Power Realignments in Asia: China, India and the United States

POWER REALIGNMENTS IN ASIA

POWER REALIGNMENTS IN ASIA China, India, and the United States

Edited by ALYSSA AYRES C. RAJA MOHAN

Copyright © Observer Research Foundation and the Trustees of the University of Pennsylvania, 2009 All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher. First published in 2009 by SAGE Publications India Pvt Ltd B1/I-1 Mohan Cooperative Industrial Area Mathura Road, New Delhi 110 044, India www.sagepub.in SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320, USA SAGE Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kingdom SAGE Publications Asia-Pacific Pte Ltd 33 Pekin Street #02-01 Far East Square Singapore 048763 Published by Vivek Mehra for SAGE Publications India Pvt Ltd, phototypeset in 10/12 CalistoMT by Televijay and printed at Swan Press, New Delhi. Library of Congress Cataloging-in-Publication Data Power realignments in Asia: China, India, and the United States/edited by Alyssa Ayres and C. Raja Mohan. p. cm. Includes bibliographical references and index. 1. Asia—Foreign relations. 2. China—Relations—United States. 3. China—Relations—India. 4. India—Relations—United States. 5. India—Relations—China. 6. Economic development—China. 7. Economic development—India. 8. World politics—21st century. I. Ayres, Alyssa. II. Raja Mohan, C. DS33.4.C5P66

337.5—DC22

2009

2009022979

ISBN: 978-81-7829-948-8 (HB) The SAGE Team: Elina Majumdar, Rachna Sinha, Trinankur Banerjee

CONTENTS List of Tables List of Figures Foreword by Ambassador K. Raghunath Foreword by Francine R. Frankel Acknowledgements 1. Introduction Alyssa Ayres

vii viii ix xi xiii 1

2. The Economic Architecture of China in Southeast and Central Asia Nicholas R. Lardy

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3. China’s Economic Resurgence and ‘Flexible Coalitions’ Vivek Bharati

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4. The Case of China and the Global Environment: Dizzying Growth, Devolution of Power, Environmental Disaster Elizabeth Economy

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5. Growing India–China Economies, Linked Environmental Concerns, and Emerging Scenarios P.S. Ramakrishnan

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6. Security Concerns and China’s Military Capabilities: The Eagle, the Dragon, and the Elephant Jasjit Singh

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7. The Evolving Security Order in Asia: Implications for US–India Relations David Shambaugh

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8. Energy Security and the Future of Energy Cooperation: China Kenneth Lieberthal

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9. China’s Quest for Energy Security: Implications for the World Sudha Mahalingam

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10. US and Indian Interests in India’s Extended Neighbourhood Ashley J. Tellis 11. India and Regional Security Interests Vikram Sood

221 249

12. The Evolution of Sino–Indian Relations: Implications for the United States C. Raja Mohan

270

13. The Context and Purposes of US–India Strategic Cooperation Richard J. Ellings

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14. Situating the Realignment C. Raja Mohan and Alyssa Ayres

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About the Editors and Contributors Index

328 337

LIST OF TABLES 2.1

China’s import tariff rates, 2004–10

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2.2

ASEAN 6 import tariff rates

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8.1

China oil demand and imports (MMBD)

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8.2

Chinese petroleum companies

165

9.1

China’s oil demand (MBD)

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9.2

Expected growth of renewables in China under the new law

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LIST OF FIGURES 2.1

Exports of foreign affiliates as a share of China’s total exports, 1985–2006

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2.2

Processing exports, 1981–2006

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2.3

Exports of electronics and information industry products, 1995–2006

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2.4

China’s applied tariff rate, 1982–2005

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2.5

China’s import tariff revenue as a share of GDP, 1978–2005

31

FOREWORD This publication brings together the papers presented at the meeting of Indian and US scholars and experts from public life held in New Delhi on 15–17 December 2006 for sharing assessments on ‘Power Realignments in Asia: China, India, and the USA’. The discussions focused on the significance for India, the US and India–US relations, of China’s growing economic and strategic profile and presence in the Asia–Pacific region, as well as on India and US engagement with this development in the framework of our respective national interests. This exercise involves forming a real-time sense and evaluation of the changing Asian strategic scene including, in particular, China’s all round growth, keeping in mind that along with China’s rise, there is also a larger picture of Asia–Pacific resurgence and the emergence of new centres of influence in this region. Their interdependence on each other and on China is an important pan of the evolving Asia– Pacific security and development architecture. In this framework, India, because of its traditional connectivity—commercial, cultural, and demographic—with its extended Asia–Pacific neighbourhood, has developed as a factor for stability and security in the region. This meeting was intended to be the first round in a larger dialogue between the Observer Research Foundation (ORF) and the Center for the Advanced Study of India (CASI). To date, this is the most comprehensive and imaginative India–US venture of its kind. It has grown out of the agreement between ORF and CASI, reached over two years ago on establishing a substantive dialogue on developments of common interest, pertaining in particular to the Asia–Pacific region. Relations between our two countries have, over the decades, acquired the necessary comfort level and mutual understanding to enable a meaningful dialogue on these lines. The US team comprises eminent academic scholars and other experts who have contributed significantly to an objective comprehension of modern China, to educating the public, and shaping US policy. The Indian side for its part is made up of persons of cutting edge engagement with the issues on the dialogue agenda, who have reached the highest professional levels in government, academia, and business and are now leading major think tanks and other national institutions.

