As bilateral ties evolve between China and India, they remain shrouded by suspicion. Politically, the countries disagree about many things, not least their border where tensions are stoked by alarmists on both sides and often lead to temporary violence. Commercial relationships are emerging between the world?s two most populous countries on a scale never seen before. It remains to be seen whether Chinese and Indian politicians and policymakers will help or hinder the flourishing of commerce between their countries.
Today?s commercial relationships between India and China are preceded by almost 3,000 years of trade?in saffron, silk, and both Buddhist pilgrims and practices?between the Sichuan Basin and the Gangetic Plains. In 1820?before colonisation and the rise of the West?India and China accounted for 48.9% of world output in purchasing power parity terms.
Politicians are aware of the growing Sino-Indian commercial activity. More than five years ago, China and India had set up a Joint Study Group on trade and economic cooperation, which urged both nations to negotiate an agreement for reducing political and administrative barriers to trade. But without concrete action by political leaders, dust is gathering on the group?s recommendations. During the October 2009 Fourth East Asian Summit in Bangkok, the countries revealed their intentions to work more closely on commercial issues. More recently, the meeting of the Joint Economic Group in Beijing last month, held after a hiatus of four years, conveys encouraging signals. But obstacles still remain.
?Chindian? commercial ties have grown substantially over the past decade. Indians and Chinese are slowly realising that this is just the tip of the iceberg of a pivotal relationship of the 21st century. Beneath fiery rhetoric on niggling issues such as the border and broader geopolitical influence, China has quietly emerged as India?s most important trade partner. India has also grown into an increasingly important partner for China. For most of the last decade and particularly since China?s entry in the WTO in 2001, Sino-Indian trade in goods has grown from $2.3 billion to $40.6 billion a year?an annual increase of 50%. Both countries? services sectors are gathering speed domestically and globally, so it is no surprise that bilateral trade in services is rewarding Chinese and Indian companies and workers.
China and India are ideally suited as trading partners with India?s technology and services-oriented companies complementing China?s manufacturing and infrastructure prowess. India also stands poised to benefit from Chinese investments. India?s telecommunications infrastructure has received a massive boost from Huawei Technologies? $500 million R&D facility in Bangalore, producing cutting-edge optical networks. The relationship goes far beyond stereotypical low-value call centres in India and assembly lines in China.
Major Indian IT companies?Infosys, Tata Consultancy Services and Satyam?operate out of China, as do pharmaceutical firms such as Ranbaxy and Dr Reddy?s Laboratories. Supply chains are now more likely than ever to run through both Chinese and Indian companies. One example is the far-reaching Lenovo, nominally a Chinese company, which operates factories in both the countries.
Trade is also paving way for stronger cultural and intellectual ties with researchers in both countries collaborating in agricultural research, trade in commodity futures and environment. All this commercial activity and investment has encouraged Beijing and New Delhi to rethink their political relationship and to understand the reality that aggression will destabilise the blossoming commercial ties. This pragmatism needs to be accompanied by practical policy changes to demonstrate political commitment to the flourishing of bilateral trade.
Commercial entities engaging in trade are aware that economic exchanges are mutually beneficial by definition. National politics, on the other hand, tend to be shrouded in hostility and suspicion. More often than not, such hurdles are more apparent on the Indian side.
China?s involvement with India?s telecommunications industry has been treated with hostility. Huawei supplied equipment to India?s lumbering state-owned telecom giant BSNL?but this prompted outrage in some quarters about how India?s national security might be at risk. In reality, a competitive Chinese company is supplying equipment that allows an Indian entity to become more efficient. Is this therefore a case of advocating protectionism on security grounds?
Even worse, politicians often bend to special interests. Lobbyists claiming to represent the interests of Indian industry protest widely over ?cheap? Chinese goods ?flooding? the country and damaging manufacturing. New Delhi has responded by imposing high anti-dumping duties on Chinese imports to placate vested interests. Research from the Global Antidumping Database suggests India has instituted 32 trade-restricting anti-dumping measures since January 2008, but these do not include more recent protectionist policies. For example, tariffs ranging from 50% to 236% on Chinese telecommunications companies implemented in December 2009, or the 10% tariff on tyre manufacturing machinery imposed last month. These actions are not technically illegal under international legislation?at least until China is nominally awarded ?market economy? status?but they illustrate how bad policy leads to unintended consequences. Hundreds of thousands of Indian businesses are forced to pay higher prices for inputs sourced from China, which increases consumer costs, reduces productivity and diminishes their international competitiveness.
Moreover, India?s populist anti-dumping barriers also invite retaliation by Beijing. This potential race to the bottom could undermine the hugely lucrative partnerships that India?s flourishing businesses have established in China. For a glimpse of trade relations gone bad, observe China?s tit-for-tat retaliations against the US over goods ranging from steel to poultry to tyres.
It is worth remembering that China is also guilty of some fairly protectionist policies, including restrictions on basmati rice, fruits and vegetables and landing rights for Indian television channels. Irrespective of these harmful policies, however, the potential damage caused by implementing yet more retaliatory trade barriers will only provoke further tension that undermines growth.
Yet another reason to rise above the petty squabbles is that China?s entrepreneurial policymakers, not to mention its big businesses, are looking further afield to secure better trade ties. From the beginning of this year, China secures a free trade area with the Association of Southeast Asian Nations (Asean). This consolidates a trade area already worth almost $4.5 trillion, with deeper tariff cuts extending to more products than before. Not only does China-Asean trade trump India-Asean trade, the FTA between China and Asean involves better terms than those negotiated in the India-Asean FTA.
A good start would be for both Indian and Chinese political leaders to proactively push for a rapid and successful free trade agreement. This needs support from a broad array of Indian industries, which must be self-confident in their ability to compete in an increasingly globalised economy. Likewise, politicians and policymakers need to abandon petty squabbles (and the siren songs of vested interests) in order to secure a meaningful agreement that will benefit both the countries.
A trade agreement between China and India will not only strengthen prospects of peace, but will also produce significant gains for India within Asia?s regional trade architecture. Sino-India trade could rise above $100 billion in the next few years?and this is but a tiny fraction of their combined GDP of $5.6 trillion. There is no time like the present for Beijing and New Delhi to act in their own self-interest.
?Amitendu Palit is visiting research fellow at the Institute of South Asian Studies in National University of Singapore. Alec van Gelder is project director at International Policy Network, a development think-tank in London. Views are personal