In 1962, Dutch economist and Noble laureate Jan Tinbergen came out with the 'gravity theory of trade' and immediately created ripples in the staid world of trade theorists.
His theory that trade volumes between two countries were directly correlated to the combined size of their economies and inversely to the distance between them (smaller the distance, larger the trade) provided economists a fundamental tool to study trade patterns between any pair of countries.
By his logic, India and China should have been one of the biggest trading blocs in the world by now.
Unfortunately, however, the two countries have yet to fulfil their enormous potential for trade. But don't write off the gravity theory. Or you'll repeat the mistake some members of a visiting Chinese delegation had made in 1997 when the bilateral trade was still far from the $1-billion mark. They brushed aside as a joke a report of the Federation of Indian Chamber of Commerce and Industry (Ficci) that said India-China trade would touch $10 billion by 2007.
The trade between the two hit $18.7 billion in 2005-06, jumping 38% year-on-year. And last month, when Saroj Kumar Poddar, president of the same Ficci, told a Beijing audience that the two-way trade might hit $100 billion in the near future, nobody laughed. "If such a momentum is maintained, China will become India's largest trading partner in the next two or three years," says India 's Commerce and Industry Minister Kamal Nath.
The composition of trade, however, is not much in India's favour. While imports from China are diversified and dominated by value-added products like electronic goods, India's sparse exports basket mostly contains low-cost inputs like iron ore, primary steel, plastics and minerals -- with 15 products constituting 89% of the total.
If trade is a slow starter, investment is a non-starter. Almost. In the last 13 years, for instance, the Indian government has cleared $67.15 billion of foreign direct investments (FDI). And the share of China in that was a minuscule 0.3% at $231.7 million. Again, during the same period, India granted 7,878 technical collaboration approvals to different countries with China's share being just 70. Really nothing to crow about.
But then, these low numbers reflect the vast potential that exists for increasing trade and investments. "There is a huge potential for collaboration in various sectors like information technology, IT-enabled services, biotechnology, education, financial services, healthcare, tourism and energy," says Manoj Pant, professor, School of International Studies, Jawaharlal Nehru University in New Delhi. "It's not only to feed each other's domestic market but also to export to third countries," adds he.
The potential is high but the will to fulfil that may be lacking. Call it distrust or fear, there is a strong resistance, particularly on the part of India, to go the whole hog in bilateral ties. "The Chinese will cooperate only in those areas where they have set specific goals to accelerate their development such as software development and energy independence," says Tom Masci, former corporate vice-president (Asia Pacific), Motorola.
Also, the lurking fear of being inundated by cheap goods from the "factory of the world" seems to be high in India Inc, which is opposed to a free trade agreement (FTA) with China. "Unless there are internal reforms, especially those in the country's labour laws, the government should not consider entering into an FTA because there is no level playing field," Rahul Bajaj, chairman and managing director, Bajaj Auto Ltd, told the recent CII annual conference.
"China is still transiting to a full-fledged market economy; the US and the European Union are still to grant China that status," reasons Amit Mitra, secretary general, Ficci. What it means is that there is little transparency in the costing of products, capital subsidisation and other subsidies, which makes Chinese goods unusually competitive in global markets. As a first step, India should go for a preferential trade agreement with China, feels the industry.
There may be some merit in this argument, but even in areas where there is an obvious synergy, the two neighbours have still to come together. The much-hyped marriage of Indian software and Chinese hardware hasn't quite happened. Instead, an element of competition has crept in with the Chinese staking their own claim to the global software pie and India waking up to the possibility of becoming a low-cost hardware manufacturing hub. Thus both countries are stepping on each other's toes.
However, the fact remains that India and China complement each other's strengths. "Chinese manufacturing plus Indian services, Chinese hardware plus Indian software, will create an ideal win-win situation for both the countries," says Wang Jinzhen, Assistant Chairman of China Council for Promotion of International Trade (CCPIT).
Kiran Karnik, president, Nasscom, feels embedded software is an ideal area for mutual collaboration. In China, Indian software players can offer solutions to improve the efficiency of Chinese user industries; they can use Chinese talent in chip design and telecommunication technology; and they can also leverage China as an offshore development centre to serve the Japanese market, explains Karnik. Further, China's entry into the World Trade Organisation (WTO) throws up opportunities for Indian software providers in banking, securities, telecom, energy and utilities.