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This exercise should be seen primarily not as yet another ‘Track II’ event, but more appropriately as a free and wide ranging exchange, a meeting of minds between Indian and US experts, reflecting scholarship, as well as policy experience, with an emphasis on rigorous analysis and practical suggestions. The views expressed are independent of the government and yet, at the same time, reflective of national positions. This quality of the dialogue as well as of the actual participation helps reinforce the utility of this exercise as a contribution to public understanding and policy clarity. Ambassador K. Raghunath

FOREWORD The essays in this volume resulted from a three-day dialogue in December 2006 between distinguished American and Indian scholars and policy experts. The meeting provided the first opportunity for an exchange of views by some of the most influential thinkers in both countries on the implications for India and the United States of China’s rise across a broad spectrum of security issues: strategic, military, economic, and environmental. Many of the dialogue participants had moved easily between public service and academic life in each country, but few had been challenged to make their understanding relevant to counterparts across countries. Equally important was the dialogic discussion’s unusual forum. All participants, whatever their experiences, presented their views independently, without having to keep in mind any official or government position. The hallmark of this kind of free intellectual interaction is the production of fresh perspectives, which can then enrich and be integrated into the way each of us thinks about the new power relationships in Asia. The genesis of the dialogue meeting goes back to an agreement reached between the Observer Research Foundation (ORF) and the Center for the Advanced Study of India (CASI) in 2004. This agreement developed out of conversations during which we identified the need for periodic bilateral exchanges on jointly defined issues important to India and the United States. The December 2006 dialogue was conceived as the first of a three-year US–India project examining several aspects of the rise of China projected into the future. The goals of this initial meeting were twofold: We wanted to identify overlapping and diverging perceptions of the implications of the rise of China for US and Indian foreign policies and develop an overview to help structure discussions in subsequent meetings. My successor as CASI Director chose not to follow up the 2006 dialogue with two successive meetings, so this volume stands on its own. As the United States and India both create and adapt to a rapidly changing world, part of the dialogue process involves understanding what we mean when we use certain terms—and whether we mean the same thing when we use them. Often tensions arise because we

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think we are saying the same thing but in fact different meanings are assumed for the same words. In thinking about the changing power alignments in Asia, there are two or three words that continue to require clarification. One is ‘hedging’. This word seems convenient because it does not necessarily assume a confrontational outcome, but neither does it make clear against what outcome is a country hedging. As a result, it can cause misunderstanding. ‘Strategic partnership’ is another term for which further explication is needed. What does it mean, and in what contexts? India has a strategic partnership with the United States, and it has a strategic partnership with China. How do they differ, if they do? The third term that comes up frequently is the India–China–US ‘security triangle’. Does it imply any specific policy equations? Finally, I want to acknowledge very gratefully the contribution made to this dialogue by the Nand and Jeet Khemka Foundation, which allowed us to bring our US colleagues to New Delhi for this meeting. The host institution in each country underwrites local expenses, for which I want to thank the ORF and especially Ambassador M.K. Rasgotra, advisor on international affairs to the ORF, who graciously hosted a final dinner for our group which we very much appreciated. The pages which follow represent a great investment for all of us in the future of US–India relations. Francine R. Frankel Founding Director CASI

ACKNOWLEDGEMENTS Edited volumes typically require a great deal of time from a large number of committed participants, sustained over several different stages. This one is no exception. We are thankful to all the authors represented in this volume for their contributions and their involvement in the entire project. The essays collected here originated with a conference coconvened by the Observer Research Foundation (ORF) and the University of Pennsylvania’s Center for the Advanced Study of India (CASI), the result of discussions between ORF Chairman R.K. Mishra and Center Founding Director Francine R. Frankel. We owe this collection to their foresight and planning. Former Foreign Secretary K. Raghunath, along with Dr Frankel, chaired the conference proceedings; Dr Marshall M. Bouton of the Chicago Council on Global Affairs inaugurated the proceedings with a talk based on his institution’s recently-released public opinion survey, which set the stage for vigorous discussion about rising powers and the perception thereof. Former Foreign Secretary and President–ORF International Centre M.K. Rasgotra proved a guiding hand and more-than-occasionally provocative interlocutor as well. He also hosted the entire gathering for a wonderful dinner at his home. Also at ORF, Honorary Secretary Baljit Kapoor not only ensured that everything ran smoothly, but was also the linchpin for the transition to publication with Sage. Senior Fellow Ashok Singh worked closely on the conference from idea through execution, and helped shepherd the papers into a coherent manuscript over the course of many months. ORF’s Editor Anshu John served as the centralizing force in the later manuscript stages, as every author updated their chapters and made final changes. A special thanks goes to Satish Puri and his team, without whose hard work the entire conference undertaking would never have been realized. At Penn, the Center experienced a leadership transition in 2006, and we are deeply grateful for the enthusiasm with which Director Devesh Kapur embraced this project; we are also appreciative of his patience and support during the long time to publication that ensued. Michael Baker worked tirelessly to help the Center raise the funds necessary to support the project. Tanya M. Carey always offered her

