Hats off to merchants of China and India: Is economics trumping politics?

Over the last couple of years, there has been a sense of growing political tension between China and India. Whether it is China's claim on parts of India's north eastern state of Arunachal Pradesh, or the recent media reports on incursions by Chinese troops across the line of control, these and similar events have only contributed to sense of unease. Although, official sources on both sides have denied any political or military tension. Yet, strategic and military thinkers across the world have been assessing the geo-political implications of economic growth in India and China, and their impact on the region.

However, just as political tensions between China and the United States have not had much impact on the balooning trade between two of the largest economies in the world, so too China - India economic ties has grown rapidly despite the political tensions. The question therefore is whether the growing trade relations will help smoothen the political feathers, or whether the political tensions will eventually begin to adversely affect economic ties.

Healthy political ties are considered positive for bilateral economic engagement. Bilateral trade, investment and commercial transactions are expected to enhance along with improvement in mutual political ties. India and China, however, appear to be interesting exceptions to this causality. In recent years, economic engagement between the two countries has grown at a robust pace despite persistence of political tensions...

The sporadic volatility noticed in political ties has been conspicuously absent in economic engagement between India and China. The rise in economic engagement has been rather spectacular. In 2003-04, India-China bilateral goods trade was worth $7 billion. Over the next five years, the trade experienced a five-fold increase to reach $37.9 billion in 2007-08. During the same period, India-US trade and India-Japan trade increased from $16.5 billion and $4.4 billion respectively in 2003-04 to $41.7 billion and $10.2 billion respectively in 2007-08. The quantitative expansions in India-US and India-Japan trades amounted to slightly more than two-fold increases during the period. These were just about half the increase in India-China trade...

During 2004-05 to 2007-08, India’s exports to Japan and the US grew at annual average rates of 22.8% and 16.1%respectively. The corresponding growth in exports to China was 40.9%. On the other hand, India’s imports from Japan and the US during the same period grew by 24.4%and 44.4%respectively. But India’s imports from China recorded a far higher growth of 61.%...

The divergence in the nature of economic and political engagements between the two countries can be explained by highlighting some fundamental aspects that are usually ignored by conventional strategic analysis. Foremost among these are economic complementarities between the two countries. The heterogeneities in the two economies contain ample contrasts in terms of resources and capabilities. Given the varied range of final and intermediate products manufactured by the two countries and the niche specialisations of their workforces, numerous opportunities exist for efficient exchange of commodities. Manufacturers and exporters from both sides are simply responding to these opportunities...

View a graphical presentation of India's merchandise trade with China, Japan and US, here.

Amitendu Palit and Parama Sinha Palit look at the China India merchandise trade, in "Hats off to merchants", in the Financial Express (14 Sept 2009).