Monday, October 26, 2009

India's China policy should move beyond the traditional paradigm

Even as public opinion in India gets driven into a crescendo over Chinese incursions into Arunachal Pradesh and its aggressive comments at the Prime Minister's visit to the state, and India's loud protestations, a more immediately damaging event may be unfolding on the trade front in the form of ballooning Chinese trade surplus with India.

I feel that the border dispute, while being important, is more a red-herring, a mis-guided (because it sustains and amplifies China's aggressive and not-so-pleasant external image that will surely block its entry into the leadership platform of the "modern democratic" world) Chinese habit (whether it is deliberate and part of a larger plan or a legacy of history and China's internal politics is a matter of debate) of keeping the borders with all its neighbours unproductively active. It would be unfortunate and playing straight into Chinese hands, if we fritter away our scarce energies and resources to match the Chinese rhetoric and build up our military arsenal strength to match the Chinese, and in the process overlook more urgent and important issues.

The immediate and more important concern for the world with China is not its aggressive foreign policy posturing. The real problem is its obsession with keeping the renminbi under-valued, so as to keep its exports competitive, and its refusal to take pro-active steps to address the massive global macroeconomic imbalances that contributed to triggering off the sub-prime crisis and the resultant economic recession. Given the profile of Chinese trade, a policy to keep the Chinese currency under-valued adversely affects other developing countries, especially given the global recession and slump in global aggregate demand, by keeping out their exports to China, pricing out their exports elsewhere (to developed economy markets), and making their domestic markets a dumping ground for cheap Chinese exports.

The under-valued renminmbi is an effective import tariff cum export subsidy, and therefore a back-door attempt to subvert the spirit of the World Trade Organization and principles governing global trade. In plain language, shorn of all trade jargon, it is the "mother of all protectionist policies"!

In the context, taking a leaf out of the Chinese foreign policy book, with its efforts to keep India's foreign policy establishment busy with neighbourhood politics (Pakistan, Arunachal border issue, and even support for Maoist insurgencies), it may be prudent long term strategy to align with the US on issues like the currency manipulation and international macroeconomic imbalances to keep the Chinese on the economic backfoot. India (and its influential opinion makers across the world) should play a more subtle role in exposing China's duplicity in pretending to assist in the development of poorer countries of the world, like in Africa, even as it keeps its currency over-valued and thereby harming their domestic economy and long-term economic growth prospects.

India should play its role in making China's conscious beggar-thy-neighbour policy more salient in international foreign policy debates and thereby lock China's government into fending off this charge. The near universal adverse impact of China's currency policy and suppressed domestic demand would make this a powerful and damaging challenge for the Chinese government. And in the process, it would also highlight attention on one of the most important global economic challenges - restructuring global macroeconomic imbalances - in the coming years.

Lord Palmerston famously said, "nations have no permanent friends or allies, they only have permanent interests". Following this acknowledged lesson in realpolitik, India should seek to go beyond the traditional paradigms of Hindi-Chini bhai bhai and evolve a more multi-dimensional approach in its China policy. While acknowledging the shared interests as developing countries and the persisting border dispute, we should seek to build issue-specific positions (that may conflict or agree with the respective Chinese positions) on issues that impinge on our national interests.

On a substantive note, I am not so much concerned with the arguement about cheap Chinese exports destroying our industry as with China's policy to keep the renminbi artificially undervalued and thereby effectively pursue a beggar-thy-neighbour policy.

The contribution of the artificially weak renminbi towards subsidizing Chinese exports and taxing Indian imports should be of concern to India, not only in our bilateral trade but also in the larger competition in global trade.

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