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kind assistance with the many threads that needed stitching together. Finally, the Nand and Jeet Khemka Foundation underwrote Penn’s component of the project, a most generous gesture. This volume thus represents a lasting product of that investment. In a closing word of memoriam, it is with great sadness that we note the passing of ORF Chairman R.K. Mishra in January 2009. Were it not for his vision of India, clarity of thought, and ability to implement ideas into action, the partnership that resulted in this volume would not have been built. He was a remarkable public intellectual, and will be missed.

C. Raja Mohan Singapore, June 2009

Alyssa Ayres Washington, June 2009

1 INTRODUCTION Alyssa Ayres

China’s rise to great power status in the 21st century stands perhaps as the most important long-term trend affecting our world. Its economic growth, unprecedented in speed and scale, has created a vast new workforce driving globally integrated production, resulting in the country’s emergence as a formidable trading power. This relentless pursuit of growth has not only interwoven China’s fortunes with the rest of the world through robust trade relationships, but the country’s high savings rates have also given it the wherewithal to consolidate its hard power. Escalated expenditure on military modernization for this nuclear power with the world’s largest standing army, not to mention the development of space capabilities, symbolize the ambitions and the stakes at play. Observer after observer has flagged the current moment as one of a ‘great shift of wealth and power to the East’.1 Both India and the United States have vital interests in this seismic shift: China’s rise affects not only the security and economies of India and the United States, but also the new Indo–US strategic partnership. How both countries view China’s rise in these many dimensions will frame the context for how closely India and the United States cooperate on a range of issues, from trade to nonproliferation to counter-terrorism, as well as their approaches The opinions and characterizations in this book are those of the authors, and do not necessarily represent official positions of the US government. 1 Best illustrated by the trade press: see, variously, Clyde Prestowitz, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East (New York: Basic Books, 2005); Ted C. Fishman, China, Inc.: How the Rise of the Next Superpower Challenges America and the World (New York: Scriber, 2005); James Kynge, China Shakes the World: A Titan’s Rise and Troubled Future—and the Challenge for America (New York: Houghton Mifflin, 2006).

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towards global regimes. Yet the commonalities in Washington’s and New Delhi’s views on China remain understudied. In part, this relates to the Cold War artefact of mentalmapping dominant in the United States, in which neat regional partitions carved up the world into self-contained ‘areas’. Flows and relationships between them remained of less interest to the United States than how they related back to Washington.2 And in truth, the economic autarky which characterized the middle of the 20th century reinforced this practice. But the interdependencies that now structure our world have knitted together the economic interests of countries which only recently saw themselves as security competitors if not enemies. China’s transformed relationships with both the United States and India exemplify this shift, and make the assessment of how and where the United States and India understand their changing interests all the more complex. Moreover, even within India and the United States, tension exists between the compulsions of economic policymaking versus those that drive national security strategy. The logic of trade development views increased integration as benefitting all, and delivering security dividends by increasing interdependency, thus minimizing security competition. The logic of national security, however, does not necessarily share this assumption—for power is a zero-sum game, while trade is not.3 This disjuncture between perceptions of benefit from an increased economic integration versus the suspicions of security competition are particularly acute in both US–China and India– China relationships.4 In both bilateral relationships, neither capital makes a policy with one voice. The United States and China are tied together through their robust economic relationship, one in which China enjoys a large and ever-growing trade surplus. This As a step toward redressing this gap, a recent initiative examined India–China relations, without considering the United States as an actor in Asia: Francine R. Frankel and Harry Harding, eds, The India–China Relationship: What the United States Needs to Know (New York and Washington, DC: Columbia University Press and Woodrow Wilson Center Press, 2004). 3 For a superb overview of the question with respect to Asia, see Ashley J. Tellis, ‘Overview,’ in Tellis and Wills, eds, Strategic Asia 2006–07: Trade, Interdependence, and Security (Seattle: National Bureau of Asian Research, 2006), 3–25. 4 For a thoughtful exposition of the many uncertainties of the future of United States– China relations, see Aaron L. Friedberg, ‘The Future of US–China Relations: Is Conflict Inevitable?’ International Security 30, no. 2 (Fall 2005): 7–45. 2

