SAARC’s demand for China’s ‘Observer’ status reveals China’s increasing clout in the region, as well as the growing economic and political relations intended to dilute India’s dominance in South Asia.
China has been improving its trade and investment relations with South Asian countries through treaties and bilateral cooperation. China and Pakistan signed a Free Trade Agreement (FTA) in 2006, as well as numerous other agreements and Memorandums of Understanding (MOUs), including Bilateral Investment Treaties (BIT) to increase mutual trade and investment. Pakistan provides China with cheap raw materials and the use of Pakistani ports in return for access to Chinese markets through preferential treatment under the FTA. Pakistan could very well become a hub in the region, which may lead to considerable future transit revenues and help Beijing build the ‘trade and energy corridor’ through Pakistan.
Although China does not have an FTA with Bangladesh, the two countries granted each other Most Favoured Nation (MFN) treatment in 1984. China provides duty-free access to a list of Bangladeshi products under the Asia-Pacific Trade Agreement, and Bangladesh has offered oil exploration rights to China at Barakpuria. China has also gained naval access to the Bangladeshi Chittagong port, which will bring China closer to Myanmar oil fields and the seas around India.
China has also been increasing its ties with Sri Lanka. China’s motives include oil, ports and Indian Ocean access. China and Sri Lanka signed a Joint Communiqué in 2005 to further bilateral relations and provide each other MFN treatment. China has offered Sri Lanka funds in the form of Aid and Preferential Credit for various developmental purposes. In turn, Colombo has allocated a block in the Mannar basin for Chinese oil exploration. On the southern coast of Hambantota, China has begun developing port and bunker facilities, as well as an oil tank farm.
The downside of this is that China’s increasing presence in the Indian Ocean could threaten Indo-Lankan relations, especially if there is any military cooperation between the two. The case is similar with Nepal, where China is investing in infrastructure at the China-Nepal border.
China has exercised caution in developing these friendly ties with the coastal countries of South Asia. China’s increasing need of energy sources and access the international markets makes the Indian Ocean and its ports very attractive. The increasingly strong relationship between China and these countries is not surprising given this allure, as well as the ongoing rivalry between India and China.
India was once seen as the guardian who would lead South Asia towards growth and development. But SAARC members today are feeling India’s hegemony more than its role as mentor. Pakistan and Bangladesh in particular have many unresolved issues with India that hamper multilateral trade and economic relations. Some of these are geographical, such as land border sharing or sharing of waters, and some are political. One major reason for the failure of SAARC has been the India-Pakistan impasse.
Economic issues, such as barriers to trade and internal protectionism between India and its neighbours, have also been a problem. Countries like Bangladesh and Sri Lanka have accused India of creating barriers against their exports. Although India has an FTA with Sri Lanka, Sri Lanka has issues with India over easier entry, caps on imports and Rules of Origin. Bangladesh accuses India of non-tariff barriers to trade and protectionist anti-dumping measures against its exports. The clearance points of trade between the two countries are constantly clogged up due to inadequate infrastructure. Bangladesh also complains against restrictions on trade due to allotting different goods to specific ports for Customs clearance, as well as discrimination against Bangladesh at Petrapole.
Improving relations with Bangladesh is very important for India’s political relationship with other South Asian countries, but improving India-Pakistan relations tops the list for better economic relations and stability in the region. Currently, trade between the two countries is minimal and usually routed through Singapore or Dubai (or more recently through Sri Lanka, since they share a FTA). Although India granted MFN status to Pakistan long ago, Pakistan has not reciprocated. Transit and trade permits are other critical issues that need to be resolved, though perhaps the APIBM (Afghanistan-Pakistan-India-Bangladesh-Myanmar) corridor could provide a solution.
The most important need for SAARC is true multilateralism and cooperation, which will help catapult the region to higher growth and development. The smaller nations (Sri Lanka, Nepal and Bhutan) need India’s assistance with development and solving internal problems, but if India does not proactively assume leadership in this area, and continues to protect its industries and businessmen from international trade, this opportunity will slip away and spur Chinese interference in the region. Since India borders all of these countries, it is an important security measure that these issues be resolved.
Traditionally, India has been the major trading partner with its neighbours, but China’s trade with South Asian countries has been growing rapidly. Exports from China have increased significantly over the last two decades, surpassing Indian exports to the region since 2000, except for 2003, although exports from China and India grew at about the same rate between 1992 and 2000. India’s exports to other South Asian countries showed a higher growth rate from 2000 to 2003, but Chinese exports have increased year on year faster than Indian’s since 2004, resulting in more Chinese exports for the last three years. This gap is increasing in China’s favour.
Imports from South Asia into China surpassed those flowing into India in 2000, although imports into India grew faster than China between 2000 to 2006. In recent years, imports from South Asia into India have been greater than into China. But China has been capturing neighbourhood markets once dominated by India, particularly in industries such as textiles, machinery and the chemical industry.
China is also increasing its investments in South Asia and has been providing increasing amounts of developmental assistance, grants and aid. China’s is interested in Pakistan’s trade and energy corridor, from the Gwadar (in Balochistan) port of Pakistan to the Western regions of China, which would connect China with oil routes in Western Pakistan. Pakistan’s Karakoram highway provides the shortest possible route from Gwadar to the western regions of China. This route is short, secure and can serve as an alternative to the sea route through the pirate prone Straits of Malacca, where China currently transports most of its crude oil imports. The Chashma Nuclear Power Plant has been another large Chinese investment in Pakistan, and the private sectors in both countries have made important joint ventures, including the economic zone in Pakistan between the Haier (China) and Ruba (Pakistan) groups.
In Bangladesh, China has constructed six friendship bridges, as well as the Bangladesh-China Friendship Conference Centre located in Dhaka. One of the bridges, completed in January 2008, is very important because it connects the northern and southern parts of Bangladesh. Bangladesh received a roughly 60 million yuan grant and 100 million yuan interest free loan from China for this bridge. In Sri Lanka, China has invested heavily in the infrastructure sector, including the Norochcholai Power Station, planned to be completed by 2010. The Board of Investment of Sri Lanka (BOI) is actively promoting a Special Economic Zone for Chinese enterprises at Mirigama, near Colombo. In 2006, through Project Loans, China transferred US$150 million in the form of Buyer’s Credit Facility for the Puttalam Coal Power Project. China also gave US$306.7 million in 2007 as a project loan for the Hambantota port Development project, and another US$74.8 million for the supply of railway passenger carriages and diesel multiple units.
China’s increasing trade and investment relations with South Asian countries should be a point of irritation for India as, in a globalised world, economic relations play a major role in deciding political relations and multilateral collaborations. A healthy relationship between India and its neighbours remains crucial to India’s security, as well as the stable and peaceful development of the South Asian region.
Pravakar Sahoo is Associate Professor, Institute of Economic Growth, Delhi.
Nisha Taneja is Professor at Indian Council for International Economic Research, Delhi.