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Modi’s China visit: Asia’s new strategic quadrangle

Modi is wise to pursue dogged economic and strategic diplomacy with the other two sides of the Asia quadrangle. Tokyo and Washington have their own goals with Beijing. But positive Indian relations with both will shape the context through which China views India’s emerging role in Asia writes Evan A. Feigenbaum for South Asia Monitor
May 13, 2015
 
By Evan A. Feigenbaum
 
Prime Minister Narendra Modi’s visit to China must be seen against the backdrop of an increasingly volatile Asia. The region’s geopolitics and economics are shifting rapidly, as security tensions intensify and countries, from China to Indonesia to India itself, struggle with structural adjustment and the need for growth-conducive reforms.
 
For two decades, Asia has defied the gloomy predictions of those who believed its future would simply resemble Europe’s conflict-ridden past. Like Europe before 1945, Asia is beset by territorial disputes, nationalisms, and a long history of war and conflict. Yet Asian countries have managed in the post–Cold War period to grow and prosper while keeping their disputes in check.
 
Today, however, the Indo-Pacific is increasingly turbulent. Whether that continues depends, in large part, on the dynamics that will shape relations among four states: China, India, Japan, and the United States.
 
In that context, Modi has already had a dynamic effect on India’s options by injecting new energy—and new questions—into New Delhi’s relations with the other three. 
 
China stands out because it encapsulates the central strategic dynamic that defines Asia today—the collision between economic integration and security fragmentation. Over half of Asia’s trade is now conducted within the region, powering a $21-trillion regional juggernaut. But these same countries that are trading, investing, and growing together are beset by security tensions and dysfunctional diplomatic relationships. Modi and Chinese president Xi Jinping find themselves in precisely this predicament. China is India’s number one trading partner, with further room to grow. But border tensions and New Delhi’s suspicion of Chinese activities in South Asia and the Indian Ocean crosscut and undermine that positive dynamic.
 
Modi should begin with economics—first, because his own instincts seem to point in that direction, but also because, unlike previous Indian prime ministers, he will be visiting a China whose growth model has sputtered, yet whose leaders recognize this fact and have embarked on significant domestic reforms.
 
These could permanently alter the structure of the Chinese economy, creating new opportunities for India. Just take overseas investment: China has some $4 trillion in foreign exchange reserves and billions more on the balance sheets of state and private corporations. Since much of this sits in low-yielding vehicles like US Treasuries, Beijing and numerous companies have begun to recycle those savings into higher-yielding direct investments overseas.
 
For China, investing in countries like India offers an opportunity to diversify risk from domestic markets. The principal question will be whether and how India successfully turns that Chinese interest to its own advantage.
 
Many in India, quite rightly, fret about China’s tendency to export its industrial overcapacity, and even Chinese labor, to infrastructure projects overseas. But there is no single model of Chinese investment, thus India has room to shape the terms of play.
 
Consider Chinese labor: it has been deployed to Africa but, by and large, not to Latin America. And infrastructure projects can be structured in various ways, including a creative mix of debt and equity, public-private partnerships, or the marrying of Chinese capital with private capital from global market participants that delivers return to Chinese investors while balancing shareholding within specific projects.
 
A changing Chinese market offers other opportunities: For all India’s trade tensions with the G7, Modi may find it to India’s advantage to align negotiating objectives with the US, EU, and others who aim to piggyback on reforms, now being debated in Beijing, that would introduce competition by breaking state-led oligopolies and opening new sectors.
 
That debate is happening because, as its economy slows, China needs new growth drivers to boost employment, to the tune of some 10-11 million new jobs annually. Bluntly put, that effort cannot succeed without greater competition—particularly in services, a high growth sector that remains dominated (but weighed down) by state-led firms. With its strengths in IT, healthcare, and management consulting, India should be a principal beneficiary of the very competition reforms that Washington, Brussels, and China’s own private sector now advocate, including via prospective bilateral investment treaties.
 
Of course, security realities cannot be wished away. Nor can economic interdependence alone serve as a conflict-mitigating mechanism. So it is better to straightforwardly acknowledge the realities of India-China competition while working to insulate other aspects of the relationship from its debilitating effects. 
 
For China, India and South Asia are third-tier security priorities at best—distantly behind internal stability and challenges in the East Asian littoral. India, however, cannot but view China as a first-tier priority, not least because Beijing’s choices are central to debates about the reliability of India’s strategic deterrent and defense posture.
 
But that is why Modi would do well to focus on the determined pursuit of India’s interests, rather than trying to “game out” China’s responses.
 
Consider Pakistan: As China-India economic ties have grown, some have argued that India should triangulate by leveraging economic interdependence to “loosen” the bonds between Beijing and Islamabad. Yet this seems utterly fanciful. Strategic abandonment is not Beijing’s style (as North Korea can attest). And Xi’s recent infrastructure pledges to Islamabad have made clear that, while Beijing is increasingly attentive to political and investment risk, Pakistan is important to broader Chinese goals in continental Eurasia.
 
Ultimately, that is precisely why Modi is wise to pursue dogged economic and strategic diplomacy with the other two sides of the Asia quadrangle. Tokyo and Washington have their own goals with Beijing. But positive Indian relations with both will shape the context through which China views India’s emerging role in Asia. 
 
(Evan A. Feigenbaum is Vice Chairman of the Paulson Institute at the University of Chicago and Nonresident Senior Associate in the Asia Program at the Carnegie Endowment for International Peace. He is a former US Deputy Assistant Secretary of State for both South Asia and Central Asia and policy planner for East Asia. The views expressed are personal. He can be contacted at contributions@spsindia.in)
 

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