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surplus benefits US consumers by making available low-cost goods on a large scale. Because of its very high savings rate, China is awash with cash, and parks a great part of it in US treasuries—as of September 2008, the largest holdings in the world, now surpassing Japan, and far larger than the United Kingdom’s.5 And this gives the US government the ability to finance its deficit spending. On the other hand, across the Potomac, many defence and security planners view China’s increased military spending, and its opaque reporting on the same, as an ominous development suggesting the emergence of a future rival. Theorists of a realist orientation see China’s rise—as with the rise of any new major power—as a phenomenon unlikely to occur without conflict, for which ‘hedging’ stands as the logical antidote. These two divergent compulsions, further underscored by the strategic desire to avoid precipitating enmity by identifying China as a hostile emerging power needing containment, have given rise to new coinages seeking to bridge this divide: ‘congagement’, ‘hedged engagement’, and ‘strategic hedging’ being the most illustrative.6 India–China relations offer a similar study in disjunctures. As recently as 1998, the two giants were undeniably trapped in relations of hostility, dating back to their 1962 war—from which a border dispute remains—but further amplified during the past two decades by China’s close ties and aid to Pakistan. In 1998, India’s then-defence minister referred to China as an ‘encircling enemy’ contributing to India’s decision that year to go nuclear. But in the intervening years, their economic relationship has grown geometrically, adding a new and mutually beneficial economic dimension to their complicated ties. Astonishingly, from that low point of 1998, India and China have now signed an agreement to establish a ‘strategic and cooperative Major Foreign Holders of Treasury Securities, US Department of Treasury data (monthly), available at http://www.treas.gov/tic/mfh.txt 6 ‘Congagement’ derives from Zalmay Khalilzad, Abram N. Shulsky, Daniel Byman, Roger Cliff, David T. Orletsky, David A. Shalpak, and Ashley J. Tellis, The United States and a Rising China: Strategic and Military Implications (Santa Monica: RAND Corporation, 1999). ‘Hedged engagement’ comes from David M. Lampton, ‘Paradigm Lost,’ The National Interest 81 (Fall 2005): 67–74, available at http://www. nationalinterest.org/Article.aspx?id=10178. See also, Evan Medeiros, ‘Strategic Hedging and the Future of Asia-Pacific Stability,’ The Washington Quarterly 29, no. 1 (Winter 2005–06): 145–67, available at http://www.twq.com/06winter/ docs/06winter_medeiros.pdf 5

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partnership for peace and prosperity’, an arrangement which sounds very similar to the new strategic partnership between India and the United States. India and China have begun joint cooperation on overseas energy acquisitions too, underscoring an arena in which both feel vulnerability with respect to global energy regimes they see as serving Western interests. As with the US–China case, the unclear path that India and China will take in their relations— whether they will remain competitors at one level, or partners at another, or both—has been described by awkward calques such as ‘coopetition’. But as this new relationship between the Asian giants develops, it will create new considerations and incentives (or even disincentives) for the ways in which India and the United Sates will be able to expand their partnership. This volume explores how these rapidly changing power realignments in Asia will offer scope for US–India ties.

THE UNITED STATES AND INDIA IN A CHANGING WORLD Against this backdrop of rapid change in Asia we must situate the new US–India relationship. The United States and India have only just begun to develop a relationship of cooperation, a beginning which stands in dramatic contrast to their longer history of strained relations. Efforts to build closer relations, starting in the last year of the Clinton Administration, faced a temporary setback after 9/11 and prompted a renewed alliance with Pakistan in the war on terror. Many in India viewed the reinvigoration of US–Pakistan ties—which had atrophied owing to sanctions following Pakistan’s nuclear tests of 1998, and again following General Musharraf’s 1999 military coup—as a return to the old days of Cold War balancing in the region. To its great credit, the Bush Administration managed to develop US–Pakistan and US–India relations on their own terms, without returning to the zero-sum game that characterized US relations with South Asia for so long. By the second term of the Bush Administration, the long-articulated goal of finding a way to craft a real partnership between the United States and India received substantial policy muscle. In March 2005, US Secretary of State Condoleezza Rice announced a radical new plan to cooperate in civilian nuclear and

