OUTLOOK Business, June 05, 2006

By Pradeep S Mehta

Home to one-third of the world’s population, India and China adopted similar development strategies prior to adopting a market economy. While China’s first steps were taken in 1970s, India’s piecemeal reforms were launched in early 1980s. The 1990s saw an acceleration in these reforms due to the arrival of the WTO in 1995. While India was a founding member of the WTO, China made hectic efforts to join it in 2001. Today, both the countries are the cynosure of all eyes in the world: China has become the factory of the world due to cheap manufactures, and India performing the back office role for the rich world. As a result, there is increasing heat from rich countries, stoked by protectionist forces. Nevertheless, both China and India see synergies in the IT sector i.e., Chinese hardware offering a partnership to Indian software.

The possibility of such a relationship extends to hundreds of others goods being made by either country. No wonder then that bilateral trade between India and China has grown a huge amount just in the last decade: from $1 billion to $18.7 billion. Commerce minister Kamal Nath believes that this will double by the end of this decade.

Together, the two countries seem set to consign the ghost of 1962 to the dustbin, and follow Deng Xiaoping’s advice: “Intractable issues should be kept aside and progress should be made on other fronts”. Such a regional peace can transcend into better trade and economic ties, from which both India and China can gain. Such gains generate the confidence and trust to tackle global issues as well. The WTO is another platform where both China and India, along with several other countries, are pushing an agenda to reform the distorted agriculture subsidy regime in the rich countries. The agenda is not moving, but the alliance is also not weakening.

China and India (or Chindia, as some commentators will have it) will continue to plod in a partnership mode through both bilateral and multilateral issues and third country settings. Such a partnership will be based on a healthy mix of complementarity, competition and some amount of conflict as well. Competition in the area of tradeables is likely to heat up. This can be in the area of manufactures, where India is slowly moving up. In the context of WTO, both are being targeted with non-tariff barriers, such as labour standards. This is one area, where both can dig their heels in at the WTO to stop the same being mainstreamed, as environment has already been done.

One area of conflict arises here, when numbers show that India is now a major user of anti-dumping provisions, while China is facing majority of antidumping actions. This will require some attention by India’s policy makers to see that it doesn’t cause harm to our closer economic cooperative agenda.

The WTO is one example of complementarity. For China, it does not matter if it has to maintain a low profile, even if India (along with Brazil) is at the vanguard of the G-20 alliance at the WTO. The balance of power is shifting. On the other hand, it is just not the rich countries driving the global economy. China and India are now also in the same league. This has some reverberations in international policy making circles, such as in the IMF. Discussions are on to change the voting powers to reflect the new politic; how quickly this will happen is not known, but it will happen sooner than later.

Growing economies need a larger amount of energy than before. This is another area where both China and India have adopted a cooperation mode. In the area of oil, since 2004, Indian firms had faced competition from Chinese firms. In three cases, Indian firms were outbid by their Chinese counterparts: Angola, Kazakhstan and Equador. The first cooperative venture succeeded in Syria, and more are likely to follow. Wisdom has prevailed over myopia.