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Dealing With China – An Indian Perspective

Dealing with China – An Indian Perspective

Post Series: 2017: Volume 16, Number 2
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Three issues bedevil Sino-Indian relations at present. These are the long-pending boundary dispute, the huge trade deficit in favor of China, and the Chinese initiated “One Belt, One Road” proposal, which – while giving the veneer of advancing economic cooperation – actually has significant geo-political and geo-strategic implications. Recently the Chinese Ambassador to India, Luo Zhaohui, while speaking in Mumbai, said that to improve relations between India and China, “We should negotiate a bilateral Treaty of Friendship and Cooperation, a Free Trade Agreement and gather early harvest related to border issues.” Luo also raised the rhetorical question of how to “synergize” China’s “One Belt, One Road” project with India’s “Act East” policy. It is not in the public domain whether Ambassador Luo has officially proposed these initiatives to the Indian Foreign Office in Delhi or whether he was simply raising these publicly to elicit and test public opinion. Be that as it may, let us assume that these are official Chinese initiatives.

Consider the first offer. Whenever the Chinese take such initiatives, the most important aspect to note is that such initiatives must be examined in the context of the prevailing international situation, for rarely are they bereft of such linkages. In the current uncertain times, any Chinese strategic analyst based in Beijing would aver that the principal security threat to China would emanate from its eastern seaboard, in tandem with the deep anxiety and uncertainties the new Trump Administration engenders. This would also suggest that the Chinese, well versed in the art of strategic manoeuver, would be keen to cover their flanks so as to fully concentrate on the gathering storm that they perceive might come from the Asia-Pacific region.

The Trump-Xi Jinping Summit in Florida was designed for both sides to assess the relationship at the highest level. While China has continued to prevaricate on the North Korean nuclear issue, the U.S. realizes that its options for unilateral action are strictly limited, and therefore reliance on China becomes even more enduring. The outcome of the recent trade deal indicates the final burial of Trump’s anti-China campaign rhetoric branding China as a currency manipulator, etc. In some aspects, the announced trade deal is nothing but China implementing what it had already promised. Yet Trump’s persistence seems to have paid off. The decision to participate in the Belt and Road meeting in Beijing, however, surprised many in that this was a Chinese initiative designed primarily to challenge U.S. trading and military power in the Asia-Pacific region. This challenge remains and it would be extremely shortsighted for the U.S. to believe that a new equilibrium with China has been established. China’s ultimate goal of ousting U.S. power from the Asia-Pacific is unchanged.

Past as Prologue

Sometimes a review of historical events offers vital and interesting clues on future developments. A near similar situation to the current one arose in the late 1950s when the Chinese were bombarding the two Taiwan-held islands of Quemoy and Matsu just off mainland China, but were deterred from further military action when the U.S. warned that it would use “all means” (a clear reference to nuclear weapons) to defend Taiwan (not including Quemoy and Matsu). This was a bitter period in Sino-U.S. relations that coincided with the final break in Sino-Soviet relations after Soviet leader Khrushchev refused to back China against a U.S. nuclear strike. On March 19, 1959, a revolt also broke out in Tibet that led to the flight of the Dalai Lama from Lhasa to India for personal safety. On May 6, 1959, the People’s Daily published a scathing article entitled “The Revolution in Tibet and Nehru’s Philosophy.” It was popularly believed that the article carried Mao’s personal imprimatur and contained a nasty personal attack on Nehru for the first time since the signing of the 1954 Agreement between India and China on Trade and Intercourse between Tibet and India, under which India recognized Chinese sovereignty over Tibet for the first time ever. Nehru was devastated by the viciousness of the personal attack.

Despite extreme Chinese unhappiness at what had happened in Tibet and their unflinching belief that Nehru was involved in the events leading to the Tibetan uprising and the subsequent flight of the Dalai Lama to India, the Chinese never lost sight of the greater strategic threat that was gathering in the shape of U.S. military deployments in the Taiwan Strait and the Soviet refusal to back them in case the U.S. used nuclear weapons. It was a grave threat that they could not ignore. Mao had earlier referred to it in his conversation with Nehru during the latter’s visit to Beijing in October 1954. This is what Mao told Nehru:

Between friends, there are times when there are differences; there are also times when there are fights—even fights till we become red in the face. But this type of fight is different in character from the sort of fight we have with Dulles. We are a new country. Although we are counted as a large country, our strength is still weak. Confronting us is a larger power, America…. Therefore we need friends. PM Nehru can feel this. I think India also needs friends.

