The Most Troubling China-India Conflict Is Economic

(Bloomberg Opinion) - What is worse than two populous, nuclear-armed countries killing each other's soldiers? Two populous, nuclear-armed countries are collapsing their longer-term relationships.
Fighting along the Chinese-Indian border on the Tibetan plateau has not come out of the blue. Neckties that are never tight are increasingly becoming a victim of the way New Delhi is drawn into the greater rivalry between Beijing and Washington. If trade and investment suffer, the deteriorating relationship could cause problems decades later.
"India needs to review and reduce its current economic dependency on China," wrote an experienced diplomat Gopalaswami Parthasarathy this week on the Hindu BusinessLine.
He pushes for an open door because the relationship already seems to be on an increasingly shaky floor. As my colleague Andy Mukherjee wrote, economic nationalism is increasing in India - and China seems to be the most visible loser.
Last year the United States overtook China and became India's largest trading partner. This could be an equally important moment when the US emerged as China's largest partner ahead of Japan in 2004. In April, New Delhi tightened its foreign investment laws, a move that is widely interpreted as targeting Beijing. According to the Economic Times, it is about restricting equity-based investments from China as well.
In November, India decided to withdraw from the Comprehensive Regional Economic Partnership, a Beijing-backed trade bloc that will tie China to other major Asian economies. Although the total value of Indian exports increased by almost half between 2010 and 2019, the total to China shrank by 14% during the reporting period and widened a trade deficit that fueled India's nationalist turn.
All of this is worrying because trade relationships can be an important limitation of conflicts. The immediate economic loss that would result from the war with an important trading partner is one factor that can prevent skirmishes from deteriorating into major battles.
A study by economists at the University of Sorbonne on conflicts in the late 20th century in 2008 found that while openness to trade does not automatically prevent war, there is a higher risk of conflict if countries become less economically dependent, as is currently the case China and India seem to be the case. Paradoxically, this means that globalization can worsen the situation: countries that are more integrated into the global economy can better bear the loss of trade with a single nearby rival.
You can see this most clearly in two of the most worrying military hot spots in Asia. Trade between North Korea and South Korea is approaching zero, so it is not surprising that the demilitarized zone between them is the other place in the region on the brink of war.
Consider India's most difficult relationship. At the time of independence in the late 1940s, India took over almost a quarter of Pakistan's exports, which in turn bought about half of its imports from India. This trade quickly disappeared in the 1950s until the 1965 war completely closed the trade for almost a decade. Relationships never recovered. Only 1.8% of Pakistan's exports went to its eastern neighbor in 2018. India counts Nigeria, Belgium and Mexico as larger export partners than the country with which it shares a border of 3,300 kilometers.
There is no overriding reason for China and India to be rivals. Each has its own regional sphere of influence and the story of staying on the brink of major strategic struggles. The extent to which India is increasingly being drawn into Washington's orbit is in many ways a response to its nervousness about the rise of a more aggressive China.
A better policy would be if Beijing recognized how its belt and road projects in Pakistan, Sri Lanka, Bangladesh, and Myanmar felt India was encircled, just as NATO's expansion into Eastern Europe in the 1990s promoted lasting hostility in Russia. China's large infrastructure investments have not done well on their own terms anyway, so the smaller countries of the subcontinent are burdened with debt and, in many cases, a legacy of pollution. India itself would be a far better destination for Chinese outbound capital.
China should see how much it will benefit from India's development, as well as richer countries from its own growing prosperity. This should mean that the domestic market is opened to important Indian exports such as IT. Facilitating the approval process for Indian generics would also help lower China's sky-high drug prices. New rules were introduced on this front last year, but it's not clear whether they will be successful: China's marginal drug imports from India actually decreased in 2019.
India would do well to use its new foreign investment rules sparingly. While there is legitimate caution regarding the participation of state-owned Chinese companies in critical infrastructures, the investments made by companies such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd. in the emerging Indian e-commerce sector. This is especially true at a time when Covid-19 is likely to exacerbate the longstanding problems in attracting foreign capital.
In the midst of the sugar frenzy of nationalism triggered by military hostilities, there is currently little evidence that cooler heads will prevail. However, an earlier confrontation in the Himalayas in 2017 did not reverse the busy diplomatic relations between the two countries. To smooth the current conflict, India and China need to deepen their economic and social ties - otherwise the next fight will be even more serious.
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist dealing with commodities as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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