Speech by Dr Rollie Lal, Political Scientist, RAND

Today what we are seeing in Asia is a remarkable shift in relations between India and China. Both countries are moving closer together, and this change is affecting the strategic realities in Asia. Indian Prime Minister Vajpayee's visit to Beijing earlier this year produced agreements that will help settle the long-standing border dispute, increase trade, and decrease mutual distrust. It's also important to note that their growing economies are drawing the two countries closer. But, while it appears that the probability of military conflict is increasingly low, economic competition and tensions from China-Pakistan relations could still be the source of possible friction in the relationship.

Implications of China's Economic Power

China's economic growth and liberalization program has affected India in significant ways. China set a positive example for India in the 1980s by liberalizing its economic system and transforming China into an economic success story. But India implemented the lessons from China's modernizations a decade later, after an economic crisis forced India to reform its bureaucratic and socialized economic system. Another effect is that China's economic growth and wealth has decreased the incentives for it to engage in conflicts with its neighbours, and increased the initiatives to make peace with India. And across the border, India's liberalization and economic growth has led its leaders to come to the same conclusion.
 
One thing to keep in mind is that china and India are now following very similar programs that are meant to generate economic growth and strengthen their militaries. Both countries are also facing the same threats of growing income disparity, ethnic unrest, and separatism and both China and India are focused on integrating their economies with the rest of the world. Minor territorial disputes don't further this agenda for either country. For China, high tensions with Taiwan are also providing a good reason to resolve the old disagreements with India. On top of that, China has concerns with internal security. The separatist movements in Xinjiang and Tibet are absorbing a lot of its attention, and rising unrest from unemployment and huge income inequalities between regions are making these problems worse. Improving relations with its neighboring countries allows China to focus on these growing internal problems.

A difference is that Indian policy makers are much more confident than the Chinese regarding their ability to deal with domestic ethnic and economic problems. In fact they overwhelmingly state in interviews that the existence of the Indian state does not depend upon keeping Kashmir, whereas in the view of most Chinese policy makers, a separation from Taiwan could mean the end of China as we know it.

Instead, what we are seeing is that India is trying to focus on economic growth to match China's success. Indian growth rates have averaged 6% in the past decade, but growth needs to be even faster to eradicate poverty and raise living standards. Conflict and tensions with neighboring China and Pakistan have posed a serious economic hurdle for India in the past, deterring foreign investment and draining the budget. Moves by India to foster ties with Pakistan work well with the recent initiatives in China, and could eventually lead to a significant demilitarization of India's northern borders.

A breakthrough in relations with China is also likely to mean a rapid growth in trade between the two countries in coming years. Whereas a decade ago, bilateral trade volume was just $300 million per years, it is now $5 billion, and growing. Trade is expected to reach $10 billion by 2005-2006. These changes mean a boost to the Indian economy, and greater interdependence between the two economies.

As a result both countries are now competing on economic terms. India wants China's high growth rates and competitiveness in the consumer goods sector. In past, Indians were worried that cheap Chinese goods were flooding the Indian market and threatening domestic manufacturing. But in the last few years, businesses are looking at China more as a model for attracting foreign investment. But it's important to remember the difference in FDI to the two countries. China brought in about $52.7 billion in FDI in 2002, while India brought only $5.5 billion. Indian businesses are realizing that they need to put in a lot of effort to match China's performance, including added attention to education, infrastructure, and less bureaucratic entry and exit procedures for businesses.

China, for its part, is hoping to copy India's success in information technology. Recent media reports in China are showing that businesses there are worried about India's competitiveness in microchip manufacturing. Chinese analysts argue that because India's salaries are lower, costs are cheaper, making Indian products more competitive Language is also a factor in China's concerns. Businesses in China fear that U.S. businesses will prefer Indian products because Indians are more comfortable with English. So, in a strange turn of events, the Chinese population is now asking if their market is likely to be flooded with cheap indian goods. It's clear that trade competition will be inevitable.

Security Relations

China and India fought a border war in 1962 that India lost. This war left both countries suspicious of each other for decades. Diplomatic relations were reinstated in 1976, but both sides have kept thousands of troops along their disputed borders for years. In 1998, India's nuclear tests were interpreted as aimed at China, also throwing relations off course. The situation was made worse by the Indian Defense Minister's statement claiming that China was India's main threat. But since then both countries have slowly come to the understanding that their national interests can be compatible. Leading officials and scholars in both countries say that the remaining border disputes are not worth a war. India's decision to formally accept Tibet as a part of China, and China's flexibility on the issue of Sikkim in recent discussions have also helped to improve relations.

The U.S. role in Asia is also no doubt a serious factor in China's strategy towards India. The idea of the U.S. using India to contain China has provided Chinese strategists with a real reason to warm relations with India. A closer relationship with India could preclude the U.S. from being able to co-opt India into a containment strategy, whereas tense relations between China and India would give both the U.S. and India an opportunity to work together in a containment strategy. 

We can see the clear shift in security relations in their new military cooperation. The first bilateral military exercises just took place between China and India in November 2003. Both countries took part in a joint naval search and rescue exercise off the coast of Shanghai, which was a very important move in their relationship, although it is limited in its military significance. Working together in the military arena will decrease the possibility of miscommunication and misunderstanding making conflict less and less probable. The joint exercises also serve as confidence building measures between the two country's militaries. However, the exercises do not mark the beginning of a security alliance by any means. China and India will take time in deepening their security ties and trust will need to be built through expanding economic ties, political agreements, and further military cooperation to create a mature and stable relationship

China and Pakistan

China's relationship with Pakistan has also been shifting in recent years. During the Cold War and the 1990s, China had a close relationship with Pakistan, to India's disadvantage, China's military assistance over the years, including the possible transfer of nuclear and missile technology, to Pakistan has been a serious irritant in Sino-Indian relations.

However, China is now emphasizing its intent to pursue a balanced foreign policy towards India and Pakistan. This shift is likely a result of India's growing importance as an economic and military power in Asia. However, other issues are increasingly affecting China's relations with Pakistan. Pakistan's transfer of nuclear technology to North Korea has placed China in a difficult position with the international community and North Korea. China has been placed in a position where it needs to defuse the situation in Northeast Asia created by North Korea's nuclearization. In addition, whereas Pakistan's support for fundamentalist groups was not a priority to China before, reports now show that the numbers of Uighur separatists trained by Pakistan has created problems for China in Xinjiang. As a result, the issue has become a liability for Pakistan in the bilateral relationship. Nonetheless, the strong historical relationship between the two countries is unlikely to disappear. Military cooperation continues, and China may want to maintain close ties with Pakistan as a hedge against being surrounded by a hostile U.S., Japan, and India in the future. But in the end, cooperation with Pakistan will increasingly be tempered by the current trend of warming ties with India.

Implications for U.S. Interests in South Asia

Closer relations between China and India have far reaching implications for U.S. foreign policy. For India, while having close relations with the U.S. will remain their number one priority, keeping good ties with China will probably be increasingly important to ensure future security. Closer relations between these two countries also means the U.S. will need to understand that there is a possibility that China, India, and Japan could work together in the future, and it may not be possible to successfully play off India against China. At the same time, a more secure India will mean a more stable partner for the U.S. in South Asia, a less dangerous Asian dynamic, and a more attractive destination for U.S. investment in the future.