Why China and India Need Each Other

To speed their economic development, both countries must overcome their mutual suspicion, write columnists Anil K. Gupta and Haiyan Wang

By Anil Gupta and Haiyan Wang

Recent rumblings that the Indian government is making it difficult for Chinese companies to export telecom equipment to Indian operators (or may even issue an outright ban on security grounds) is just the latest development in a two-step-forward, one-step-back dance that China and India are trying to master, albeit awkwardly.

From a tiny base of $2.9 billion in 2000, bilateral trade between China and India has grown explosively over the past 10 years. It reached $52 billion in 2008, retreated somewhat in 2009 due to the global financial crisis, and will likely cross $60 billion in 2010. To put these numbers into perspective, China's bilateral trade with the entire Latin American region and the entire continent of Africa is about $110 billion in each case. Over the past decade, China-India trade has grown at a 40 percent annual rate, twice the pace of growth in either country's trade with the rest of the world. China is now India's largest trading partner. In turn, India is now China's 10th-largest trading partner.

Consider also some of the recent developments. Chinese companies are now the largest suppliers of equipment to India's power producers. In March 2010, a Chinese company shipped custom-built subway trains for use by Mumbai Metro. The same month, Kamal Nath, India's Minister of Road Transport and Highways, noted publicly that he would like to invite Chinese companies to play a role in developing India's high-speed rail networks, a statement that received a very positive response from Chinese officials.

India's exports to China consist largely of raw materials. After Australia and Brazil, India is the world's third-largest exporter of iron ore to China. Aside from trade, economic links between the two countries are growing along other dimensions, too. With its acquisition of Jaguar and Land Rover from Ford (F), Tata Motors (TTM) now derives nearly $1 billion in revenue from the China market. Another Tata company, Tata Consultancy Services (TCS:IN), has become the leading provider of core banking software to China's banking sector.

In turn, such Chinese companies as Lenovo (992:HK), Haier (1169:HK), and Alibaba (1688:HK) have a growing presence within India, and Shanghai Automotive (600104:CH) recently acquired a 50 percent stake in General Motors' Indian operations. Huawei Technologies, China's leading technology company, runs a 2,000-person software research-and-development center in Bangalore—its largest outside China—and has announced plans to expand it to 5,000 people over the next three to five years.

Aside from growing trade, investment, and technology links between companies, the Chinese and Indian governments have also begun to harmonize and coordinate their policies in a number of areas, such as global warming, global trade talks, and decision-making power in such multilateral institutions as the IMF and the World Bank.

Sources of Distrust

Notwithstanding these positive developments, two major issues continue to cause friction—India's trade deficit with China and the lingering distrust rooted in unsettled border disputes, coupled with China's enduring friendship with Pakistan. Even though political leaders on both sides have been explicit in charting a pragmatic course, the trust deficit occasionally rears its head, with negative side-effects on the economic front.

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