The India-China relationship was recently disturbed by a stealthy incursion across the disputed Himalayan border by the People’s Liberation Army (PLA), which pulled back its troops just in time to allow Premier Li Keqiang to go ahead with a scheduled visit to New Delhi. That daring, three-week-long intrusion may have overshadowed Li’s May 19-22 visit, yet the trip helped shine a spotlight on another negative aspect of the relationship between Asia’s two great emerging economies — India’s ballooning trade deficit with Beijing, compounded by China’s import of mainly primary commodities while exporting finished products. A flood of cheap Chinese-made goods has undercut Indian manufacturing.
Perpetuating such an asymmetrical relationship presents India in an unflattering light as a raw-material appendage of, and a goods-dumping market for, the Chinese economy. More important, the lopsided economic engagement gives China little incentive to bridge a widening political divide with India. If anything, it encourages China to continue with a strategy to keep India under strategic pressure so as to regionally contain that country.
With China exporting almost twice as much as it imports, its already-large trade surplus with India will only balloon if the two countries meet their target of raising bilateral trade from the current level of nearly $70 billion to $100 billion by 2015. Li himself underscored the difficulty of correcting the fundamental imbalance in trade by taking mainly exporters in his business team to India. To boost Chinese exports, state-run Chinese banks have started providing debt financing to troubled Indian companies.
Li drew attention to the Chinese sourcing of commodities from India: A fuel-for-cash deal was inked during his visit with the Mumbai-listed Essar Oil, which, in exchange for securing $1 billion in debt financing from China Development Bank, will export products from its main oil refinery to state-owned PetroChina. Since last year, Indian exports to Beijing have actually declined, in part because of legal and environmental wrangles over extraction of iron ore, the largest export item in the past decade to China, which is conserving its own reserves of strategic mineral ores to rely on imports.
Economic problems in the West, by contributing to a slowdown in China, have only increased the importance of the Indian market for Chinese goods. But while swamping the Indian market with its products, China has made it difficult for Indian exporters to gain much of a foothold in its market, including in sectors where India is strong, such as pharmaceuticals and information technology. For example, Indian IT firms have found the going tough in China because selling software to Chinese companies usually demands gaining the Chinese government’s support. As a result, India’s exports to China largely comprise low-margin, unprocessed commodities.
China’s increasing access to the Indian market, however, has done little to promote an India-friendly Chinese foreign policy. Indeed, the more profits China has reaped from its trade relationship, the more assertive it has become.
As India’s trade deficit with China has soared from just $1 billion in 2002 to $40 billion in 2013, China has openly challenged Indian sovereignty in the western and eastern sectors of the Himalayas by portraying Indian Kashmir as disputed and by resurrecting its claim to the Austria-size territory of Arunachal Pradesh. This period has also seen China enlarge its footprint in Pakistani-held Kashmir through new strategic projects and military presence, which means that India now faces Chinese troops on both flanks of Kashmir, one-fifth of which is under China’s occupation.
Instead of calibrating China’s market access to progress on the political, territorial, and water-resource disputes, a politically paralyzed and adrift India is doing just the opposite — allowing Beijing to strengthen its leverage. This only undercuts India’s strategic and economic interests, with the trade imbalance worsening the country’s current account deficit and pushing the rupee to record lows against the U.S. dollar since last year.
In fact, China is leveraging its trade and financial clout, including its role as a major supplier of power and telecom equipment and its emergence as a lender to financially troubled Indian companies, to limit India’s options on how to counter the multipronged Chinese strategic pressure. An Indian business community dependent on Chinese product supply and financing, for its part, is lobbying for a continued cautious Indian line on China, now India’s largest source of imports.
The bilateral focus on trade, even as the PLA steps up cross-border forays to needle New Delhi and Beijing refuses to be transparent on its dam building on the international rivers flowing across the Himalayas, plays into the Chinese agenda to reap profits in the Indian market while continuing with a strategy to strategically hem in India. Despite the supply of power-plant turbines and other equipment, most Chinese exports to India are not high-technology items but cheap products that kill small-scale manufacturing and rob jobs in India.
India wrongly bet on the possibility of rapidly growing trade ties helping to mute political disputes and create a more favorable environment for working toward their settlement. Having believed that growing trade would smooth over border disputes and moderate Chinese conduct, India has ruefully discovered that greater trade and Chinese profit is bringing greater Chinese strategic pressure on it. The politics and economics are actually going in opposite direction in the relationship, to India’s detriment.
The recent Chinese military incursion into Ladakh served as a powerful reminder that an unresolved border — coupled with China’s refusal to clarify even the line of control with India — remains an obstacle to building stable, close ties. The ingress was proof that, notwithstanding the progress in other areas of the bilateral relationship, China will use the territorial and border cards it holds to catch India by surprise or keep it under military pressure.
As the disputes in the East and South China Seas attest, China does not allow booming trade with any country from coming in the way of its territorial assertiveness. Nor does it shy away from wielding economic instruments for political ends.
India must recognize the difference between being cautious and being meek: The former helps avert problems, while the latter symbolizes weakness and invites more pressure. What makes India particularly vulnerable is its ad hoc, diffident, and reactive approach, which stands in stark contrast to China’s proactive regional posture designed to build synergy between all policy spheres — economic, diplomatic, and military — so as to reap maximum advantage. To prevent China from using its trade prowess to achieve political objectives, New Delhi must not shy away from employing market access to advance its strategic interests.
Brahma Chellaney is professor of strategic studies at the independent Center for Policy Research in New Delhi and the author, most recently, of “Water, Peace, and War” (Rowman & Littlefield, 2013).