalls constitute a major obstacle to sustained growth. Both countries will need to rely on new energy sources, which could create tensions and even cause conflict between them. In India, energy security has been singled out at the highest political level for its importance—second only to food security according to Indian Prime Minister Manmohan Singh.[7] The importance of energy security scarcely was missed by the previous government either—in 2003, the Foreign Secretary, during the Bharatiya Janata Party (BJP) rule, suggested energy security was a huge challenge for India, second to combating terrorism. [8] India, which currently imports nearly three out of every four barrels of oil it consumes, will likely import up to 90 percent of its oil consumption by 2032. A third of the country’s current gas consumption comes in the form of imported liquefied natural gas and India is likely to import even more gas in the future through pipelines, as well as tankers. Thus, India’s energy security policies will have to reckon with the country’s acute import dependence for hydrocarbons, but not just limited to hydrocarbons since India has been importing coal as well in recent years.

          China’s energy dependence is even more problematic. Its major supply sources are situated far away and energy transport routes are controlled by its potential adversaries. Eighty percent of China’s oil imports come through the Indian Ocean by way of the Strait of Malacca. President Hu Jintao is credited with coining the term “Malacca Dilemma” in 2003 to describe China’s challenge. Shortly after Hu Jintao’s statement, the China Youth Daily claimed that “It is no exaggeration to say that whoever controls the Strait of Malacca will also have a stranglehold on the energy route of China.”[9] China also is concerned about the ability of the United States to disrupt its sea lanes of communication from the Persian Gulf to Northeast Asia. According to some U.S. analysts, such a disruption would pose a clear threat to China’s economy, even more than to its military capability. As China develops its anti-access/area denial (A2/AD) strategies against the United States, it will become difficult, if not impossible, to distinguish between China’s aim of ocean control for protection of sea lanes of communication, on the one hand, and a threat to freedom of navigation, on the other. [10] This situation along with the “Malacca Dilemma,” could very well result in spillover effects that harm Indian energy security.

China’s national energy strategy increasingly also includes port construction and access points in the Indian Ocean. China’s far flung acquisitions in Africa have been likened to the “new scramble for Africa.” China’s tactics appear geared toward edging out competitors: China extends aid and loans to oil-rich countries such as Angola; finances and builds infrastructure in host countries where it owns assets; and makes advance payments for long-term oil supplies. China even attempts to suggest political solutions for disputes in the countries where it is invested, such as in Sudan. China’s overseas investments are five times those of India, apart from loan commitments, which are even larger. [11] China is a giant compared to India regarding global energy presence and China’s tactics, which could close off energy sources, may set up potential competition in the future.

Political-Strategic Trends between India and China. Political-strategic trends between India and China present a mixed picture. The two have an unresolved border dispute but their armies have carried out joint military exercises. China has strong enduring ties with India’s adversary Pakistan, but India and China call themselves strategic partners.[12] On the one hand, it could appear that China is deliberately encircling India by: reaching new heights in Sino-Pakistan ties with the Chinese construction of Pakistan’s Gwador port (Phase I completed in 2007 and Phase II currently underway), and talks of building a trans-Himalayan highway; forging unprecedented ties with Sri Lanka including construction of the Hambantota port facility in 2010; cultivating ties with Bangladesh through critical energy and infrastructure projects and the Chittagong port; and consolidating relations with Myanmar over the past several decades including port access. These relationships are all along India’s critical sea lanes in the Indian Ocean. Many Indian analysts now routinely describe this as the Chinese “string of pearls.” Further afield in Afghanistan, as the U.S. withdrawal looms, China is becoming more active— particularly in its quest for mineral resources.[13] Whether these moves represent a shifting balance of power in India’s strategic neighborhood is yet to be seen. A big question is the extent to which Chinese activities are driven by commercial and economic imperatives (especially energy security), rather than by hostile military aims.

At the same time, there are signs of marked improvement in India-China political and strategic relations for some time. During Prime Minister Atal Bhari Vajpayee’s visit to China in 2003, which turned around the slump following India’s nuclear tests, the countries signed the Declaration on Principles for Relations and Comprehensive Cooperation, charting a path for future collaboration. The two countries then signed a highly touted Strategic and Cooperative Partnership for Peace and Prosperity in 2005. Since 2003, high level summits have become the norm; there are a variety of ministerial and lower level committees and working groups in the political arena; a hotline was set up between the foreign ministers in 2008; and there is an ongoing annual defense dialogue.[14] Beyond the bilateral level, the two countries are key members of the so-called BRICs (Brazil, Russia, India and China); they, together with Russia, interact in the Trilateral Summits; usually uphold multi-polarity promoting mechanisms, and tend to be sovereignty hawks on the global stage. As the title of an article in the Economist on India and China put it, “India and China: Friend, Enemy, Rival, Investor.”[15]

 

[1] The Hindu, Dec. 13, 2013.

[2] Huchet, p. 63.

[3] The Economic Times, Oct. 22, 2013.

[4] Jaishankar, “The Elusive Smoothness of the Silk Route.”

[5] Embassy of India, Beijing, China,

http://www.indianembassy.org.cn/DynamicContent.aspx?MenuId=3&SubMenuId=0

[6] “Export Import Data Bank,” The Ministry of Commerce and Industry, the Government of India, http://commerce.nic.in/eidb/default.asp.

[7] See Manmohan Singh’s interview with Edward Luce, Financial Times, Nov. 17, 2004.

[8] Kanwal Sibal, “Indian Foreign Policy: ‘Challenges and Prospects’ Presentation,” Geneva Forum, Jan. 23, 2003, www.mea.gov.in.

[9] Quoted in Jeff M. Smith, Cold Peace: China-India Rivalry in the Twenty-First Century (Lanham, MD: Lexington Books, 2014), p. 148.

[10] Charles L. Glaser, “How Oil Influences U.S. National Security,” International Security, vol. 38, 2013, pp. 112-146.

[11] Sudha Mahalingam and Deepa M. Ollapally, “India’s Energy Security,” paper presented at regional workshop on “Energy, Nuclear, and Transit Security in Asia,” Beijing, China, Jan. 7, 2013.

[12] The relationship is increasingly seen as a paradox; see, for example, Times of India, Oct. 17, 2013.

[13] Brendan O’Reilly, “China Searches for an Afghan ‘Pivot,’’’ Asia Times Online, Nov. 21, 2012, http://www.atimes.com/atimes/China/NK21Ad02.html.

[14] For a good list of agreements and dialogues, see M. Taylor Fravel, “China Views India’s Rise: Deepening Cooperation, Managing Differences,” in Strategic Asia 2011-2012 (Washington, DC: National Bureau of Asian Research, 2011), pp. 81-86.

[15] The Economist, June 30, 2012.

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