India & China: Friends forever! - Views on News from Equitymaster

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India & China: Friends forever!

Dec 20, 2005

The 'flattened' world of this decade has brought in two positives for the developing world. One of them relates to the emergence of the G-21 alliance of developing countries as a force to reckon with. The second is the proposed alliance between Southeast Asian nations to combat competition from India and China. In this write-up, we would discuss the benefits of forming trade and economic alliances (or trading blocs), and how important a role these play in the growth of participating economies. Before that, we need to note that, as reported by the media sometime in the recent past, India and China have formally launched talks to study the feasibility of signing a bilateral Free Trade Agreement (FTA) as well as a Comprehensive Economic Cooperation Agreement (CECA) to cement their booming commercial ties.

Apart from providing higher bargaining power at global trade fora, these alliances (like ASEAN, SAARC and the Cairns Group) serve as a route for countries with common interests to voice their concerns regarding developmental issues. Also, in a way similar to the most-favored nation (MFN) status provided as per WTO rules, these alliances serve to provide 'equal' treatment rather than 'special' treatment to its members, thus paving a way for the growth of one and all of its constituents.

Let us take the example of India and China. Despite the fact that these countries are not part of any regional alliance as of now, China is all set to emerge as India's leading trade partner in the near future, leaving its current number one partner, the US, much behind. India's trade with China has registered a CAGR of over 45% during the period FY00-FY05 as against its trade with the US, which increased at a CAGR of mere 10% during the same period. (Source: Assocham study on Indo-China trade).

This is indicative of the potential that each country (India and China) promises for the other in the future, and this potential could increase several-folds if we have an alliance on trade and economic fronts. While this is not an example of a trade alliance, the issue we are trying to highlight here is that, the creation of a formal alliance between the two countries will definitely help exploit the trade potential between them to the fullest.

Over the long-term, the benefits of a formal alliance accrue in forms of increased competition (thus improved efficiency), economies of scale (through better utilisation of capacities due to increased exports), increased investment levels (leading to higher employment and rising income levels), and efficient usage of resource (through free movement of labour and capital). Now, isn't that true friendship (though in commercial terms to start with!)?

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