Op-eds

Countering China's Economic Dominance

by Arvind Subramanian, Peterson Institute for International Economics

Op-ed in the Business Standard, New Delhi
August 24, 2011

© Business Standard

 


Bismarck famously said of the United States that it had managed to "surround itself on two sides with weak neighbors and on the other two sides with fish." India, unfortunately, does not enjoy this luxury of splendid isolation: instead of fish it has Pakistan on one side and China on the other, a China that is on the verge of becoming economically dominant, sharing that status with the United States for now and enjoying it exclusively in the near future.

The India-China relationship is fraught, having to contend with a number of things: the mutual resentment created by history (India's stemming from its humiliation in the 1962 war and China's from having to endure the Dalai Lama's flight to, and long-term exile in, India); tensions of contiguity; anxieties of a hierarchical geography with upstream China controlling downstream India's access to possibly the most precious of all future resources—water; and the unavoidable rivalries of large growing economies competing for markets, commodities and seats at the high table of global decision making.

Goldman Sachs, in creating the grouping BRIC (Brazil, Russia, India and China), thought that the common denominators of size and promising growth prospects could somehow wish away or at least dilute these complications and create common purpose and interest. Alas, that will not be the case. So, a strategic question for India is: how should it respond in the economic arena to a dominant China?

On the one hand, trade and economic relations between China and India are intensifying, creating opportunities for both countries and mutually reinforcing stakes, and imparting a positive-sum dynamic to the relationship. On the other hand, the economic relationship is seen, politically, as increasingly imbalanced. India runs a large and growing trade deficit with China, and the pattern of trade is reminiscent of trade during the days of empire. India exports predominantly raw materials to China and imports high-value-added and sophisticated goods.

Indian industry and government officials have complained about China's policies on trade, industry, foreign direct investment and exchange rate that aid, often opaquely, Chinese industry and exports. China's government procurement policies have impeded Indian pharmaceutical exports and the fear is of a large China using its size to create and set standards (for example, for telecommunications equipment) that others have no choice but to follow. Not just the content but even the tone of these complaints can resemble the emanations from the China hawks in the United States.

India, like China's other major trading partners, has to grapple with the question of how much it should engage with China bilaterally and how much multilaterally. India's dilemma is that its negotiating strength in a bilateral context is limited owing to the stark imbalance in economic size, yet it is unable to embrace multilateralism as conviction, preferring a reluctant and opportunistic multilateralism that can end up as ineffective multilateralism. Why the latter?

India has been a habitual naysayer in its multilateral dealings. It was a "sovereignty hawk", in Strobe Talbott's famous words, trying its best to minimize having to do what it would otherwise not want to do. In the trading system, for example, India lobbied hard and strong over the past three decades to preserve the right to protect its economy through tariffs and quotas. Sovereignty, in this arena, was equivalent to the freedom to protect or prevent the imposition of rules and obligations that would deprive India of this freedom. Of course, this objective, in turn, flowed from an economic ideology that initially viewed liberalization and market opening as unhelpful to India's interests, and later, when it recognized the benefits of liberalization, it still viewed it as something to be undertaken at India's pace and on India's terms rather than have it dictated by outsiders.

But if India was a naysayer, it was one with a following with the old G77 serving as a forum for India to intellectually lead, and speak on behalf of, several developing countries. Leading this pack became a habit, a mindset, even an entitlement.

In recent years, as India's ideological moorings have shifted, it has been able, although gradually and episodically, to back away from playing the recalcitrant partner, stymieing efforts at international cooperation (Jairam Ramesh's constructive role in the climate negotiations at Cancun is one example). But its officials have been less able to renounce the mantle of leadership, and hence less willing to join multilateral coalitions where leadership is shared or even sacrificed. In short, it has been easier to repudiate ideology than to spurn the spotlight.

As a result, India finds itself in an interesting situation. For example, in discussions on China's exchange rate policy, India has chosen not to align itself with the United States as part of a multilateral coalition for fear of endangering the broader relationship with China ("we live in a rough neighborhood" is India's response with some merit), and because it believes that the United States can "handle" China alone without India's participation. The consequence, of course, is the classic free rider problem where all countries that think similar contribute to the breakdown of co-operation.

Even where the need for forging coalitions is recognized, the Indian instinct is still to seek out developing country partners such as South Africa, Brazil, or Indonesia rather than the United States and Europe.

If China is to be tethered to the multilateral system—an imperative for countries such as India against an unbenign exercise of future Chinese dominance—India must become part of the effort to forge successful coalitions that will strengthen multilateralism. Going forward, the United States cannot do it alone. Coalitions must be broad and require easy engagement between the old powers and emerging ones. Thus, India must become a visceral multilateralist which would entail coming to terms with a demotion in status and require reaching out to all partners, not just erstwhile comrades in the G77.

The appealing symmetry in future efforts to engage China is to induce a greater humility in both the United States and India. The United States will have to spurn the temptation—rather shed the delusion—that it can exercise exclusive leadership and dominance in shaping outcomes. India will have to stop coveting the mantle of leadership and instead participate in multilateral co-operation as an important but humble drone rather than as the queen bee.



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