India and China Butt Heads in South Asia

David Caploe - It’s a truism that the 21st century future of not just Asia, but the entire world, will be significantly determined by the relationship between the globe’s two fastest-growing large economies, China and India.

As most observers know, there have long been kinks in the political military relationship between the two countries, most notably their direct armed confrontation in 1962.

This was generally seen as a military victory for China, and provoked a thoroughgoing rejection of the generally pacifist policy of India’s founding Prime Minister, Jawaharlal Nehru.

Indeed, this resulted in a significant militarization of India’s foreign policy throughout the 1960s / 70s / & 80s, and was marked by a series of victories over India’s “fraternal” enemy, Pakistan – which had become a strategic ally of BOTH China and the US, in opposition to India’s deep bond with the Soviet Union.

Tensions with both Pakistan and its sponsors, the US and China, escalated in 1974, with India’s inaugural “Smiling Buddha” nuclear test in the Rajasthan desert, and intensified and accelerated in the spring of 1998, when both countries held a series of nuclear tests marking their irrevocable “joint” entry into that deadly “club”.

This history of military confrontation – direct and indirect, hot and then cold, significantly moderated in recent years by agreements to maintain peace along their frontier, and on principles to settle disputes, going so far as the conduct of joint army exercises on both Chinese and Indian soil – forms the backdrop for Sino-Indian economic relations entering the second decade of the 21st century.

In the eyes of some observers, bilateral exchanges at the political, economic, military and cultural level have developed to the extent that China and India can expect the coming decades to be defined by a so-called competitive-cooperative relationship.

Expanding trade ties have given the two sides a huge stake in keeping co-operation alive. In 1992, their trade totaled $338 million. By 2004, it had mushroomed to $13.6 billion, and by the end of this year is expected to reach a whopping $60 billion – more than quadruple the amount from the middle of the decade.

And at the recently concluded, not particularly successful, Copenhagen climate talks, the two countries worked together to thwart what both considered a Western-oriented plan to cut carbon emissions at their expense.

Given this, some have envisioned a nearly indissoluble link between the two emerging superpowers, which do indeed have complementary strengths as they contemplate the dynamics of the 21st century global economy Cooperation between the two economies holds potential for creating what is called ‘Chindia', the largest economic powerhouse in the world.

As a senior Chinese official once put it, "Chinese manufacturing plus Indian services, Chinese hardware plus Indian software, will create an ideal win-win situation for both countries."

This is a vision we strongly endorse and share, seeing the possibility of a structural alliance between the world’s most powerful “sell” economy – China – with the one country in the world that has the potential, if it can overcome its massive IN-equality of income distribution, to become at least a regional Asian, if not global, successor to America, whose power has come as the world’s “buyer of last resort”: India.

In the context of what COULD be, it therefore comes as a disturbing reminder of the gap remaining to contrast this positive vision of the future with the existing realities of the aptly-named “competitive-cooperative” relationship between the two countries.

Interestingly enough, the new area of economic contestation is not along their “mile high” border region – north-east India / south-west China – where their now-decades-ago military confrontation took place, but, rather, in areas that have traditionally been considered firmly in India’s traditional sphere of influence.

Leaving aside Pakistan – with whom India has significant trade relations, despite the constant lurking background possibility of armed conflict – China has been creating a notable economic presence in three countries always thought of as economically and culturally Indo-centric: Sri Lanka / Bangladesh / and Nepal, not to mention the always mysterious Myanmar.

As recently as the 1990s, China’s and India’s trade with the four South Asian nations — Sri Lanka, Bangladesh, Nepal and Pakistan — was roughly equal.
But over the last decade, China has outpaced India in deepening ties.

The most notable is a massive project in the port of Hambantota, Sri Lanka, home of the current Sri Lankan President Mahinda Rajapaksa, who hopes, with China’s help, to vault the town from its current status as SL’s 9th largest metropolitan area to second, behind only Colombo.

And this hope is by no means simply a personal obsession, given the port’s strategic location in an area now quiet, for the first time in decades, as a result of the end of the Sri Lankan civil war.

The plans are certainly impressive:

China is investing millions to turn this fishing hamlet into a booming new port, furthering an ambitious trading strategy in South Asia that is reshaping the region and forcing India to rethink relations with its neighbors.

As trade in the region grows more lucrative, China has been developing port facilities in Pakistan, Bangladesh and Myanmar, and it is planning to build railroad lines in Nepal.

These projects, analysts say, are part of a concerted effort by Chinese leaders and companies to open and expand markets for their goods and services in a part of Asia that has lagged behind the rest of the continent in trade and economic development.
[Indeed,] China has become a partner of choice for big projects here like the Hambantota port.