In fact, a clutch of Indian IT companies has already set up base in China, although for entirely different purposes. With their American and European clients setting up shops there to take advantage of the low-cost facilities, the Indian software vendors had no choice but to follow suit. And they are scaling up. Wipro, for example, is looking to set up a slew of
development centres in China in a year or so. "The idea is to utilise the talented local pool for localisation, customisation as well as product and application testing services for our multinational clients,'' says Masaki Nagao, CEO, China and Japan Operations, Wipro Technologies.
Satyam Computer Services entered China in January 2002 to use it as an offshore base, but found itself servicing global majors there. It already has four centres -- in Beijing, Shanghai, Dalian and Guangzhou -- and is now scouting for a 1,000-seat campus in a Tier II city to cut costs.
"Not just us, many companies are moving to Tier II or III cities to contain costs," says Virendra Aggarwal, director and senior vice president, Satyam Asia Pacific, hinting at the rising costs in the big coastal cities of China. Others like TCS, Infosys and Flextronics too are scaling up in China.
Another area where Indians are doing well in China is IT education. NIIT was the first off the block, setting up a training centre in Shanghai in 1996 in cooperation with Pudong Continuing Education Centre, the education arm of the Municipal Government of Shanghai. Today, NIIT covers over 20 Chinese universities across 25 provinces and 100 locations. And it has over 25,000 students.
"We realised that China was not only the gateway to the Far East, but it was home to a large number of multinationals who needed high quality support for their information, communications and technology requirements,'' says Prakash Menon, head of NIIT operations in China. "We were the first Indian IT training company to launch training curriculum in Mandarin," exults Menon.
Even for the Indian manufacturing players who live in constant fear of a "Chinese invasion", the big neighbour offers hope. "The best way India can emerge as an economic superpower is to learn to match Chinese prices and quality by locating India's manufacturing base in attractive countries outside India," says Vijay Govindarajan, professor, Dartmouth's Tuck School of Business.
Companies like Bajaj Electricals and Bharti have already taken the lead by making China a sourcing base for low-cost electrical appliances and telephone instruments. J K Tyres is using China as a base for exporting tyres to Southeast Asia and West Asia, while Videocon is manufacturing internet TV there.
Meanwhile, a number of Chinese companies like Haier, Bird and Huawei are looking to scale up their Indian operations. The government, however, is sitting on a couple of investment proposals including telecom equipment manufacturer Huawei's move to set up a $100-million manufacturing centre and Hutchison's porposal to invest in port infrastructure. "The government indecision has jeopardised the company's plan to make India the South Asian regional headquarter," says Wang Wei Jun, chairman, Huawei Telecommunications (India).
One area China and India have identified for mutual cooperation is energy security. The two have been engaged in a dogfight for oil equity abroad. Last October, China National Overseas Oil Corporation Division (CNOOC) outbid Oil and Natural Gas Corporation (ONGC) in Angola. India also lost out to China in Kazakhstan and the Akpo field in Nigeria.
"It's true that Indian enterprises have failed to beat their Chinese counterparts in grabbing energy equity, but the Chinese too had to pay a heavy price for the competition," points out Zheng Ruixiang, Senior Fellow, China institute of International Studies, Beijing. Agrees Subir Raha, former chairman and managing director, ONGC: " We soon realised that unbridled rivalry was a disadvantage to both, regardless of who eventually won the bid because ultimately it was the seller who won."
And wisdom soon prevailed on both ends. So when ONGC and CNOOC joined hands to bid for Petro-Canada's stakes in the Al-Furat Petroleum Company in Syria, they won hands down because of their strong bargaining position. The cooperation between the two national oil companies covers the entire oil value chain, from upstream exploration and production to downstream activities such as refining and petrochemicals, marketing of petro products, transmission and city distribution of gas, laying of national and transnational energy pipelines.
But all these would require the Indian security establishment to be less paranoid about the involvement of Chinese expertise in domestic energy locations.
Another important area for India-China cooperation relates to the developmental objectives of the WTO and other international bodies such as IMF and UN. "China and India can offset each one's weaknesses with the other's strong points," says Jinzhen of CCPIT.
Whenever the two speak with one voice, the world sits up and takes notice. This was in display during the multilateral trade talks in Doha 2001 where a paper submitted by India and co-sponsored by China ensured that the developed world's efforts to link investment with trade was taken out of the Doha Development Round. That's the power of India-China cooperation. And it's just being unleashed. Sit back and enjoy the roller coaster ride.
With inputs from Tang Lu in Shaanxi.
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