China and India: Two Emerging Powers

In July 2015 the European Parliament has issued an analytic paper about India and China, which is especially focused on their relationship and on the strategic consequences of their growth for the EU.

The relationship between India and China is multifaceted and how it unfolds in the next few decades will be one of the defining features of the 21st century. As two large developing countries – together they account for 36% of the global population – China and India are aware of each other's role in the process of promoting the establishment of a new international political and economic order. Their current leaders, the Chinese President Xi Jinping and the Indian Prime Minister Narendra Modi, have both made an increased global role for their respective countries and a more assertive foreign policy defining points of their tenure. China and India have an ambiguous relationship, where growing cooperation goes hand in hand with mounting rivalries and historical problems. Border disputes between the two powers erupted in a brief war in 1962 which caused thousands of casualties. Such border disputes – as of today unresolved – are still casting a shadow on their relationship.

However, cooperation has been increasing, especially in the fields of security and defense, infrastructure connectivity, cross-border water management and international financial institutions. In terms of security and defense, both countries agreed to improve border co-operation with annual visits and exchanges between military headquarters. Both countries are members of the Asia Regional Forum (ARF) and of the East Asia Summit (EAS). Prime Minister Modi has highlighted his country’s desire for regional leadership in the EAS. To a certain extent, the two countries coordinate their policies in international fora. President Xi Jinping’s concept of Asian security, which claims that Asian countries should decide Asian affairs first, reinforces the importance of all Asian regional security dialogue. Notable strategic differences nevertheless remain and are even deepening: Indian ongoing outreach to the US, Australia, Japan and even Indonesia are calculated moves to counterbalance China’s assertiveness in Asia, while Pakistan, India’s traditional bête noire, seems increasingly close to China.

As far as international economic management is concerned, both countries have been vocal in calling for reform of international institutions. In particular they want to focus on financial institutions to give more weight to emerging economies. Tired of waiting for reforms, China has embarked on the creation of its own institutions, with India’s active participation and support even if India at times seems displeased with China’s prominence in the grouping. Such institutions include the New Development Bank (founded in 2015) and especially active in the BRICS countries (Brazil, Russia, India, China, South Africa) – which is interestingly located in China but has an Indian president – and the very relevant Asian Infrastructure Investment Bank (AIIB) whose headquarters are in Beijing and have been operational since 16 January 2016. On 17 January 2016, India, which is the second share holder of the AIIB after China, was elected to the 12- member board of directors. The AIIB is expected to loan India USD 500 million in solar power projects. It is important to note that also 14 EU Member States joined the AIIB, including the largest EU countries[1].

In terms of economic relations, the relationship between India and China is quite imbalanced. Both countries have in common their intention to develop prosperity based on international trade. China is India's largest trading partner with two-way trade totalling about USD 65.5 billion in 2013. However, their trade relations are characterised by India's soaring trade deficit vis-à-vis China. Indian consumers have indeed been consuming an increasing amount of Chinese products, but Indian exports to China have not grown in the same way. Additionally, Chinese foreign direct investments to India also remain at a low level. According to Indian government statistics, the country has received a total of around USD 400 million from China in investment in the last 14 years. Another source of concern for India is the quality of their trade. New Delhi, indeed, exports mainly commodities to China, while Beijing deliveries to India are chiefly semi-finished or finished products. The two largest categories of products exported by India to China are cotton and copper, which together account for 35% of total Indian exports, while the two largest categories of products exported by China to India are electrical machinery and equipments, and nuclear reactors, boilers, and machinery, which together account for 45% of total Chinese exports to India.

In short, despite growing cooperation and economic, political and military ties, there remain challenges for India and China to overcome before embarking on a mature relationship. For the European Union, it is important to monitor the relationship between these two Asian giants because they will represent hugely relevant economic and political actors in the coming decades.

According to the EU Parliament, the following actions should be taken:

the EU’s relations with China are dynamic as could be evidenced during the 18th bilateral summit between the EU and China, on 12 and 13 July 2016. Relations with India have remained more timid. The 13th summit between the EU and India held on 30 March 2016 after a four-year break created momentum towards revitalising the EU’s relations with India. The country is a fully-fledged parliamentary democracy and shares common values with the EU;

 • also the European Parliament’s cooperation with the Indian parliament, Lok Sabha, could be reinforced through deepening dialogue between members of both houses and through staff exchanges;

• the EU could monitor China’s political influence on India;

• in the context of strategic partnerships, the EU could encourage dialogue between China and India and envisage the establishment of triangular discussions between the EU, China and India;

• the EU could devise a specific policy towards the NDB and the AIIB. The EU and its Member States could discuss the possibility of joining the AIIB and the NDB, which is to admit new members from July 2017 onwards. Previous cases exist where the European Commission and the European Investment Bank have participated in multilateral facilities such as the EBRD;

• the G20 Summit scheduled to take place in Hangzhou in September 2016 provides an opportunity for the EU to recall that it considers it a shared interest to jointly tackle the substantial negative impacts of global excess capacity in certain sectors, in particular on the global economy and workers;

 • the EU is committed to effective multilateralism with the United Nations at its core. It could seek convergences with China and India on this matter as the two countries are also committed to multilateralism and support a larger role for BRICS at global level.

[1] The US and Japan have decided against applying for membership.

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