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space issues with India, part of what she called helping India ‘become a major world power in the 21st century’. This proposal framed a series of successful summits which have moved to overcome the single greatest and long-standing barrier to close US–India cooperation: the non-proliferation regime. A June 2005 summit between the Indian defence minister and the US secretary of defence was followed by a July 2005 official visit to Washington by the Indian prime minister. Some of the new and wide-ranging fora established by that summit included the US–India CEO Forum, a Trade Policy Forum, an Energy Dialogue, the US–India Global Democracy Initiative, a US–India Disaster Relief Initiative, and an Agricultural Knowledge Initiative to reinvigorate the cooperation that had been so positive during the Green Revolution of the 1960s. Most importantly, the announcement which received the most attention in both countries was the news that the United States sought to cooperate with India on civilian nuclear technology, something which had been prohibited for more than 30 years as India had remained outside the Nuclear Non-proliferation Treaty. The proposal received a further boost when, as the centrepiece of President Bush’s 2006 state visit to India, the United States and India announced an agreement on a roadmap to implement such cooperation. Executing this roadmap required careful navigation among many stakeholders, by no means an easy task for either country in terms of the operational steps required. In December 2006, the US Congress did its part by passing, and with overwhelming bipartisan support, the Hyde Act, which enabled what would have been impermissible under previous US law. India and the United States completed negotiations on the terms of that cooperation (through an accord known as a ‘123 Agreement’ after the article of the US Atomic Energy Act for which it is named) in July 2007. The process then moved to the global level: India negotiated an agreement with the International Atomic Energy Agency (IAEA) to safeguard its civilian facilities, after which the 45-member Nuclear Suppliers Group (NSG) voted by consensus to permit civilian nuclear trade with India. Following the NSG policy change in early September 2008, the 123 Agreement went to the US Congress for its vote of approval, a process made more complicated by the shortened Congressional calendar, by a changed configuration in the House, and by the emergence of an epic financial crisis that preoccupied Capitol Hill. Yet in short order, the US Congress approved this

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agreement, again with enormous bipartisan support, and President Bush signed it into law on 8 October 2008. The US–India accord was then signed by Secretary of State Rice and External Affairs Minister Pranab Mukherjee two days later. The completion of this agreement marked an enormous victory for US–India cooperation: both countries worked closely together to realize a significant, at times difficult, bilateral negotiation, and then doubled that cooperation to meet the complex challenge of the multilateral diplomacy necessary during the steps with the Nuclear Suppliers Group. This degree of consultation and unified action was a first for the US and India and will allow both countries to work more closely together on some of India’s most pressing needs. Energy is one: India’s large population and the fast pace of growth requires increasing energy supplies, currently provided by fossil fuels. While nuclear energy cannot meet India’s growing energy needs on its own, it will provide some security of supply as well as offer positive environmental benefits (one scholar has estimated the reduction in CO2 emissions resulting from India’s increased nuclear energy supply by 2020 as equivalent to all 26 European Union [EU] states observing Kyoto Protocol commitments).7 Defence cooperation is another, which will open up new areas not just between the two respective militaries, but also for the private sector. Indian infrastructure development will require large amounts of foreign direct investment—an estimated half a trillion dollars—for the country to realize its full potential, and here too a closer partnership with US investors can play a critical role. New interest from US business sector in Indian retail and capital markets suggests yet another area which may at last fulfil its long-heralded potential. All of this would appear to be a very good news. And yet, strong scepticism remains in some sections of India about the shape of its future relationship with the United States—a scepticism which became most visible with respect to the civil nuclear agreement. In the fall of 2007 a political controversy over implementation of the civil nuclear agreement emerged in India and eventually stalled progress on the agreement for nearly a year. After two years of negotiations on the David G. Victor, ‘The India Nuclear Deal: Implications for Global Climate Change.’ Testimony before the US Senate Committee on Energy and Natural Resources, 18 July 2006, available at http://iis-dv.stanford.edu/pubs/21218/ July_18Testimony.pdf

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text of the 123 Agreement, those involved in the process anticipated that its completion in July 2007 would then pave the way for a fast Indian action with its IAEA safeguards agreement, after which the United States would serve as India’s sherpa to achieve the necessary policy change in the NSG.8 But the completion of the 123 Agreement text did not lead to these subsequent steps; rather, it precipitated a parliamentary political crisis in New Delhi which nearly brought down the Indian government and resulted in a procedural stall that was only resolved in July 2008 after the United Progressive Alliance (UPA) coalition government survived a confidence vote. And the coalition government’s survival was made possible only after it secured the support of a regional party, the Samajwadi Party, since the Left Front withdrew its support to the coalition entirely. India’s Left Front, supporting the UPA coalition from the outside, took the opportunity of the 123 Agreement completion to announce that any further steps toward a closer US–India relationship—symbolized by the civil nuclear deal—was contrary to the ‘Common Minimum Programme’ platform holding together the ruling coalition, and would be grounds for withdrawal from the coalition. The Opposition Bharatiya Janata Party (BJP), which had lain the groundwork for the civil nuclear agreement during its period of office, declined to support the Congress-led coalition on this issue. Some highly vocal BJP detractors even argued that the deal went against India’s national interests by constraining its sovereignty (particularly India’s right to test nuclear devices). This stance produced a most unlikely pair of bedfellows in the Communists and the BJP. With its coalition’s survival in question, the UPA coalition created an intra-coalition committee to review each element of the necessary next steps to bring the agreement to fruition, a process which permitted the government to begin, but not complete, negotiations with the IAEA—and which prolonged all essential action on the initiative until the confidence vote resolved the matter politically. Given the complexity and sequential nature of the international steps required to operationalize this agreement, the political hurdles introduced new volatility into the whole process. In a nutshell, we can see the hurdles in building a solid US–India security relationship. Despite a formal agreement on a pathbreaking

The author served as special assistant to the lead US negotiator, Under Secretary of State for Political Affairs R. Nicholas Burns, during the period in question.

