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Countering the looming shadow of China

Jonathan DT Ward / Hemal Shah | Updated on August 27, 2018 Published on August 26, 2018

While the Wuhan Summit in April may have led to a thaw in relations between India and China, Indian government and business should beware the Chinese olive branch. File Photo   -  Reuters

India and the US must build greater trade and business synergies to face China’s geopolitical challenge

As the US-China ‘trade war’ continues, India should find opportunities in this impending realignment in global trade. Now is the time to strengthen ties with the US and to beware of deeper economic engagement with China. Importantly, India is working to build its industrial base, strengthen manufacturing, and develop home-grown companies that can compete in global markets. America can be an important long-term partner in fulfilling these objectives.

However, economic outreach from China is often the tip of a geopolitical spear that is meant to influence a nation towards Chinese strategic interests.

In advance of the historic US-India ‘2+2’ foreign policy and defence strategy dialogue on September 6, Michael Pompeo, US Secretary of State, and Wilbur Ross, US Secretary of Commerce, unveiled several new initiatives as part of US President Trump’s Indo-Pacific vision. This includes easing exports of high technology products to India, a significant authorisation normally reserved for NATO allies. While this is powerful symbolism, what does it mean for India and the region’s business community?

China’s geopolitical rise is the result of the expansion of China’s economy. The continued expansion of Chinese power will be based on the success of Chinese global business. China’s Belt and Road Initiative (BRI) is a case in point. While the BRI may be designed by policy-makers in Beijing, its execution is in the hands of China’s companies, which have been instructed by the Communist Party to ‘go out’ to find new markets around the world. Chinese companies, supported by the Communist Party, are the engines of China’s growth beyond its borders.

Most importantly, China’s long-term strategy is based on the objective of becoming the world’s pre-eminent economic and military power, replacing the US. If the Communist Party succeeds in achieving its objectives, India stands much to lose, both in its region, and at home. Mobilising India’s business community to reify the Indo-Pacific vision — particularly with the upcoming 2+2 dialogue — opens up the potential to turn the tide around.

Let’s put this into perspective. India sits prominently at the centre of China’s geopolitical expansion. China’s global strategy unfolds across the ‘Belt and Road’ from the South China Sea to the Strait of Hormuz in the Indo-Pacific and across the Central Asian plains. Military encirclement of India is widely understood: from the Himalayas to the Indian Ocean, China’s military presence is growing on land and by sea.

While the Wuhan Summit in April may have led to a thaw in relations between India and China, Indian government and business should beware the Chinese olive branch. Here is why: Chinese policy towards most countries relies predictably on a strategy of economic engagement and military coercion. However, at a certain point, economic engagement becomes economic coercion.

Chinese checkers

Imagine what China can do when it can not only send troops to Daulat Beg Oldi and Doklam, but can threaten to cancel greenfield projects in Gujarat or to end newly negotiated partnerships between Indian and Chinese firms.

From ownership debt-traps in Sri Lanka, to curbing tourism to South Korea over a missile defence system, to grand-scale intellectual property theft from American firms, for the Chinese Communist Party, economics is a lever that serves its strategic interests. Pakistan may become the next data point if it relies on China’s help to address an imminent debt crisis, as it works to sustain the China-Pakistan Economic Corridor (CPEC).

India already stands to be impacted by not one, but three major economic initiatives coming from Beijing. The first is the BRI, which many in India recognise as both a geopolitical and an economic initiative.

The second is ‘Made in China 2025’, an economic strategy released by the State Council, which aims to make China the pre-eminent manufacturing power, through the mastery of 10 advanced industries, ranging from robotics and agricultural machinery to next-generation IT and ‘new energy vehicles’. This policy has raised alarm bells throughout Europe and America, as it could spell serious trouble for Western companies. This initiative will impact India as well.

The third is the ‘going out’ strategy of China’s major corporations. In varying degrees of alignment to the Chinese state, both state-owned enterprises and private firms like Tencent and Alibaba are poised to expand their presence throughout India’s region, and in India itself. Unlike other global firms, this does not mean business as usual.

Beijing will not back down from its claims to tens of thousands of square kilometres of territory on the China-India border, and military support for Pakistan is a geopolitical cornerstone. Sensing geo-economic tension, India boycotted China’s momentous Belt and Road Forum last year to protest infrastructure projects encroaching on Indian territory.

New Delhi flagged issues with the nature of China’s strategic, encircling projects, including the CPEC. Chinese business interests in India go beyond commercial interests — they are calculated and strategic. Chinese companies are expanding their footprint not only in India’s backyard — from Nepal and Pakistan in the north to Sri Lanka and Maldives in the south — but also in the Indian Ocean, passage to 40 per cent of the world’s oil supplies, home to 15 per cent of the world’s fishing, and 7,500 km of coastline.

However, India’s unwillingness to court the BRI has not yet translated into geo-economic balancing strategies.

In fact, a clutch of Chinese companies, Tencent and Fosun topping the list, have already managed to invest significantly in India’s life sciences, transport, real estate and retail industries, as part of the BRI.

According to the China Global Investment Tracker published by the American Enterprise Institute and the Heritage Foundation, Chinese companies invested close to $3 billion in India in 2017 — over a threefold increase from the $900 million invested in 2016 — closing the gap quickly with investments from democratic countries like Japan and the US.

With India as the global growth driver and a vital partner in the Trump administration’s Indo-Pacific strategy, the dynamic of Chinese business in India warrants attention.

Working with the Indian business community, the Indian government can focus on three important strategies and capitalise on the upcoming talks with the US.

First, India must identify and implement concrete initiatives to match its BRI rhetoric with action and stave off geo-economic risk from increasing Chinese investments.

Second, India must assume stronger commercial leadership in the region and formulate competitive policies to attract foreign investment from Asian democracies, including Japan, South Korea, Taiwan, and Australia.

Third, India should negotiate directly with the US to form a trade strategy based on the long-term interests of US-India relations. Both countries run uncomfortably large trade deficits with China — this can be reduced if both can find ways to buy less from China and more from each other. That would be a win-win for Indo-US business and the US-India strategic partnership.

Ward is Founder of Atlas Organisation, a consultancy focussed on the rise of India and China and the new geopolitics of the Indo-Pacific. Shah is director for emerging markets focussing on innovation policy at a business federation based in Washington DC.

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Published on August 26, 2018
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