By AARUSHI KARLA and SARAH MARECHAL 02/10/2014
Often, China and India are depicted as rising alongside and in opposition to Western economies. Little account is given of the internal dynamics and tensions that determine whether strong and stable economic and diplomatic ties will maintain Sino-Indian relations and foster economic development in the region. To understand the real change that these countries will represent to the world economy, one needs to leave “westernized” perspectives behind.
This is not to say that the ties between India and China and the Western world are unimportant, rather, it is to show that what will make these countries the leaders of an alternative centre of power is to be found in an analysis of their interaction with the Asian continent. It is widely recognized that the integration of these economies in the global market is responsible for their meteoric rise. However, this needs to be understood with the dynamics of their domestic economies as well as their regional leadership in local markets.
In this article, we will attempt to answer the following questions. What are the dynamics in Asia that will make these countries the next century’s leading economies? Will further economic and political partnership be possible?
Giants in Asia – Realizing Potential through Partnership
It is needless to reiterate the importance of these two countries, not just population-wise but also economically. They harbour the potential to become the engines of global economic growth in the twenty first century, through a strong commitment to multilateral trade policy. Most striking is the deepening ties within Asia through the Association of Southeast Nations (ASEAN) and Agreements on Comprehensive Economic Cooperation. These economies have managed to establish themselves as trading giants through regional trading agreements. With it’s ‘Look East’ policy in the early 1990s, India successfully attempted to expand its presence on the Global Value Chain, especially through ASEAN. China adopted a similar approach in order to increase its exports of manufactured goods. This was achieved through various Comprehensive Economic Partnership Agreements and Free Trade Agreements. The recent BRICS Summit and the establishment of the New Development Bank have unveiled exciting prospects for India and China outside Asia as well.
While India and China expand their ties with the rest of the world, bilateral trade relations have also improved over the years, despite persisting political tensions. Two-way trade increased more than tenfold over the 2003-13 period, with total trade level standing at $65.47 billion in 2013. Similarly, bilateral investments have improved in the post reform period, beginning in 1979 for China and in 1991 for India. It is worth noting that low added value raw materials constitute the bulk of these trade relations. Nonetheless, the untapped potential of a Sino-Indian partnership was recognized in March 2014, when both countries reaffirmed the need to form an economic partnership and aimed to achieve $100 billion in bilateral trade by 2015.
These observations give way to a possibility of the emergence of a strong cohesive economic unit comprising of India and China. How? While multilateral trade agreements continue to strengthen their economic growth, cooperation between India and China can establish an alternative framework of production and market base. The question to be considered is the extent of the gains from enhanced comprehensive trade and economic cooperation between India and China. Firstly, the obvious immediate impact would be to boost exports of both economies. Secondly, a Regional Trade Agreement between India and China would enhance their negotiation power in international forums, such as the WTO, and strengthen their collective bargaining power when entering trade agreements with the rest of the world. Thirdly, India and China could form a very strong bloc able to raise pro-development issues. Such a bloc could easily assert the needs of the developing world and ensure responses from developed countries. Finally, recent studies prove empirically that regional countries will also gain from ties between India and China.
Limits of the Sino-Indian union: is the all-round strategic partnership feasible?
At the time of PM Wen Jiobao and PM Manmohan Singh, a “strategic and cooperative partnership for peace and prosperity,” had been discussed. This was to be cemented by the respect of each other’s aspirations and interests, while applying an “all-round” diplomacy encompassing elements as wide as economic cooperation and cultural ties.
So far, the picture looks rosy, but could this be real or is it part of diplomatic rhetoric with no effective consequences? The possibility looks bleak at three levels: political, cultural and economic.
Politically, Indo-Chinese relations can easily be called tense. An agreement on the border issue is nowhere in sight as Chinese authorities released maps recently that showed parts of Arunachal Pradesh, an Indian state, as part of China. While India has affirmed its commitment to the “One China Policy,” it continues to grant asylum to the Dalai Lama, heightening tensions on the Tibet issue as China suspects India of harbouring Pro Free Tibet activities. China’s military and diplomatic relations with Pakistan are a constant concern for the Government of India.
Culturally, these somewhat dormant political tensions have led to an environment of distrust between India and China. Cultural exchanges between people are very rare, leading to competition. This is harmful to fostering economic ties, as the natural perception of the two countries becomes that of competitors and not partners.
Economically, a pre-condition to the integration of market and production base is the elimination of trade and non-trade barriers, which is very hard to negotiate in an environment of distrust. Both countries would like to protect themselves from the cost advantage that each of them possesses due to the availability of cheap workforce. Additionally, India may want to protect its manufacturing sector, which is still at the stage of infancy.
It is true that efforts to find a common ground on economic policy have been made, with the creation of the Joint Working Group and Line of Actual Control, for instance. However, the issues discussed above will continue sustaining “strategic mistrust” between the two countries.
As a final remark, deciphering the diplomatic discourse that both nations are putting forward is not too baffling a task and the potential for collaboration quickly disappears when confronted with old grievances, let alone their ideological discrepancies. The increasing importance of these two economic giants on Asian markets triggers competition between the two. Strategic partnership between India and China holds tremendous potential to shift the centre of economic power to this region. Yet, much of the potential for expansion of trade relations and consumer markets is expected to go unutilized, at least in the near future. This is due to political and cultural disagreements that make competition for leadership and economic power even fiercer. If the two countries manage to iron out their differences, they could together command great heights in the global economy.