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initiative, the process of operationalizing that initiative was deeply fraught politically. It brought into high relief the discomfort that many Indian politicians and policymakers from opposite sides of the political spectrum feel about a strategic relationship with the United States. India’s complex polity, moreover, points to a future of large coalition governments, comprised of numerous parties which may well have conflicting views about the country’s relationship with the United States. On top of that, India’s long-standing policy independence seems unlikely to atrophy—if anything, its national confidence is increasing—and even the most ardent supporters of a US–India partnership underscore that its success will depend on negotiating terms in which India feels it is an equal rather than one in which the United States has a ‘senior partner’ status.9 This will require not just new bilateral understandings, but also significant changes in the institutions that structure global interactions. Issues of global governance matter greatly to India, for example, and the structures of the major global institutions reflect a 20th-century world in which the United States and Europe held economic and political power. Accommodating the changing world means accommodating calls for rising powers to have a greater voice, and India has been vocal about its desire for an expanded global role.10 There is bipartisan support in India for it to take on increasing decision-making roles in multilateral fora, such as the UN Security Council, in which India claims the right to a permanent seat. (Although the United States is broadly in favour of UN reform, it has thus far remained silent on India’s bid for a permanent seat on the UN Security Council). In terms of global trade, the collapse of World Trade Organization (WTO) Doha Round talks in August 2003, July 2006, June 2007, and July 2008 occurred in part because India—with allies in the global South— took a clear stand against continued agricultural protectionism in the European Union (EU) and the United States. Other differences observed recently between India and the United States—again, in the context of a declared commitment to establishing closer ties—relate to diverging views on important national 9 For example, see the remarks by C. Raja Mohan at the Council on Foreign Relations, ‘Will India Become a Global Power?’ Remarks delivered on 19 June 2006. Transcript via www.cfr.org. See also Delivering on the Promise: Advancing US Relations with India (New York: Asia Society, 2009), available at www.asiasociety.org/taskforces/ india09 10 See Daniel W. Drezner, ‘The New New World Order,’ Foreign Affairs (March/April 2007).

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interests. Iran is a case in point: India and Iran have engaged in discussions to construct a gas pipeline from Iran’s fields to India’s growing markets. In Washington, strong bipartisan agreement prevails on the dangers that Iran poses, and the United States has economic sanctions laws in place to deter large international investment, public as well as private, with Iran (the Iran Sanctions Act is triggered at a USD 20 million annual investment threshold). In May 2007, seven members of Congress—among them, several noted India supporters— sent Prime Minister Manmohan Singh a letter expressing grave concern over India–Iran relations and urging that they be curtailed. This theme has been recurrent on Capitol Hill, for it is hard for American lawmakers to understand why India continues to broaden its relations with a country the United States views as a pariah. For American strategic analysts who were hoping that the gradual warming of US–India ties would make India a willing partner for US security actions, the refusal underscored that this new relationship has limits.11 The tremendous changes in Asia, however, are where the greatest future indeterminacy lies. The expressed hope of some in Washington that India would, as a US partner, balance China’s rise, cannot be assumed in light of recent events. With the deep-freeze of 1998 long forgotten, India and China have been discussing their long-standing border dispute. An April 2005 state visit of Chinese Premier Wen Jiabao to India resulted in their first-ever agreement on the ‘guiding principles and political parameters’ for the eventual resolution of the half-century-old border dispute.12 These steps were further strengthened by Hu Jintao’s November 2006 India visit, and Manmohan Singh’s January 2008 China visit. The border dispute remains unresolved (indeed, with disputes over the Tawang region the subject of recent attention), but the two giants nonetheless continue discussions, and have strengthened their relations substantially in areas, particularly economic ties, where no such disagreement stands in the way.13 Their bilateral trade has grown exponentially in the last 11 On this point, see Sumit Ganguly, ‘America and India at a Turning Point,’ in Current History 104, no. 680 (March 2005): 120–24. 12 See the Indian Ministry of External Affairs’ press briefing on the Wen Jiabao visit, available at http://meaindia.nic.in/pressbriefing/2005/04/11pb01.htm. Many thanks to C. Raja Mohan for this important point. 13 Complete text of the joint statement is available via the Government of India’s Ministry of External Affairs website, available at http://meaindia.nic.in/ declarestatement/2006/11/21jd01.htm