China’s Export-Import Bank is financing 85 percent of the cost of the $1 billion project, and China Harbour Engineering, which is part of a state-owned company, is building it. Similar arrangements have been struck for an international airport being built nearby …

The government is also building a convention center, a government complex and a cricket stadium.

Sri Lanka needs foreign assistance to make those dreams a reality, because the government’s finances are stretched by a large debt it accumulated in paying for a 25-year civil war that ended in May.

Mr. Rajapaksa has said he offered the Hambantota port project first to India, but officials there turned it down. In an interview, Jaliya Wickramasuriya, Sri Lanka’s ambassador to the United States, said the country looked for investors in America and around the world, but China offered the best terms. “We don’t have favorites,” he said.

But there may be reasons, some potentially unsavory, that led Sri Lanka, like other countries, to look in China’s direction, that make it a “preferred partner”:

Sri Lankan officials have refused to disclose information that would allow analysts to compare China’s proposals with those submitted by other bidders.

The country has also kept private details about other projects that are being financed and built by China, including a power plant, an arts center and a special economic zone …

Harsha de Silva, a prominent economist in Colombo and an adviser to the country’s main opposition party, said the Sri Lankan government appeared to prefer awarding projects to China because it did not impose “conditions for reform, transparency and competitive bidding” that would be part of contracts with countries like India and the United States or organizations like the World Bank.

At the same time, it is impossible to discount the impact of both China’s low-costs – made possible by its huge cash cache gained from its ever-growing trade surpluses with the US and other Western countries – and its fast-growing expertise in large projects like this, gained from experience in the massive transformation of its own infrastructure:

In 10 years, Chinese companies have become the biggest suppliers to ports of cranes used to move shipping containers, displacing South Korean and Japanese companies … “They are running at very high efficiency and at the lowest costs,” [Jerry] Lou [chief China strategist for Morgan Stanley] said. “China is a game-changer, rather than a new player in the world’s construction industry.”

And this potent combination represents a real challenge to India, which has not always handled relations with its immediate neighbors in the most mutually satisfying ways:

Protectionist sentiments have marred India’s relationships with its neighbors. South Asia has a free-trade agreement, but countries that are part of the pact get few benefits, economists say, because India and its neighbors refuse to lower tariffs on many goods and services to protect their own businesses. …

India’s chief trade negotiator, D. K. Mittal, acknowledged that the country’s economic ties with its neighbors were not as strong as they should be and blamed political distrust between the countries.

Again, underscoring our on-going point that politics and economics are ALWAYS connected.

That said, how is India reacting to this evidently successful surge by China in its own backyard – a situation that requires a great deal of thoughtful balance, not least because China is also India’s largest single trading partner ???

On the one hand, these initiatives are irking India, whose government worries that China is expanding its sphere of regional influence by surrounding India with a “string of pearls” that could eventually undermine India’s pre-eminence and potentially rise to an economic and security threat.

“There is a method in the madness in terms of where they are locating their ports and staging points,” Kanwal Sibal, a former Indian foreign secretary who is now a member of the government’s National Security Advisory Board, said of China. “This kind of effort is aimed at counterbalancing and undermining India’s natural influence in these areas.”

At the same time, India has had some success in establishing closer ties with Sri Lanka, with which it has a strong bilateral trade agreement…

India is [also] starting to respond to China’s growing influence by becoming more aggressive in courting trade partners. India recently signed a free-trade deal with the Association of Southeast Asian Nations and South Korea. Officials have even begun talking about signing a trade deal with China to bolster exports.

India’s trade negotiator Mittal … said leaders were now determined to improve economic relations, something he said was highlighted in a recent agreement with Bangladesh.

In that deal, India agreed to sell electricity to Bangladesh, provide it with a $1 billion line of credit for infrastructure projects, and reduce tariffs on imports.
Bangladesh agreed to allow Indian ships to use a port that is being redeveloped by China.

“The political leaders have to rise above and say, ‘I want this to happen,’ ” Mr. Mittal said in an interview. “That’s what the leaders are realizing.”

Well, we’ll see.

But there’s no question that, even more than Pakistan, China presents India with a challenge unprecedented in its existence as an independent nation.

Its reaction will determine in large measure whether Asia repeats the awful bloody history of Europe during the 20th century or – as we sincerely and profoundly hope – shows it is possible for two economic giants, living in close proximity, to find a way to co-operate and complement, rather than destructively compete, with each other.

The only thing at stake is the future of the 21st century.

David Caploe PhD is the Chief Political Economist at EconomyWatch.com, the largest independent economics community on the web.

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