Therefore, it was not surprising that the then-Chinese ambassador arrived at South Block (the Indian Foreign Office) on May 16, 1959 and handed over a written démarche. It contained a long rambling litany of complaints against India and was reportedly drafted by Mao himself. Toward the end, it contained a most interesting proposal:

The enemy of the Chinese people lies in the east—the U.S. imperialists have many military bases in Taiwan, South Korea, Japan, and in the Philippines, which are all directed against China. China’s main attention and policy of struggle are directed to the east, to the west Pacific region, to the vicious and aggressive U.S. imperialism and not to India…. India is not an opponent but a friend of our country. China will not be so foolish to antagonize the U.S. in the east and again to antagonize India in the west… Friends! It seems to us that you too cannot have two fronts…. Is it not so? If it is, here lies the meeting point of our two sides. Will you please think it over?

Nehru personally drafted the response to the Chinese ambassador’s démarche, and assessed it as “discourteous.”  The tragedy lies in the fact that this démarche and its contents were taken by Nehru as a personal affront. The hapless foreign secretary was directed to respond within a week, on May 23, 1959, to say that the statement was “wholly out of keeping with diplomatic usage and courtesies due to friendly countries.” Moreover, the astonishing remark was made that “the government of India does not consider or treat any country as an enemy country, howsoever much it may differ from it.” (Was Pakistan then a “friendly” country?) Mao would have been deeply offended at Nehru’s response.

Three Current Issues

Let us fast forward to current times. Keeping in mind the historical context and considering China’s deep anxiety at present on developments near its eastern seaboard, what then should India make of the latest Chinese offer of a Treaty of Friendship and Cooperation? The first point to underscore is that there exists in the Chinese mind the belief that Indians are by nature rather fond of “vision statements,” “joint declarations,” “guiding principles,” “Five Principles of Peaceful Coexistence,” etc. Therefore, offering a Treaty of Friendship and Cooperation to India, at present, would be in line with Chinese thinking about the nature of the Indian mind and the belief that it can be easily satisfied by initiating, yet again, such high-sounding joint statements.

The Boundary Dispute

Second, in the Chinese mind such lofty statements/declarations matter little when placed in the context of real politics practiced by its leadership, as they can be easily ignored or subverted should the need arise. For example, take the Sino-Indian Agreement of April 11, 2005 that set out the “Political Parameters and Guiding Principles” for the settlement of boundary issues. In Paragraph VII it was agreed that, “In reaching a border settlement the two sides shall safeguard the due interests of their settled populations in border areas” [emphasis added]. Any unbiased observer would read this to mean that in the eastern sector of the Sino-Indian Boundary, the two sides had agreed to settle the border on the existing status quo since settled populations exist right up to the boundary. And yet when the political situation turned, the Chinese referred to Paragraph V and said that they could not ignore “national sentiment” and concede so much territory.  Further in May 2007, the Chinese Foreign Minister told the Indian External Affairs Minister that “the mere presence of populated areas would not affect Chinese claims on the boundary.” In other words, the Chinese were reneging on Paragraph VII.

Therefore the question that arises is how can India pin down the Chinese in concrete terms, so that they cannot escape so easily from commitments they might make in the proposed Treaty of Friendship and Cooperation? And what is the proof of Chinese sincerity?

To begin with, India must not reject the Chinese initiative, as Nehru had so impetuously done in 1959, but play along, for it gives India enough room for diplomatic manoeuver not only with the U.S. but also with states in the South Asian neighborhood. And yet the Chinese must be pinned down in concrete terms. On November 4, 1962, Prime Minister Zhou clarified to Nehru in an official note that in the eastern sector of the Sino-Indian Boundary, the Line of Actual Control “coincides with the McMahon Line.”  Zhou further said that the Indian government must have a copy of the original McMahon map, negotiated at Simla in 1914 (the Tripartite Conference between British India, China, and Tibet), and therefore it should be easy to read the coordinates line from that copy. That being the case, India should insist that the Chinese live up to Zhou’s initiative and not only reaffirm that the Line of Actual Control in the eastern sector conformed to the McMahon Line, but insist that it be demarcated on the ground to avoid any misunderstandings.

