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India self-isolates as China’s economic might enfeebles West

Nikkei Asia - 7 January 2020

India self-isolates as China’s economic might enfeebles West
Opinion by Rupa Subramanya

On Dec. 31, the European Union and China agreed to an investment treaty that will improve access to each other’s markets.

The Comprehensive Agreement on Investment, clinched after seven years of arduous negotiation, could potentially boost trade and investment between the EU and China by billions of dollars. The deal, which still needs to be ratified by the European Parliament, has already faced criticism within the EU over long-standing human rights concerns in China and from officials in the incoming U.S. administration of President-elect Joe Biden pushing for a united front on China.

This is a far cry from what many Western leaders were saying after the outbreak of the COVID-19 pandemic. At that time, it appeared that Western nations might forge common cause and stare down China, both for being less than forthcoming about the spread of the virus which originated in the Chinese city of Wuhan and unresolved tensions over the widely held belief in Western capitals that China is an unfair trader.

So what changed? For the EU, commercial advantage clearly won out over its much-vaunted commitment to human rights and fair trade. Especially after the U.S. secured its phase one deal with China, reality sunk in, and Brussels and Berlin realized that the European trading bloc might increasingly be frozen out of global supply chains which, despite everything, are still largely China-based.

Indeed, one of the few major world capitals in which the reality of China’s continued centrality to the global economy has apparently not sunk in is New Delhi. Not only has India failed to agree on its own trade and investment deal with the EU, which has been languishing since 2007, the country, which has been pumped up as the counterweight to China in Asia by many Western leaders, has failed to capture any significant share of China-based global supply chains. The EU is one of the largest foreign investors in India, and a successful bilateral investment treaty would have helped to cement investment flows in both directions. But, India, a notoriously recalcitrant negotiator, simply does not have the economic heft of a China to negotiate terms with the EU as an equal.

India has not helped its own cause by pursuing an increasingly inward-looking development strategy, which includes a return to an import substitution strategy that was supposedly jettisoned with the economic reforms of 1991, the year India opened its economy to the world. Prime Minister Narendra Modi’s Atmanirbhar Bharat, or self-reliance strategy, has had the effect of threatening to de-globalize India, at a time when he had a window of opportunity to increase India’s importance to the global economy.

India, like China, did not participate in the U.S.-led Trans-Pacific Partnership, or TPP, and nor has either country participated in its successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which came into being after President Donald Trump withdrew the U.S. from the TPP. But China has since joined another mega-regional trade deal, the Regional Comprehensive Economic Partnership, or RCEP. India, meanwhile, has opted out of RCEP as well, leaving it one of the most isolated major economies in the world.

As many Western leaders rhetorically endorse India’s importance as a democratic and pro-Western rival to China, the reality of their economic policies suggests that no amount of rhetoric can wish away China’s continued domination as the world’s factory. Ironically, Indian leaders seem to have bought into this rhetoric more than anyone else, with a continued belief that the setting up of manufacturing facilities by a handful of major electronics and IT companies, such as Apple and Samsung Electronics, will somehow dent China’s continued preeminence in these areas. What is more, much recent inward investment into India has been concentrated in the IT sector, which produces very few jobs, and has no hope of employing hundreds of millions of young Indians in need of work.

Although Western governments may sincerely believe that it is necessary to hem China in, such a strategy can only succeed with a united front. But this runs up against a collective action problem: every country has an incentive to maintain strong economic ties with China and allow everyone else to take punitive action. Obviously, if every country behaves this way, a united front against China can never succeed.

This is exactly the lesson of the EU-China investment agreement, which occurred over the objections of the incoming Biden administration in the U.S. Meanwhile, after a plunge following the outbreak of the pandemic, new foreign investment in China has taken off like gangbusters. Investment was projected to hit a record by the end of 2020, and is expected to continue increasing this year, especially as China is the only major economy in the world that is expected to grow rather than to contract.

China’s resilience continues to confound its critics. With much of the rest of the world reeling under harsh lockdowns, life in China appears to have returned almost to normal, with its economy having roared back. This will not be lost on Western governments trying to calibrate their dealings with China going forward.

 source: Nikkei Asia