Jaimini Bhagwati: Economic & strategic interdependence

India needs to collaborate more intensely with the West and not get side-tracked by the latter's rivalry with China or other peripheral issues

The US is still the world's largest economy in hard currency terms and retains a considerable lead over Russia and China in military and conventional technologies. At times, commentaries on bilateral and multilateral relations dwell upon political-strategic interdependence without factoring in economic realities adequately. This article points to trade and investment linkages between India, USA, Japan, the Association of South-East Asian Nations (Asean) and China and suggests that these economic aspects should be taken more explicitly into account.

After the Second World War, political-strategic convergences and economic relationships between countries went hand in hand. That is, till two watershed moments, one in 1972 with US President Richard Nixon's visit to China, and after 1990 with the disintegration of the Soviet Union. The US and Western Europe, the pre-eminent powers during the first nine decades of the 20th century, coordinated their economic and intellectual property protection policies through multilateral institutions such as the World Bank, International Monetary Fund (IMF), World Trade Organization (WTO) and World Intellectual Property Organization (WIPO). Security was covered under the North Atlantic Treaty Organization (NATO) umbrella. Later the Non-Proliferation Treaty (NPT), Nuclear Suppliers Group (NSG), Missile Technology Control Regime (MTCR) and other defence equipment, missile and nuclear technology denial regimes were set up. However, Russia and China, acknowledged as nuclear weapon states under Article 1 of the NPT, became members of the NPT and NSG clubs.

For a quarter century now since the early 1990s, bilateral-multilateral relations irrespective of political differences and even strategic animosities are characterised by inevitable acceptance of economic realities. Tables I lists the volumes of trade in goods among India, the US, ASEAN and two other large Asian economies Japan and China. Table I shows that in 2014 India's two-way trade in goods with the US (India's exports of $45.2 billion plus US exports to India of $22 billion) was 10.8 per cent of China's trade with the US (China's exports of $466.7 billion and US exports to China of $159.8 billion). Similarly, in 2014 India's two-way trade with Japan was a mere 4.9 per cent of China's trade with Japan. Table II lists the relative trading importance that this set of countries have with each other. For instance, India's two-way trade with China was 9.7 per cent of India's total global trade while India accounted for only 1.7 per cent of China's global trade. Table II also shows that for USA, Japan and ASEAN too their bilateral trade with China is a larger fraction of their global trade than the corresponding numbers for China.

India's exports and imports of services to and from the US amounted to $31.2 billion and $34.9 billion respectively in 2013 (Source: US Department of Commerce). In 2013 India's two-way trade with the US including goods and services at $132.5 billion was well below US-China two-way trade just in goods (i.e. not including services) of $593.7 billion.

China has partnered with internationally significant companies (e.g. Apple phones) in global value chains. And, this was an important factor in raising China's trade competitiveness. As cyber technologies become ever more sophisticated and driverless cars, robots become household realities it is likely that it would be even more important to be part of global value chains.

China has invested almost $3 trillion of its foreign exchange reserves in US government debt and this has created substantial interdependence. The US would not want China to suddenly sell large amounts of US Treasury securities as US$ interest rates would shoot up with uncertain consequences for international financial markets. Similarly, China would not want the US to inflate away the value of its US Treasury bill and bond holdings.

The US and Japan have kept China out of the Trans-Pacific Partnership (TPP), made disapproving noises about Chinese claims in the South China Sea and about China's One Belt, One Road (OBOR) initiative. However, just the trade and investment linkages that the US, Japan, ASEAN have with China would keep their strategic interactions below serious confrontation levels. Clearly, China would like to confine India to South-Asia and would continue to use Pakistan to keep us bogged down in the sub-continent. Nevertheless, to sum it up simplistically, India should not expect any advantage by playing the West's game of containing China or weakening Russia as advocated by some e.g. at the annual Shangri-La conferences in Singapore.

India with a congruence of liberal, democratic values with the West needs to collaborate more intensely with the latter in the areas of defence, intelligence sharing, high technology and the environment. Concurrently, these efforts have to be buttressed with a deepening of our trade and investment relationships with the West. However, trade and investment linkages between India and other large economies cannot be raised sharply without improving our competitive abilities. Trading strength in goods depends on an efficient manufacturing sector which provides more employment than services. This in turn requires India to implement labour, land acquisition, banking, agriculture, judicial and tax reforms plus improve the reach and quality of primary education and vocational skills. The bottom line for India is not to be side-tracked by the West's rivalry with China, dislike of Putin's Russia or relatively peripheral issues such as NSG membership.
j.bhagwati@gmail.com
The writer is a professor at ICRIER