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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