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half-decade and exemplifies the new change in the relationship. As recently as 2001, the two-way trade between India and China was a paltry USD 3.6 billion. By 2004, it had risen to USD 13.6 billion dollars; in 2006, USD 24.9 billion, and in 2007, a staggering USD 38.6 billion.14 New expansions of Indian IT companies into China, along with Chinese interest in replicating India’s success in global services holds great promise for future growth.15 Earlier summit agreements to ramp up India–China trade to USD 40 billion by 2010 have been revised to USD 60 billion, in light of this rapid trade growth.16 The growing economic relationship between India and China, moreover, should be contextualized alongside the economic ties the United States has with each. At present, two-way India–China trade appears slight next to the USD 387 billion in US–China trade (2007 figures for goods alone). However, when compared with US–India trade— USD 25 billion in 2005, USD 31 billion in 2006, and USD 41.5 billion in 2007—India–China bilateral trade does not look as paltry.17 Some argue that the India–China trade trajectory may overtake US–India trade in 2008, raising serious questions about the possibility of a realignment in economic relationships in the very near future. These developments are completely new. Ten years ago, hardly anyone had predicted the current dimensions of transformation in both India and China. India had been put into a regional box along with Pakistan, the focus of security studies that emphasized the potential for a nuclear war in South Asia. China was viewed as an emerging Asian power in a separate sphere. As can be seen, the trajectory of the relationship between India and China, just a few years ago, not uncommonly thought to offer ‘quiet competition’ at best, now appears to elude clear prediction.18 Moreover, if the recent history 14 ‘India–China Trade Touches $24.9 Billion in 2006,’ The Hindu, 31 January 2007. 2007 figures from the Chinese Ministry of Commerce, cited in Pallavi Aiyar, ‘Manmohan’s Prescription for Better Sino–Indian Economic Ties,’ The Hindu, 15 January 2008. 15 Services receive attention in Government of India (Ministry of External Affairs), ‘Report of the India–China Joint Study Group on Comprehensive Trade and Economic Cooperation,’ (New Delhi: Ministry of External Affairs, 11 April 2005), available at http://mea.gov.in/treatiesagreement/2005/11ta1104200504.pdf 16 See Saibal Dasgupta, ‘China is India’s Largest Trade Ally,’ The Times of India, 17 January 2008. 17 See US Census Bureau Foreign Trade Statistics, via www.census.gov 18 On ‘quiet competition’, see Mark Frazier, ‘Quiet Competition and the Future of Sino–Indian Relations,’ in Frankel and Harding, eds, The India–China Relationship, 294–318.

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of China–Southeast Asian relations is any guide, conjectures about bandwagoning to balance China have proved completely wrong.19 China has deployed diplomatic efforts to counter fears that a richer and more powerful China would mean greater aggression; the ‘peaceful rise/peaceful development’ strategy has led to stronger relations with South, Central, and Southeast Asian countries, a process that is undoing many suspicions and previous impasses.20 China’s skilful development of economic relations has, for the time being, attenuated many of the old hostilities which once limited its influence in Asia.21

COMMONALITY AND DIFFERENCES AMIDST TURBULENCE The many dimensions and rapid nature of these changes in Asia, precipitated by China’s rise, served as the framework for the project that resulted in this volume. The rapid changes in both China and India, and their responses to these and other stimuli taking place globally, have created an arena in which the US–India relationship has both opportunity for new and innovative collaborations, as well as potential for major roadblocks. For the US–India relationship to truly move from rhetorical bromides to deep cooperation, we must identify how the United States and India can work together, and what we can do. By bringing together scholars and policymakers from India and the United States to compare perspectives on important ways China’s rise affects the economic and political stakes for both, this 19 See David Kang, ‘Getting Asia Wrong: The Need for New Analytic Frameworks,’ International Security 27, no. 4 (Spring 2003): 57–85. There is an emerging Asian bloc (East and Southeast Asia) which does not include the United States, but in which China is playing an increasingly powerful role. See ‘Yankee Stay Home: East Asian Diplomacy,’ The Economist, 11 December 2004. 20 For a compelling and thorough examination of China’s grand strategy, see Avery Goldstein, Rising to the Challenge: China’s Grand Strategy and International Security (Palo Alto: Stanford University Press, 2005), especially ‘China Adjusts,’ pp. 118–35, and the section on China and India in ‘China and the Major Powers,’ pp. 168– 72. See also the wide-ranging, more historical consideration: Michael D. Swaine and Ashley J. Tellis, Interpreting China’s Grand Strategy: Past, Present, Future (Santa Monica: RAND, 2000). 21 See Joshua Kurlantzick, Charm Offensive (New Haven: Yale University Press, 2007).