If the Chinese government were to agree with its own stipulation, as made by Prime Minister Zhou in November 1962, this indeed would be a concrete proof of Chinese sincerity and a solid basis for negotiating a meaningful Treaty of Friendship. It would also indicate a serious intent on the part of the present Chinese government. Otherwise, the Chinese ambassador’s proposal is basically a nonstarter. The boundary question, therefore, is likely to linger.

The Balance of Trade

Both India, and to some extent the Chinese, recogniz that the huge trade deficit that exists and currently favors China is untenable. Something must be done to ameliorate the situation. It is in this context that the Chinese ambassador offered a Free Trade Agreement between the two countries. It is not in the public domain whether the Chinese authorities have officially proposed the same to India, but nevertheless it is an important development. Before an assessment can be made of India’s response, it is imperative to first evaluate the current state of the trade relationship between the two countries.

India’s trade relations with China have had a checkered history, and unfortunately continue to remain hostage to political developments between the two countries, albeit considerably less now than earlier. It is to the enormous credit of Prime Minister Rajiv Gandhi that he was the first Indian leader to realize that a solution to the vexed issue of the boundary dispute was not imminent, and therefore to delay normalization of trade and economic relations with China would only be counterproductive. He made the decision to delink the two issues. It was also during his visit to China in December 1988, that for the first time a Joint Economic Group was established. However, it must be pointed out that no one in the Indian leadership at that time paid much attention to this aspect of the relationship, for no one ever anticipated that bilateral trade volumes would develop so fast.

But develop they did. Sino-Indian bilateral trade in 1991 was a paltry US$265 million. It mushroomed exponentially to US$70.7 billion by 2015-16. Interestingly, India’s current bilateral trade with China is larger than India’s combined bilateral trade with Britain, Germany, and Japan. But the main problem is that India’s trade deficit with China is unusually high: in 2015-16 standing at a staggering US$52.7 billion. And it is expected to rise even further this year. This by itself should not be a cause for worry, as India runs deficits with 16 of its top 25 trade partners. The inescapable fact is that India buys more than it sells worldwide.

Almost everyone recognizes the real problem behind this massive trade deficit. India’s trade basket consists of cotton, gems and precious metals, copper, and iron ore. All are commodities. China, on the other hand, exports manufactured capital goods, mainly for the power and telecom sectors. India just does not produce enough high-quality manufactured goods even for its own billion-plus consumers, let alone for exports. Therefore it has to rely on quality imports from abroad. Many experts feel that the inordinately high trade deficit between India and China of US$52.7 billion is not a very serious issue for a country such as India that is on its way to establishing an industrial base and seeks high growth rates. Under such circumstances a larger import profile is unavoidable. Since China is the major source of technology-intensive products that are cost-effective, running a high deficit with China appears inevitable.

However, running trade deficits with China may not be necessarily inevitable. According to the Chinese, the problems faced by India are elsewhere, and essentially relate to restrictive labor practices, land and tax laws, rickety infrastructure, and inadequate power supply. In addition, while China is a part of the global supply chain, being the last stop of the manufacturing chain in East Asia, India is nowhere near being a part of this global chain.

Therefore, what would a Free Trade Agreement with China entail, and what would be its implications? Empirical studies show that for India, any such agreement would be a nonstarter, for India is not competitive at all. Such an agreement would not have any major impact on increasing Indian exports to China, for the tariffs that China levies on most items in the Indian export basket already are near zero. Furthermore, the manufacturing skills and abilities currently available in India compared with China are rather low. Indian’s manufacturing industry would be badly hit. Although overall trade between the two countries might grow at a healthy pace, it would be mostly to the advantage of the Chinese. For example, if tariffs levied were to be reduced by five percent across the board, the increase in India’s exports would be negligible, whereas those of China would increase by an estimated 18 percent. 1 From the Indian point of view therefore, this proposal is a nonstarter. A selected sector-wise free trade agreement, rather than one across the board, could be one way forward. However, because both India and China find it hard to reconcile their respective positions, progress in negotiations is slow and tedious.

