Monday, December 31, 2012

Sino-Indian Relations: Are Trade Issues Likely To Cause Even More Problems?

December 24, 2012
When issues pertaining to Sino-Indian relations are discussed, a natural corollary is to focus attention entirely on the boundary question. That may have been a truism in the past, but what is fast emerging on the horizon are difficult questions pertaining to trade, commercial and economic relations that need as urgent attention as the boundary question.
Today, China is India’s largest trading partner; whereas India is within the top ten of China’s trading partners. Bilateral trade between China and India soared from about US $3 billion at the beginning of the 21st century to about US$80 billion in 2012, a phenomenal increase in about 12 years. Leaders of both countries have proposed, with confidence, the goal of increasing bilateral trade to $100 billion by 2015. That being so, what does the future hold?
In the past, trade and related matters were a stabilizing factor and leaders from both countries would point to the development of trade as one of the major benefits from improved relations. However, in recent years, there have been reports of intensified trade frictions. The main complaint has related to the huge imbalance in China’s favour. For every dollar's worth of exports to China, India imports three, leading to a trade deficit of up to $40 billion in the year to March 2012, or about 2 per cent of GDP. China accounts for 25 per cent of India's overall trade deficit with the world and over half if oil is excluded from this list. India has had to frequently initiate anti-dumping investigations on imports from China, based on complaints from domestic manufacturers. India feels that that two-way trade in 2012, which reached $80 billion – consisting of about $20 billion as India’s exports and $60 billion as India’s imports – was grossly unfair. The $40 billion trade imbalance is almost as large as the Indian government’s fiscal deficit! 
Besides, the trade mix was unreasonable. India mainly imported machinery and manufactured products from China and exported cotton, iron ore and other raw materials to China. India believes that such a trade situation is unsustainable and may lead to protectionist impulses. No bilateral free-trade agreement exists, and India often is forced due to domestic pressures to levy duties on Chinese imports, most recently of power equipment. On the other hand, Chinese companies frequently complain about India’s discriminative policy against Chinese investment and its restrictions on Chinese enterprises through strict security clauses or a restrictive visa policy.
Thus, in the years ahead, given the expected growth in the overall trade, the deficit adverse to India is bound to grow even larger and this is bound to pose an even greater challenge to the leadership of the two countries. It will certainly cause anguish to the Indian leadership. It is beyond the present capacity of the Indian economy to correct the trade imbalance on its own. Unless China decides, perhaps for strategic reasons, to take decisive unilateral steps to rectify this imbalance, this is bound to be an important factor that bedevils bilateral relations.
China is well on its way to making the yuan [RMB] the third international currency, besides the US dollar and the Euro. China has also been active in promoting a regional financial architecture in Asia that would establish its economic pre-eminence. It has taken a series of graduated steps in this direction by bringing the 10 ASEAN countries on a common platform. China is moving towards establishing an Asian Fund, which is expected to allow member countries to make currency swap arrangements and the corpus of which was raised by China from $120 billion to $240 billion. China has also proposed an ASEAN Infrastructure Fund that would channel long-term investment to projects, such as the ambitious ASEAN Connectivity Initiative. These, too, will create opportunities for China to emphasize its role as a key source of capital for the region. These recent developments give substance to China’s stated ambition of internationalizing its currency and gain the status of a reserve currency rivalling the US dollar and the euro. The future for India in this regard will be bleak, if it does not take steps to set its economic house in order by pushing through urgently needed reforms.
On the other hand, there are issues at the international level where meaningful co-operation between the two countries is being witnessed. The Copenhagen Conference served to bring out in sharp relief the global and strategic dimensions of China-India relations. The cooperation that was witnessed on climate change between the two countries was largely determined by their similar situation and concerns on this particular issue. To give a boost to the bilateral relationship, the two countries should tap the potential of coordination and cooperation in multilateral economic forums and groups such as the China-Russia-India cooperation initiative, the BRICS grouping and the G20 forum. As both India and China have a fairly similar outlook on most such matters, this is one area where co-operation is possible in the future and every effort should be made to utilize the momentum thus gained to seek cooperation in other areas as well. For example, as their economies further develop both countries are likely to require large inflows of fossil fuel energy [Oil]. Instead of competing with each other or undercutting each other’s bids, every effort should be made to work out mutual requirements. This way competition would be less as also help to stabilize the price mechanism. India–China competition for the same natural resources will only help push up the prices in the producing countries. Recently, Premier Wen had outlined his views on exploring the possibility of establishing overseas economic cooperation zones in the two countries; expanding cooperation in finance, tourism, energy and environmental protection. This too needs serious consideration.
India should carefully assess the implications of these developments. Should India also begin to think of establishing a yuan currency market in India? Should our commercial institutions be permitted to raise yuan funds to finance investment projects in India? Since China is the main competitive source for infrastructure projects, whether in power or in telecommunications, should we attempt to work out a strategic commercial partnership with China particularly for our infrastructure sector
India needs foreign capital [FDI] to boost both its manufacturing and infrastructure sectors. China has accumulated huge surplus funds that it must invest abroad and ideally not just in government bonds—as mostly happens in the United States. Europe too is not that attractive an investment destination as before. Therefore, is Chinese FDI into India an idea whose time has come? We should not confuse FDI as being entirely Western in origin.
China’s leaders are aiming to make their currency fully convertible by 2015 and even if China moves with caution in a more graduated process, the direction and destination are no longer in doubt. When that happens, the overall global balance of power will shift even more dramatically towards China. The Indian political class should seriously ponder without engaging in fruitless ideological debates – for we may be leaving ourselves with no choice – whether to acquiesce to a China-dominated commercial and economic landscape in Asia.

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