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Chinese President Hu Jintao arrived Nov. 20 in India, where he signed as many as 13 agreements to promote trade and investment between the two countries and develop Sino-Indian cooperation in civilian nuclear energy. India and China have come a long way since their border war in 1962, and they are soaking up the diplomatic spotlight to demonstrate the economic utility of having two Asian giants working together. Despite all the rosy talk about cooperation, there are still a number of obstacles that stand in the way of a sincere Sino-Indian partnership.
Prior to Hu’s visit to India, the Chinese government proposed an ambitious free trade agreement (FTA) with India to boost bilateral trade from its current $13.6 billion to the $40 billion level by 2010. The key points of the agreement are the removal of trade barriers and the strengthening of industries such as steel, oil, machines, information technology (IT) and maritime services. The deal would also allow India access to Chinese markets for rice and other agricultural products.
But India is in no rush to enter into an FTA with its Asian neighbor. The country’s protectionist traditions have long safeguarded its economy from massive foreign penetration. While India is progressing slowly and steadily — its growth rate averages 8 percent — the country is still a long way from catching up to China economically, and India does not want to take on the political and economic risks of exposing its local business to Chinese competition. To put the Chinese-Indian economic competition in perspective, China’s yearly foreign direct investment inflows average around $106 billion, compared to India’s $3.8 billion. The volume of Chinese exports is also nearly six times that of Indian exports.
The Indian and Chinese economies are certainly marriageable, but New Delhi does not want to incur the cost of tariff reductions that would largely favor China’s broad-based economy. India’s exports to China are generally restricted to primary and resource-based products, while Chinese exports to India are fairly diversified and include resource-based products, manufactured items and low- and medium-technology products.
This latest FTA proposal will end up in stalemate, as many members of the Indian business elite fear that lower-priced Chinese goods would flood their markets and force many Indian businesses out. Furthermore, India and China’s competition in the manufacturing and textile sectors has spread concerns in India that its textile market would face greater competitiveness in third-party export markets if India agrees to lower its trade barriers.
India is also not too keen on using this proposed FTA to grant China market economy status. India prides itself on its role as a nominally capitalist economy, in comparison to China’s centrally administered one; New Delhi is reluctant to sign any agreement that would give China the legitimacy of being labeled a free-market economy. This ideological conflict is just one of many concerns the Indian government has.
The potential for Sino-Indian cooperation is also plagued by deep security concerns. The two countries are engaged in a fierce competition over energy resources to supply their burgeoning populations. With little success, India has desperately tried to play catch-up to the Chinese, who have ample cash to stake claims in major overseas energy investments. Though China is engaging its neighbors to assume a greater role in the region, India is well aware that it has fallen far behind Beijing in the race for energy resources. India has proposed joint energy ventures between the two countries in order to level the playing field; but China, to date, has largely rebuffed these overtures and has stuck to low-investment energy ventures with India in the interest of maintaining the upper hand in this competition.
In the security sphere, New Delhi and Beijing continue to harbor a great deal of distrust for one another. Both sides have recognized the futility of engaging in a military confrontation across the Himalayas and have found it in their interests to restrict their direct interactions to the economic realm while pursuing a policy of rapprochement. At the same time, India and China regularly engage in defensive measures to keep each other’s regional expansion in check. Encirclement is a fear that runs deep through India’s military and political circles, and China’s long-standing support for Pakistan, in the form of defense and economic deals, has fueled India’s need to counter China’s ambitions to gain a stronger foothold in South Asia by building ports in the Pakistani city of Gwadar, Myanmar and possibly Bangladesh.
In fact, a wave of rising economic nationalism sweeping through India has been directed primarily at Chinese investments. India’s Foreign Investment Promotion Board has rejected investment proposals made by Hong Kong-based Hutchison Ports Holdings, China Harbor Engineering Co. and Chinese telecom firms Huawei Technologies and ZTE Corp., all in the name of national security. Major Indian corporations such as Reliance Industries Ltd. have been successful in opening up passages for Chinese investment to trickle through to aid their enterprises, but India’s core strategic concerns will continue to override economic considerations.
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