India needs to press the Chinese on opening more facilities and increasing border trade. Right now, trade between India and Tibet across the land borders is very modest in contrast to Sino-Nepal border trade, which stands at US$542 million.  There are several reasons. Firstly, the lists of items that can be traded are outmoded and not commensurate with modern requirements. Secondly, the time allotted for trading is very unsuitable, particularly since traders cannot stay overnight in either country. Most border trade points are open only four days a week. The time taken to reach border points is also a factor, since the infrastructure – particularly on the Indian side – is rudimentary at best. For example, the road connecting Siliguri the last railhead to Sikkim and on to Nathu La on the border is about 143 kilometers long, but is a single lane and often subject to landslides. Sikkim has no airport, nor any railhead.

The importance of border trade should be recognized, as it is an important catalyst for poverty reduction in border areas. Border villages are becoming depopulated, because of the lack of jobs, thus posing security concerns for India. In the past, border trade with Tibet helped towns such as Kalimpong, Darjeeling, and even Tawang thrive. If border trade is revived, it can again be a significant dynamic in economic development.

In 1988 when a significant shift happened in Indian policy toward China, it was the fervent hope that goodwill thus generated with normalization in all other sectors would facilitate the settlement of the boundary question. Those hopes have to some extent been belied, but what has also emerged is that the massive trade deficit generated has added an altogether new issue between the two countries. By 2030 the economies of both China and India are expected to be among the top four economies of the world.  Unfortunately India still does not have a full-time independent trade negotiator on lines of USTR, and negotiates on an episodic basis.

One Belt, One Road

The third proposal on the table was the Chinese ambassador’s idea of merging China’s “One Belt, One Road” concept with India’s “Act East Policy” that envisages that only India pays more attention to states east of India, but that special relations with them should be developed.

When the Chinese ambassador spoke of the “One Belt, One Road” connectivity, what exactly did he have in mind? Does it mean that the initiative also includes the US$46 billion Chinese funded China-Pakistan Economic Corridor as an inseparable component? A clear understanding of what is offered is necessary for the study of the proposal’s implications. In turn this would facilitate a response from India.

On September 7, 2013, President Xi Jinping made the proposal for a new Silk Road Economic Belt in an address at Nazarbayev University.  While addressing the Indonesian Parliament on October 3, 2013, he proposed the new 21st Century Maritime Silk Road. These initiatives were amalgamated and became known as the “One Belt, One Road” concept. The current Chinese leadership has done well to choose this particular name, the Silk Road, for no matter where a person is located in the vast Euro-Asian heartland, the name would always resonate. The Chinese believe that “One Belt, One Road” provides a fresh way of thinking about regional and global cooperation, and that by including both bilateral and multilateral cooperation in political, economic, cultural, and other fields, a new paradigm would be created. The Chinese benefit immensely for the Belt and Road concept takes care of Chinese overcapacity in the steel and cement industries, as well as the desire for utilizing accumulated capital resources to further Chinese ambitions. Its scope would not be limited to Asia, but certainly its success does, to some extent, depend on cooperation that the Chinese receive from important countries such as India. If this initiative comes to fruition, it would link 65 countries and 4.4 billion people.

The Indian position has been that it has never been officially consulted on “One Belt, One Road.” The assumption in India is that the China-Pakistan Economic Corridor, in which the Chinese have invested US$46 billion, is an important component of the initiative. In December 2014, the Indian External Affairs Minister stated in Parliament that, “Government has seen reports with regard to China and Pakistan being involved in infrastructure-building activities in Pakistan-occupied Kashmir, including construction of the China-Pakistan Economic Corridor. Government has conveyed its concern to China about their activities and asked them to cease such activities.” While the minister was expressing her concern, a Press Trust of India report quoted the Indian High Commissioner to Pakistan as saying that, “India has no worry over construction of the China-Pakistan Economic Corridor, as an economically strong Pakistan would bring stability to the region.”

