China-India Love-In Raises Issues for the West – by Liam Halligan

Elephant Dragon1 e1292858653428 300x189 China India Love In Raises Issues for the West   by Liam Halligan

“The dragon and the elephant should tango!” So said Wen Jiabao last week during a rare visit to India. The Chinese Premier employed some uncharacteristically colourful language to convey an unusual idea – that of Sino-Indian co-operation.

Relations between China and India have long been soured by bitter rivalry and mutual suspicion. Over the last few days, though, the two Asian powerhouses have cuddled-up like a pair of giant pandas. This is a display of diplomatic affection that matters – not least as it could significantly impact the shape of the global economy.
 
The main point of Wen’s visit was to promote bi-lateral trade between these two Eastern giants. He last visited India in 2005 – at which time he set a goal of raising combined Sino-Indian imports and exports from $18bn to $30bn by 2010. As it turns out, bi-lateral commerce totalled around $60bn this year – twice Wen’s target, despite the massive sub-prime related shock to all global trade during 2009. Over the last decade, in fact, trade between China and India has increased 30-fold.
 
Just in case anyone is in any doubt, it is worth stating the relative importance of the Chinese and Indian economies. These countries, between them, are home to two-fifths of the world’s population. They are also the two fastest-growing major economies on earth. China is already the second largest economy after the US, having overtaken Japan last year. Much less widely recognised is that, on an inflation-adjusted basis, India is the world’s number four.
 
Over the coming decades – and perhaps as soon as 2025 – China will surpass America to become the world’s biggest economy, with India also taking massive strides. By 2050, in straight-forward dollar terms, the GDP of the People’s Republic is set to be way above that of America – perhaps half as big again, or even more. On the same yardstick, India’s economy will be comparable to that of the States by mid-century, or maybe even slightly bigger. It is absolutely imperative to everyone on earth – not only in economic, but also diplomatic and military terms – that these two soon-to-be superpowers “get on”.
 
The signs, though, aren’t entirely auspicious – however attractive the zoological images lately employed by Beijing’s official image-makers. China and India share a huge 3,500km border, along which both nations continue to claim vast chunks of each other’s territory. These countries went to war over border disputes as recently as 1962.
 
India remains dismayed at China’s closeness to Pakistan – a relationship that prevents Beijing from recognising the disputed Kashmir region as Indian territory. China, in return, bristles at India’s support for the Dalai Lama, the exiled religious leader of the Himalayan region of Tibet.
 
During Wen’s visit five years ago, both sides vowed to make progress on such issues. Little has happened. In fact, tensions have risen over the contested Indian border state of Arunachal Pradesh. Water rights have also remained highly contentious – amidst Indian claims that Chinese hydro projects in Tibet are affecting water flow that is vital to crops across the Brahmaputra basin, most of which is in India.
 
On this latest trip, Delhi had half-expected Beijing to offer a clear endorsement of India’s ambitions to gain a permanent seat on the United Nations Security Council – as President Obama did when he visited Delhi last month. No firm endorsement came. India is also upset that Beijing plans to build two nuclear reactors in Pakistan – given fears that atomic materials could fall into the hands of terrorists without India’s best interests at heart.
 
In response to these on-going concerns, Beijing launched a charm offensive. During his visit, China’s Premier recited Indian poetry while professing that Mohandas Gandhi, the father of modern India, has “always lived in my heart”. He even encouraged Indian school children to call him “Grandpa Wen”.
 
Schmaltzy mood music aside, China and India last week did some serious business. The two countries signed 48 commercial contracts worth some $16bn – in sectors ranging from telecoms, steel and power generation to wind energy and food. A new bilateral trade target of $100bn was set for 2015. China is already India’s largest trading partner – and commercial relations between them look set to get much deeper.
 
India is acutely aware, though, that this is no partnership of equals. The headline numbers disguise the fact that India’s deficit with China is huge – around $25bn and by far its largest trade shortfall. The reason, Delhi complains, is that Beijing doesn’t play fair in terms of market access. No country has launched more World Trade Organisation anti-dumping investigations against China – alleging that some import prices are set artificially low – than India.
 
While Indian exports to China largely comprise of iron ore and other low-end commodities, Delhi is keen to diversify its fast-developing economy’s trade basket with it giant neighbour. On cue, Wen said he took the trade imbalance between the two countries “seriously” and would seek to grant more access for Indian producers in the areas of pharmaceuticals, agriculture and information technology.
 
That may or may not happen. China has a well-deserved reputation for being slow to concede when it comes to international trade disputes. Wen gave India few firm commitments last week. And Beijing anyway only offered the rhetoric it did after receiving a cast-iron assurance that India will relax domestic barriers against a slew of Chinese banks.
 
From a Western perspective, ever-rising trade between China and India has to be a good thing – even if it is symptomatic of our relative economic decline. When the sub-prime crisis broke in earnest, and Western economies hit the skids, many pundits said the East would also crash and burn, on the basis that “they can’t grow without us”.
 
That’s turned out to be nonsense. India and China have anyway roared ahead, as have many other emerging markets, despite Western woes. Such growth has been driven by intra-emerging market commerce – typified by the explosion in trade between India and China. We should be glad that the Eastern giants are replacing a heavily-indebted Western world as the engine of global growth. Without them, the global economy would be in a sorry state.
 
Determined to sort out their commercial disputes, China and India last week took steps towards an over-arching bi-lateral trade deal. That would be bad for the West. The best way to ensure free trade is for all countries to sign multi-lateral agreements under the auspices of the WTO. Such deals have kept protectionism at bay since the end of the Second World War – and a new multi-lateral “trade round” is now needed more than ever. Unless that happens soon – with the EU and US burying their differences and taking the plunge – then the emerging nations could go their own way, leading to very serious East-West trade disputes in years to come.
 
During last week’s trip, Wen gave Manmohan Singh a gift package of Chinese white tea, reciprocating the locally-produced black tea his Indian counterpart sent him last year. Singh then accepted the Chinese premier’s invitation to visit Beijing in 2011. The two men also agreed to have a “hot line” installed between their offices – so they can easily and regularly confer.
 
They may need to – given the importance and complexity of this ancient relationship. As each of these burgeoning economies continues to expand, so will trade between them – binding them together via a myriad of mutually beneficial business relationships. In theory, such commercial ties should keep the very real danger of broader Sino-Indian conflict in check. In the name of both prosperity and peace, the rest of the world must certainly hope so.
 
Liam Halligan is Chief Economist at Prosperity Capital Management

This article first appeared in The Telegraph: http://www.telegraph.co.uk/finance/comment/liamhalligan/8211788/China-and-Indias-latest-love-in-raises-serious-issues-for-the-West.html

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