Relations between China and India are improving, as each of the Asian behemoths comes to realize the combined trade and economic potential that their respective and complementary strengths could unleash. But, as Marsha Vande Berg describes, there is still much about which the two countries disagree – and plenty of room for competition and conflict

Atiny, windswept pass through the mighty Himalayas will be central to commerce between the world’s two most populous nations – and could serve as a gateway between south and east Asia – if India and China succeed in their recent efforts at rapprochement. The Nathula Pass – situated at a height of 4,300 metres in the former kingdom of Sikkim and right on the Indo-China border – was formerly a key point on the silk route connecting Asia to Europe.

It is again part of a grand scheme – this time to improve relations along the India-China axis. Trade as a form of shadow politics is the means of accomplishing the realpolitik that both sides of this geopolitical divide are hoping to realize.

India is seeking assurances that the economic behemoth to the north will not turn into a menacing regional power. China wants a separate set of assurances, including better diplomatic ties in the event that India’s improving relationship with the United States (aside from the Iraq intervention) should end up posing any kind of threat to Beijing.

Both want – and need – time, resources and a degree of cross-border peace and quiet to attend to their respective and considerable priorities at home, and to keep pace with today’s rapidly globalizing marketplace.

If friendly relations between these two giants succeed, then each will have greater latitude to concentrate on its respective economy. India grew at a projected rate of nearly 6% in 2003. China’s economy boomed into the double digits after it recovered from the Sars epidemic last spring.

Both desperately need to maintain the pace of their economic reform and restructuring programme as well as to find ways to deal with the seemingly intractable global challenges of Aids, terrorism and environmental degradation.

It was a visit by India’s prime minister to China in June 2003 – reciprocating a visit in early 2002 by then Chinese premier Zhu Rongji – that planted the most recent seed for the rapprochement we are now seeing. Atal Behari Vajpayee became the fourth Indian prime minister to visit China and the first since Narasimha Rao in 1993.

Joined by a phalanx of Indian business representatives, Vajpayee arrived in Beijing intending to identify mutual and complementary commercial interests. During his six-day visit, he and the Chinese leadership set in motion a framework for a two-fold increase (or more) in bilateral trade and for resolving deeply ingrained diplomatic differences. They claimed initial success, backed by a slew of agreements and a joint declaration that favoured improving relations.

Beijing agreed to loosen visa regulations that have complicated efforts by Indian citizens to do business in China. China also offered

to cough up $500 million to help India’s infrastructure in the areas of water and energy development.

Each side appointed an envoy and then put the duo in charge of resolving the 14-year-long impasse that is central to their core dispute – the precise location of the 3,500-km border that separates them.

Since the 1980s, more than a dozen rounds of talks have failed to produce even an approximation of a mutually acceptable solution to the border issue of where Tibet meets India in the snow-capped Himalayas.

During his visit, Vajpayee formally recognized the Tibet Autonomous Region as part of mainland China and reiterated New Delhi’s stand against allowing Tibetans to engage in anti-Chinese activities inside India.

(India’s nod toward Beijing’s claim on Tibet so far seems not to affect the status of the Dalai Lama, who with 100,000 followers fled Tibet in 1959 and received sanctuary in India.)

China, in turn, agreed to reopen the old silk route into Tibet via the Nathula Pass, and, in the process, implicitly acknowledged India’s 1975 annexation of the former Himalayan kingdom of Sikkim.

The trade aspect of the Indian delegation visit highlighted at least two arenas for prospective economic cooperation. One is India’s sophisticated computer software industry being a prospective complement to China’s growing international profile as a manufacturer of IT hardware. The other is the supply of steel to help meet the demands of China’s dynamic growth.

“In combination, rather than in competition, India’s and China’s IT industries can be potent forces,” Vajpayee told his Chinese hosts at a gathering of business representatives in Shanghai toward the end of the visit.

His sentiments echoed those expressed by Zhu during his own earlier groundbreaking visit to India in 2002. “You are the first in software, and we are the first in hardware. When we put these two together, we can become the world’s number one,” Zhu exclaimed at the time.

Vajpayee’s message was as clear as Zhu’s. India’s information technology sector has been a cornerstone of the country’s economic growth for the past several years. China wants and needs both software and technology know-how in virtually every sector of its ultra-dynamic economy.

Beijing also seems intent on steering its industrial policy toward filling a gap in its economic food chain – first by learning from, partnering with and/or imitating the technological know-how of others, and then, ultimately, by developing Chinese expertise. According to International Data Corp (IDC), China intends to spend $9.4 billion each year between now and 2006 on the kind of technology services that Indian software companies are selling worldwide. That figure is almost triple the $3.74 billion spent in 2002.

From India’s perspective, Delhi remains receptive to domestic pressures to find additional ways to benefit the country’s dynamic IT sector and to help find new markets for its IT services. The Indian IT sector is today a $50 billion industry – having risen dramatically from relatively paltry beginnings as a $4 billion industry in 1999.

As of mid 2003, India’s IT export to China accounted for 0.05% of the sector’s total export, according to the Delhi-based National Association of Software and Service Companies (NASSCOM).

