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Can India and China cooperate?

BS Bureau in New Delhi | April 13, 2005

The gains from cooperation will certainly be tremendous, but only as long as China doesn't see India as a competitor

N Srinivasan, Director General, Confederation of Indian Industry

Two of the fastest-growing large economies in the world. Two countries, which jointly account for close to $ 2 trillion in GDP. Two nations offering a market -- between them -- of 2.5 billion.

A combined intellectual capital of staggering proportions. Can one ask for a better framework for economic cooperation? Indeed, can one ignore the immense potential of economic cooperation between India and China?

India-China bilateral trade has been growing at an exponential rate and currently stands at over $13 billion. Yet the basket of items traded between India and China is extremely limited at present. The opportunities are many.

From India, pharmaceuticals, auto components, value-added ferrous items, fruits, vegetables and special purpose machine tools are just a few examples. For China, India could be a good market for glass, ceramics, electronic components and plastics.

There is scope for stronger intra-industry trade, which would leverage the complementarities through value addition in similar products. A case in point is the auto component sector.

Manufacturing in both countries is growing rapidly and one would be tempted to believe there is no room for cooperation, only competition. In actual fact, Indian manufacturing has a comparative advantage in the area of "complex" or integral manufacturing, where there is a significant element of design and engineering skills input. China, on the other hand, has mastered standard design, mass production.

There are thus opportunities to sell to each other different kinds of manufactured good. More importantly, both countries could leverage their respective manufacturing strengths to jointly explore the growing market in the region.

In the area of information technology, India's software capabilities can be combined effectively with Chinese hardware strengths to exploit global markets -- specifically in Japan and Korea.

On the investment front there are again opportunities for both the countries. Indian pharmaceuticals, IT and auto component industry have already shown the way by setting up units in China to cater to the large Chinese and regional markets.

Many more such Indian companies need to register their presence in China. Only a few Chinese companies have marked their presence in India. The opportunity for investment in each other's country is quite immense.

In the area of human resources development there are huge opportunities for Indian IT training companies. China has a large demand for education services in software.

India is well positioned to attract Chinese students to India through its well-developed higher education infrastructure. Sharing of experience in vocational training could be of immense mutual advantage.

At a broader level, the economic engagement between India and China would be of particular relevance in the financial and energy sectors. India's mature and dynamic finance services sectors can work fruitfully with the Chinese counterpart industry, which is not so well developed.

Indian organisations are well equipped to enter the Chinese market and facilitate the development of the banking sector in China. The entire gamut of financial and banking services provides a good canvas for cementing economic relations between the two giants.

The two Asian giants are major users of energy. Energy resources being finite, it is logical for India and China to cooperate on energy security issues.

Joint ventures between Indian and Chinese companies could well lead to fruitful business. A combined India-China effort in the area of energy will also carry strategic significance in the global context.

The road to develop meaningful and comprehensive economic cooperation must be chartered with specific milestones. First, there must be greater people to people exchange, including tourists.

Second, air connectivity needs to be augmented rapidly. Third, sectoral delegation must be exchanged on a regular basis between the two countries. Fourth, political visits to smoothen the process of cooperation must become a regular feature.

This is a moment for the two giants to grasp. There are, of course, issues of competition as also areas of complementarities. Even as India and China compete in the world market, they could fruitfully cooperate in many economic spheres. I do feel that today the Indian industry is confident, competitive and equipped to make this economic relationship come true.

The India-China economic relationship could be classified in three phases. Yesterday it was India or China. Today it is India and China. And, tomorrow, it could well be India with China.ª It is up to the two fastest-growing economies to seize the opportunity.

T C A Srinivasa-Raghavan, Managing Editor, Margin, and consultant, NCAER

It is never a good idea to start with a cliché and, much as I hesitate to, I think I must: we've been here before -- albeit in the 1950s when bhai-bhai visions were especially vivid in India.

China, if you take the trouble to read about the period, was less misty eyed. It probably still is.

The problem is not that any two countries can't cooperate - -whatever that means in respect of trade. Of course, they can.

But China, it is worth bearing in mind, is not your ordinary, friendly neighbour. The Chinese state, as they say in the US, has an attitude, a King-sized one.

Prickly, smug, filled with visions of grandeur, contemptuous of everyone else (especially India), ruthless, obstinate and, above all, prone to bluster, dealing with China is fraught with problems.

Ask the east Asians whom China beggared with its ruthless 40 per cent devaluation of 1993. Deprived of exports, by 1997 the east Asian economies had collapsed and are now dependent on China for as much as half their export sales.

True, that since then it has held the yuan constant. But that is only because the alternative -- an upward revision in the dollar-yuan rate will slow down its own rate of growth.

This holds an important lesson for India: China doesn't tolerate competitors. Others seek accommodation, China prefers elimination.

Singapore invested about $1.5 billion in a technology park in the Chejiang province. After it was finished, the Chinese set up another one near it and took away all the investors with lower prices. The deal was a dead loss to Singapore.

The east Asians learnt the lesson the hard way, as indeed have the others who have had to put up with dumping on a scale never seen before.

So the real question is whether in the medium term, say, over the next decade, India and China will become competitors. As long as China doesn't see India as one, things will go smoothly. The moment it does, the gloves will come off.

Ordinarily, there are two things countries compete for -- markets and resources. Where the market for manufactured goods is concerned, China has more or less sewn things up.ª So as long as India doesn't start to nibble at these, especially in east Asia, which China regards in the same way as the US regards Latin America, things will be fine.

But should India begin to hurt China there, it will cut up rough. So India's share of the east Asian market, which is likely to be the fastest growing one apart from India and China, will be available only on a limited access basis to India. The limits of cooperation will be set by China.

As far as competition for resources is concerned, the only commodities of importance are oil and gas. A balloon has been floated that India and China can act in concert in the international energy markets because they buy so much.

As anyone familiar with the world's energy markets will tell you what a pie in the sky this is. The energy markets are only half about commerce; the other half is about politics.

When the two collide, politics always wins. There have already been some collisions between India and China in the last 24 months. China has always got the better of us.

The truth is that India and China have been trying to cooperate for the last year or so. But they have found it almost impossible to do so.

As Zha Daojiong, the director of the Center for International Energy Strategic Studies in School of International Studies, at the Renmin University of China, has observed, "...the large-scale projects for exploiting oil can guarantee a nation's energy security and stability, so it involves more political factors."

In the end, the question must boil down to what China wants from us and what it is willing to give in return. One thing it certainly wants is a slice of our domestic market. Another thing is some of the IT software skills.

But what is it willing to give in return? It is on this that everything hinges because China is not just your run-of-the-mill hard bargainer. Most of the time, it doesn't bargain at all -- it lays out its terms, take it or leave it.

At other times, it tries its hardest not to keep its side of the deal. Again, ask the east Asians who discovered that dealing with Chinese firms also meant dealing with the Chinese state.

The moral, if I may slightly modify a Chinese saying: fear not the sun, fear not the moon; fear the foreign devil who speaks English with a Chinese accent.


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