27 April 2018

Trade war


Prime Minister Narendra Modi and China’s President Xi Jinping will once again meet at Wuhan on Saturday. Wuhan which is capital of Hubei province is at the confluence of the Han River and Yangtze Rivers, is recognized as the political, economic, financial, cultural, educational and transportation center of central China. It has a three thousand year old history and has played a significant role in China’s recent history. Will history be made now once again in Wuhan? The significance of this meeting is not that the two leaders are meeting under the shadow of Dokolam. There is a larger shadow of the looming trade war and the attendant rollback of globalization, of which the US President Donald Trump has fired the first shot with sanctions targeting $100 billion of US-China trade. The collapse of the globalization arrangements that had set off the greatest expansion of the world economy in the last three decades, threatens not just China’s economic well being but also India’s. 

Globalization has benefitted China the most, but India too has hugely benefited by it. While China has a huge market for its manufactured goods in the USA and has a trade surplus of $245billion, India has an IT market of $ 120 billion last year. We must not forget that the value addition of India’s IT exports vastly exceeds the value addition generated by China’s export of manufactured goods to the USA. The high economic growth rates in both countries owe a great deal to their trade with the USA and the huge trade deficits the USA has with both countries. Thus, for the first time in decades the most immediate and important objectives of India and China coincide. Both leaders will see the need to act in concert. Clearly this should be at the top of the Xi-Modi agenda in Wuhan.

Next on the agenda will almost certainly be the huge trade gap in favor of China that has resulted in India directly contributing about $350 billion to China since the turn of this century. Of this almost $250 billion has happened in the last five years. The reduction of this will almost certainly be next on the agenda. India is still hoping that China would mitigate this somewhat by investing in India, preferably by commercial FDI, instead of the debt trap OBOR investments. The Modi government has rightly rejected calls for sanctions on Chinese imports by the usual bunch of RSS crackpots, because Chinese imports are central to Indian growth in sectors like pharmaceuticals, telecommunications and even .

India has rightly been skeptical about the OBOR economic play, which is little more than a grand scheme to run down Chinese reserves in US banks, relieve China’s industrial over-capacity in its infrastructure related sectors like cement, steel and power generation. In this manner the zero earning reserves are converted into interest bearing loans to hapless countries like Pakistan and Sri Lanka. Sri Lanka is already feeling the bite of the Hambantota “investments” and has to restructure the debt by giving the port and 19000 acres on a 99-year lease to a Chinese SOE.

By providing large loans on generous repayment terms, investing in major infrastructure projects such as the building of roads, dams, ports, power plants, and railways, and offering military assistance and political support in the UN Security Council through its veto powers, China has secured considerable goodwill and influence among countries in the region around India.

The list of countries that are coming within China’s strategic orbit appears to be growing. Sri Lanka, which has seen China replace Japan as its largest donor, is a case in point—China was no doubt instrumental in ensuring that Sri Lanka was granted dialogue partner status in the Shanghai Cooperation Organization. China has made major inroads in Nepal and has forged ideological and pecuniary relationships with many leading Nepalese politicians and opinion makers. Anti-Indianism, always a given in Nepali domestic politics is growing more legs now. Most recently China has been attempting to bring a change in India’s historical and treaty relationship with Bhutan. 

The rise of China as the world’s greatest exporter, its largest manufacturing nation and its great economic appetite poses a new set of challenges. At a meeting of South-East Asian nations in 2010, China's foreign minister Yang Jiechi, facing a barrage of complaints about his country's behavior in the region, blurted out the sort of thing polite leaders usually prefer to leave unsaid. “China is a big country,” he pointed out, “and other countries are small countries and that is just a fact.”

The fates of India and China in a world of rapid economic, technological and social change are inextricably linked. The GDP's of India and China within the next two decades will exceed that of the G-7. A major global power shift is underway. India and China must wake up to this reality and be prepared to play a historical instead of living out the childish fantasies of their half baked and under educated "strategic experts".

China is bound to express its concern about India joining the QUAD, a quasi alliance favored by American strategists of the USA, Japan, Australia and India. It is just a western wish. We know what is in our interests and what is not. USA, Japan and Australia are separated from China by vast oceans and enjoy a sense of security that India cannot. We have a big land border with China and it will feel the immediate consequences of any armed conflict. The US and Japan are too closely economically integrated with China to be taken as credible allies by India. If anything India knows, it knows it stands alone.

India didn't take part in the OBOR because there was nothing of interest to it in it. When China makes a proposal that will incorporate India into its worldview, India will respond suitably. Otherwise India has no intention of paying court to the "Emperor Far Away." There are indications that there is a belated realization of this in China now. The greater economic integration of India and China is the best hope for China and India's sustained long-term growth.

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