China and India are growing at rates that Western industrialized countries can only dream of. Experts see these two Asian heavyweights as important drivers for the future of the global economy. A free trade agreement now in the planning stage could further increase their influence in the global marketplace. Roland Howanietz of the Department of East Asian Studies at Ruhr-Universität in Bochum spoke with GED about the opportunities and significance of an India-China economic axis.

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Interview with Roland Howanietz of the Department of East Asian Studies at Ruhr-Universität Bochum

GED: Mr. Howanietz, many people see China and India as important drivers of global economic growth during the current economic and financial crisis. Just how important are they?

Roland Howanietz: Together, India and China have 36 percent of the world population and generate 20 percent of the gross world product. The critical question that this raises is whether the bilateral economic relations between China and India have the potential, thanks to their close strategic economic cooperation, to become the global economic axis of the future.

GED: For a long time, these two countries played a fairly minor role in the global economy.

Howanietz: The People’s Republic of China and the Republic of India went through a similar process of economic development during the 20th century. In the 1940s, both countries completely dissociated themselves from the global market to pursue a policy of internally oriented industrialization. To achieve this, both countries introduced centrally administered economic systems. China had a pure planned economy in the Soviet style, while India went for a socialist planned economy with market characteristics. Numerous economic problems led both countries to eventually give up this form of self-reliance. For China, the shift came in 1978 with Deng Xiaoping’s policy of reform and opening up. For India, the year was 1991 under Prime Minister Rao. Opening up for foreign trade and implementing economic reforms enabled both countries to achieve annual GDP growth rates that exceeded the international average. China’s average growth rate was 10 percent from 1979 to 2011. India averaged 6.8 percent from 1992 to 2011.

Bilateral economic relations between China and India were long overshadowed by their political relations. They have been fighting over the exact position of their 4,000 km common border since the 1950s. This dispute reached its climax in a 1962 war that has not been resolved to this day.

GED: How did China and India begin their rise to global economic prominence?

Howanietz: The year 2000 was a turning point for India-China relations. Until that time, attempts at a political rapprochement faltered because of past conflicts, but now leading politicians from both countries actively sought reconciliation. They signed various declarations and agreements about building and strengthening a bilateral strategic and cooperative partnership, culminating with “A Shared Vision for the 21st Century of the Republic of India and the People’s Republic of China.”

GED: How have these attempts to establish a partnership revealed themselves in their trade relations?

Howanietz: From 2000 to 2011, China’s exports to India grew 36-fold, from $1.48 billion to $54.35 billion. That equates to 3.6 percent1 of China’s exports (0.5 percent in 2000) and 28.8 percent of India’s imports (5.7 percent in 2000). Compare that to China’s exports to the reference group comprising the five industrialized countries of Japan, South Korea, the U.S., Germany and Australia, which only grew 4.2-fold during the same period, from $197.66 billion to $842.45 billion. This group of countries declined in significance as a market for Chinese exports during that same period. In 2000, 72.1 percent of all Chinese exports went to Japan, South Korea, the U.S., Germany and Australia, but in 2011 the number had fallen to just 56.3 percent. In 2000, India exported $1.35 billion in goods to China (4.1 percent of all Indian exports). In 2011, it was $23.37 billion in goods (14 percent of all Indian exports). Indian exports to the reference group grew 3.6-fold from $17.59 billion to $65.08 billion. These countries also declined in significance for India during that period. In 2000, 53.6 percent of all Indian exports went to Japan, South Korea, the U.S., Germany and Australia, but in 2011 the number had fallen to just 39 percent.

As a result, India has a trade deficit with China. In 2000, India’s trade deficit with China stood at $130 million. By 2011, the amount had grown to $30.98 billion. Trade patterns are the primary reason for this. India’s main exports to China are raw materials such as iron ore and iron sand. Chinese demand for these raw materials has fallen as a result of overcapacity in its iron and steel industry and slightly weaker economic growth since the global financial and economic crisis. Meanwhile, India has been importing industrial goods, especially machinery and electronics from China. Demand for these goods has been rising continuously on the India market, and Indian companies either cannot produce them at all or cannot produce them at competitive prices.

In a nutshell, you could say that trade relations between India and China have grown significantly during the period in question – faster than either country’s trade relations with countries in the reference group. Yet the total volume of trade between China and these industrialized countries or India and these industrialized countries is still greater. You could say the trade patterns between the two countries are complementary, although China does enjoy a growing trade surplus.

GED: To what extent are better trade relations between China and India reflected in migration?

Howanietz: There is a clear difference between Indian and Chinese emigration to the reference group versus Indian and Chinese trade with those countries. Migration between India and China is so low that there are no official statistics for it. Unofficial estimates say no more than 200,000 Indian citizens are of Chinese origin.

In contrast, the reference group is very important for emigrants from both countries. In 2000, 48.7 percent of Indian emigrants and 73.6 percent of Chinese emigrants went to Japan, South Korea, the U.S., Germany or Australia. In 2010, the numbers were virtually unchanged at 44.8 percent and 73.6 percent respectively. These figures are no surprise. The economies of India and China are at the same stage of development. But migration usually takes place from the south to the north, from the developing world and newly industrialized countries to industrialized countries with better job opportunities and a higher standard of living.

GED: What is the state of debt relations between China and India?

Howanietz: Debt relations, measured by the debt a country owes to foreign banks, are similar to the picture we saw for migration. In 2000, India owed banks in the reference group $15.9 billion (46.6 percent of its foreign debt). In 2011, it owed them $113.47 billion (50.4 percent of its foreign debt). China’s foreign debt with banks in Japan, South Korea, the U.S., Germany and Australia stood at $20.26 billion in 2000 (51.6 percent of its foreign debt). In 2011, that figure had risen to $168.46 billion (42.1 percent of its foreign debt). Unfortunately, no data is available for how much other countries owe Chinese and Indian banks. In China, this is due to strict controls on capital movement. Although China is one of the world’s biggest lenders next to Japan and Germany – the People’s Bank of China, the country’s central bank, holds U.S. government bonds worth around $1.2 trillion – the foreign activities of Chinese banks are limited to just a few selected, government-approved projects. Strict regulation, government management and control also impede the foreign activities of Indian banks. Internally oriented government banks have a market share of nearly 70 percent. Government banks and private banks both have to meet lending targets for high-risk domestic priority sectors. For both countries, the lack of available data can be explained by the fact that the government has a significant limiting influence on foreign lending.

GED: How likely is it that an axis of global importance will emerge between these two countries?

Howanietz: According to the data that is available, economic relations between India and China are currently focused entirely on their developing goods trade. These trade relations will continue to be strengthened in the future, especially if India signs the free trade agreement that China has proposed. Indians are divided over this agreement, with one side concerned that it will cause India’s trade deficit to expand and the other side hopeful that the agreement could lead China to open up to India’s very strong, highly developed service sector.

Taking into account all three indicators, however, it can be said that India and China both have closer economic ties to the reference group that to each other. In view of that fact, it is too soon to be talking about a global economic axis of the future. As the title of their agreement for a shared vision suggests, this economic axis will need time to crystallize over the course of the 21st century.

Interview by Jörg Frommann. Translated from German by Douglas Fox.