S Ramadorai, CEO of Tata Consultancy Services (TCS) in India, was asked recently why he thought having a presence in China was important to India’s largest information technology services company and whether TCS would end up competing with the Chinese for the same business. TCS opened India’s first development centre in China some 18 months ago.

Ramadorai replied: “There’s an enormous demand inside China that will far outstrip what they can do outside. As for the India model – we saw looking outward as our only way of survival.”

In addition to TCS’s facility in the eastern city of Hangzhou, the Indian software services giant recently completed work on the IT architecture for Shenzhen Development Bank, a second-tier commercial bank in the economically vibrant region that lies north of Hong Kong.

NITT, a software training company with operations in China dating back to 1998, also has plans to expand its training facilities inside China. “More and more Indian businessmen and firms are turning from Europe and America to the huge market that is nearby,” said NIIT executive Prakash Menon.

A recent study by the Confederation of Indian Industry (CII) identifies twin sets of opportunities that can flow from the agreements reached last June in Beijing.

First, there is the opportunity for Indian software companies to supply products and services to China’s growing number of small- and medium-size businesses.

Second, there is the potential for servicing Japan and other regional markets, including those represented by the Association of Southeast Asian Nations from a platform inside China.

Another Indian software superstar is Satyam Computer Services, which is listed on the New York Stock Exchange and is intent on doing business in China. The IT powerhouse recently set up shop in an industrial park in Pudong, just across the Hwang-po River from Shanghai. With 9,500 employees in 45 countries, Satyam views China as one of its two global software-development bases.

Also by locating in China, Satyam – which ranks as one of the world’s top five outsourcing firms – can exploit the needs of the Japanese market while reducing its dependency on the North American market. (North America accounted for 75% of Satyam’s $414 million in revenues in 2002. By contrast, the Asia Pacific region represented 6%-7%.)

According to the CII study, other opportunities include: tenders related to the Olympic Games, which will be held in 2008 in Beijing; telecommunications equipment (China has the fastest growing telecom sector in the world); energy; medical equipment; automobile components; plastics; and packaging equipment. There is also potential in the biotech and pharmaceutical fields, and in exporting more steel to China.

India is the world’s cheapest producer of steel, having successfully restructured its steel-production capacity. By riding into China on the prime minister’s coat tails, India’s steel interests intended to gain a wider entry into the Chinese market, especially in the arena of supplying steel for China’s massive infrastructure projects.

The opportunities for improving trade relations between the two countries are real. At the same time, the fact that they are neighbours, competitors and global giants all at the same time invites comparisons that suggest competition in the future for dominance in Asia. Economic diplomacy can sometimes fall short of bridging important qualitative distinctions between nations. For example, India is a democracy – however raucous – while China continues to evolve its governance in the direction of authoritative pluralism. Both undertook economic reforms at roughly the same point in the latter half of the 20th century, but both have arrived at the present point with divergent identities and needs.

India, with per capita annual income of $2,540, has one of the highest poverty rates in the world. China, by contrast, has eradicated poverty for all but about 4% of its population. Its per capita income is $4,400.

India has been successful in building an industrial and financial services infrastructure that includes transportation links and stock markets. The country supports nearly two dozen exchanges with 7,000 listed companies. China, by contrast, has two stock exchanges with about 1,200 listed companies and is trying to overcome a reputation in the past for “casino capitalism”.

China’s four largest banks have an estimated 40% of their assets in non-performing loans. They face the Herculean task of throwing off archaic approaches to credit analysis, banking services and lending practices that favour cronyism and alignment with government policy. Meanwhile, the majority of the economy continues to labour under state controls.

The collective mindset of China’s central and provincial leadership has yet to embrace fully a commitment to unleash the economy and allow the marketplace to operate based on a true supply and demand basis.

But the potential of the China market is reflected in the foreign direct investment flows, which topped $52 billion and exceeded foreign investment even into the United States in 2002.

As a recent World Bank development model pointed out, India’s challenge is to establish a market that is based on competition before it is able to realize its economic potential. China, on the other hand, must establish the right institutions and guarantee the right economic fundamentals to maintain its current rate of progress.

And even if trade doubles from the $5 billion in goods and services that were exchanged in 2002, this is still a drop in the global ocean of trade – which totalled $6.424 trillion in 2002. A total of $10 billion in bilateral trade is also dwarfed by China’s trade with Japan ($101.9 billion in 2002); with the US ($97.2 billion); and with Europe ($86.8 billion).

So even as the Nathula Pass opens up and trade resumes through the snowy Himalayas, it may be helpful to recall just how these two ancient and complex Asian cultures – each with its own brand of national pride – tend to look at foreign policy.

The Indians have a saying: “A strong neighbour is a natural enemy.” Or, as the Chinese like to say: “One mountain cannot accommodate two tigers.”

Marsha Vande Berg
Marsha Vande Berg is an Asia analyst based in San Francisco and a member of the Council on Foreign Relations. She is also editor of The World Report.