What China and India Could Do Together

China and India have a shared history, now largely forgotten, of exchange and mutual learning that came to an end when Turkic and Afghan invaders arrived from the northwest around a thousand years ago.

In the 20th century, the two countries have been deeply mistrustful of each other, and the bitter border war in 1962 still scars Indians’ memories.

The bilateral economic relationship warmed after the Cold War ended, when both governments began to see the potential mutual benefits of growing economic interdependence.

These warming ties are also efforts to offset mutual suspicions of each other’s strategic intents. China resists India’s permanent membership in the UN Security Council and in regional forums, such as the East Asia Summit and trans-Pacific and Europe-Asia forums, that might elevate India to peer or rival status in the region.

China’s nuclear capabilities and its patronage of Pakistan have been a source of major anxiety for India. They were the catalyst for the latter’s decision to embark on its own costly nuclear weapons program in the 1990s — and to seek closer cooperation with Japan and the United States.

The United States and China have clashed repeatedly over China’s assistance to Pakistan’s strategic programs, which some see as the central obstacle to better relations between China and India.

Within this strategic context, economic cooperation is gaining momentum — a joint working group already oversees the bureaucratic planning and implementation of closer cooperation.

India’s IT successes have impressed the Chinese. India’s increasingly liberal economic policies and liberal politics provide a potential counterexample to China’s liberal economic policies and autocratic politics.

Other governments expect that China-India relations will be a significant factor in the Asian region — and that cooperation and competition, but not confrontation, will characterize the bilateral relationship.

One of the most interesting future economic possibilities is a bilateral free trade agreement — indeed, the two countries have been studying the possibility since 2005.

Two-way trade has been growing since then at annual rates of about 46%, reaching $25 billion in 2007 and $38 billion in 2008. If growth continues at that rate, total trade between the two countries could reach $200 billion by 2015, roughly the size of China and Japan’s total trade in 2005.

The problem is that the balance of this trade is strongly in China’s favor.

Economic ties are also deepening through the activities of the two countries’ international firms, which are seeking out investment and other opportunities in each country. Indian software companies such as Wipro, TCS and Infosys are investing in China to serve their global clients there.

Others are marketing software solutions to increase the efficiency of Chinese manufacturers and to take advantage of Chinese skills in chip design. Still others are using China as an offshore design center for business in Japan.

Meanwhile, Chinese multinationals such as Huawei Technologies are investing in India. In 2007 India’s Reliance Communications outsourced to Huawei the expansion of its huge, next-generation mobile phone network deep into rural India.

U.S.-based multinationals such as IBM and GE are also locating business units in both countries, where they are developing the complementary talents of Chinese and Indian workers and knitting them closely together.

Looking to the future, a comprehensive free trade agreement between China and India — one that has a robust period in which to phase in the reduction of barriers and few sectoral exceptions — would set the important example that an Asian free trade agreement can have economic, not just foreign policy, benefits.

A full-fledged China-India free trade agreement is possible by 2030. The strategic potential of such an agreement would reach far beyond its obvious bilateral benefits if it allowed other countries in the neighborhood to join. This would solve a conundrum that faces the Asian region.

Editor’s Note: This feature is adapted from “Gravity Shift: How Asia’s New Economic Powerhouses Will Shape the Twenty-first Century” by Wendy Dobson. Published by University of Toronto Press. Reprinted with permission of the author.