This dichotomy of approach remains to be reconciled, for it seems that it stems from strategic ambiguity. If the past is any guide then in 1965 at Tashkent, India agreed to restore the 1949 ceasefire line and withdrew from areas it occupied across the ceasefire line in the 1965 conflict. Similarly, the whole ethos of the Simla Agreement in 1972 was that Pakistan would accept and at an appropriate time convert the ceasefire line (now called the Line of Control) into an international border. In 1999 as well, India maintained the sanctity of the Line of Control, never crossed the line militarily and used force to oust Pakistani troops and pushed them back and beyond the Line of Control. Thus, it seems India was quite prepared to give up its claims to Pakistan-occupied Kashmir, if Pakistan accepted the Line of Control as an international border. It is not in the public domain if any such concrete offer was ever made in writing to Pakistan [emphasis added]. On the other hand, Prime Minister Modi recently reiterated in his August 15th independence message that Pakistan-occupied Kashmir was indeed sovereign Indian Territory. The question is which of the two strategic modules would India prefer to pursue on a long-term basis?

Thus, if the China-Pakistan Economic Corridor is indeed a vital component of “One Belt, One Road,” then it violates Indian Territory, and for India to accept the initiative is a matter of national territorial integrity. On the question of the China-Pakistan Economic Corridor traversing Pakistan-occupied Kashmir, Chinese Foreign Ministry spokesperson Hua Chunying prevaricated on the issue: “With regard to whether the economic corridor passes through [Pak] Kashmir, as far as I have learned, a joint committee for the construction of China-Pakistan Economic Corridor has been established and a second meeting has been held coinciding with the visit of the Pakistani President. I do not know if they have talked about whether the corridor will pass through this region [Pak-Kashmir], but I can tell you that we hope the Kashmir issue can be resolved through consultations and negotiations between India and Pakistan.” Clearly the Chinese were hoping to obfuscate the issue and the fact that the China-Pakistan Economic Corridor passed through Pakistan-occupied Kashmir. Recent Chinese press reports have also taken the same view, calling upon India and Pakistan to settle the matter among themselves.

Therefore, if India cannot join “One Belt, One Road” then the Chinese’s proposal of joining the “One Belt, One Road” with India’s “Act East Policy” clearly becomes a nonstarter. Alternatively, at present India does not have sufficient economic resources or the political heft to put in place either a competitive or an alternative connectivity network on a scale that can offer an alternative option to the Belt and Road initiative. In such circumstances would it be plausible to prudently study those components of the initiative that may improve India’s own connectivity to major Central Asian markets, just as India has chosen to join the Chinese-sponsored Asian Infrastructure and Investment Bank and the National Development Bank? For example, India’s proposal to build a road cum rail link to Central Asia through the Iranian port of Chahbahar could ostensibly be linked to the Chinese-built routes in the Central Asian region to obtain access to both Central Asian as well as Russian destinations. Would the Chinese be prepared to allow limited participation by India, as opposed to full participation?

If India’s resources are indeed limited, then it automatically follows that strategically these must not be spread too thinly as a part of its Act East Policy. As the Indian Ocean area is strategically extremely important for India, it may be more imperative to deploy resources to build an Indian Ocean network of ports, with connecting highways and rail routes, such as the planned Mekong-Ganga corridor and the Sittwe-Mizoram multimodal transport corridor. Plans to develop the deep water port at Trincomalee on Sri Lanka’s eastern coast, as a major energy and transport hub, are still in limbo, despite the fact that the Chinese have gone ahead and built the Hambantota port in Sri Lanka and have expanded Colombo port. The Andaman and Nicobar Islands are strategically located in the Bay of Bengal and opposite the Malacca Straits, and yet India continues to treat these islands as distant outposts rather than developing them as important commercial and transportation hubs. The idea of launching a Spice Route, Cotton Route, and even a Mausam project are currently mostly rhetorical ripostes to China’s “One Belt, One Road” and to the China-Pakistan Economic Corridor. Much more therefore needs to be done, and clearly some hard thinking needs to be initiated soon.

[Ambassador RS Kalha is a former Permanent Secretary, Ministry of External Affairs, India. He was also a Member of India’s National Human Rights Commission, 2003-08]   

  1. Chandra Rupa. “India-China Free Trade Agreement (FTA): Viability, Prospects and Challenges. ”IIMB Management Review.
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