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project sought to chart the most salient commonalities and differences. In some cases, disciplinary orientation proved the common ground—most notably among those focused on trade and economic issues rather than defence and security. In others, clear divides linked to regional perceptions emerged. Within each of these frameworks, the comparisons also elicited key disjunctures in perceptions despite agreement on many fundamentals. With economic growth driving Asia’s rise, this volume begins with four essays focused on growth and its impacts. The first set pairs Nicholas Lardy, an economist and long-time China watcher, with Vivek Bharati, an economist who now advises the Federation of Indian Chambers of Commerce and Industry, following a long career at the World Bank. Lardy’s chapter provides the overview narrative of China’s phenomenal economic rise, sketching how it grew from only a modest participation in global trade in 1978 to its emergence as the world’s second-largest trading country in 2007. He then gives an overview of China’s export-led growth strategy, which used the country’s huge labour pool advantage to become a site for final goods assembly—the most recent phase of which has knit China together with the Association of the Southeast Asian Nations (ASEAN) countries in a giant production chain. Bharati views the historical narrative of China’s economic growth similarly, but differs from Lardy in his assessment of its impact on India’s direction in the Asian and global economic future. Bharati sees an opportunity for India to offer a ‘balancing force’ for ASEAN in a world characterized by constant change and ‘flexible coalitions’ among nations. Lardy assesses China’s economic dominance as of a complete different order of magnitude and questions whether there is space for India to do so. Two numbers encapsulate this assessment: China’s USD 375 billion increase in trade in 2006 was twice the entire level of India’s total trade in 2004. Further, Lardy underscores future problems with India’s ability to continue its pace of growth through a services-led model that may soon reach human resources capacity. In his view, India’s economic reforms and tariffs have not gone far enough to enable growth in manufacturing that would leverage India’s advantage: a large, low-cost labour pool where wages are only one-fifth of those in China. Bharati, from his perspective at the intersection of business and national economic policy, recognizes this weakness but thinks that India is moving fast

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to correct it, in part through government focus at the highest levels and the creation of a manufacturing competitiveness council. The final pair of essays in the volume’s first section on economic growth deal with the emerging environmental challenges. Elizabeth Economy, a political scientist and author of the award-winning The River Runs Black: Environmental Challenges to China’s Future contributes a chapter that evaluates the impact of China’s ‘dizzying’ growth on environmental problems beyond China’s borders. Its reliance on coal, for example, coupled with lax enforcement of emissions standards and rapid growth of automobiles have given China five of the 10 most-polluted cities in the world. Its greenhouse gas emissions determine the shape of global climate change—its CO2 emissions overtook those of the United States, previously the world’s largest contributor, in 2006. China has also become a major contributor to illegal timber trade. It has become the second-largest importer of timber and timber products (including paper and pulp) in the world, and efforts to protect its own forests have resulted in illicit timber smuggling from East and Southeast Asia, Africa, and Russia. In the oceans, China has become the biggest cause of marine pollution in the Pacific, and is contributing to water pollution in Cambodia, Malaysia, Thailand, and Vietnam. The spillover effects of each of these cases are obvious. Elizabeth Economy sees solutions for these challenges only through a political reform in China, the reform that would create accountability for officials, judicial transparency, and political incentives to institutionalize environmental protection. She sees space for US–China collaboration on these issues, but notes that many proposals so far have not achieved traction. P.S. Ramakrishnan’s contribution to the volume takes a grassroots view of the question of environmental degradation resulting from rapid growth. He argues, through a comparison of the environmental impacts in India versus China, that only an approach sensitive to local biodiversity and cultural diversity can result in sustainable resource management. His discussion of knowledge systems and the necessity of re-integrating local techniques with current agricultural methods draws from India’s green revolution experience—the same lands rendered most fertile through green revolution technologies in the 1960s are now those that face water table depletion and soil exhaustion. Ramakrishnan advocates a middle-ground approach to

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growth, where local communities can be active stakeholders in developing balanced methods to deliver the food or timber products they need, while keeping the environment healthy with an ability to sustain itself in perpetuity. Here, Ramakrishnan draws a sharp contrast with the China case, seeing India’s cacophony of voices from nongovernmental environment groups as an asset in this process. The second part of the volume moves from economic considerations to global and regional security concerns. The first pair of security-focused essays juxtaposes David Shambaugh, professor of international affairs and director of the China policy programme at George Washington University, with Jasjit Singh, director of the Centre for Air Power Studies in New Delhi, and director emeritus of the Institute for Defence and Security Analyses. Both are in firm agreement with the structural changes underway in Asia—the increasing integration of regional spaces once separate, the shift of power to Asia, the major change resulting from China’s proactive engagement of its periphery—and both agree that a new era characterized by multipolarity, polycentricity, fluidity, and deep interdependence has dawned. Shambaugh notes how Chinese diplomacy has converted formerly hostile neighbours, even adversaries, into new partners (Japan is the exception). Moreover, a normative security community has emerged in Asia, driven more by the transnational economic, scientific, and cultural engagements characteristic of non-state actors rather than governmental initiativies. As Chinese influence grows, however, Shambaugh also points out that this causes anxiety for many Americans, particularly for defence planners at the Pentagon, who have assessed China as the only ‘prospective strategic competitor on the horizon’, leading to a policy of ‘hedged engagement’. He cautions that any temptation for the United States and India to mutually hedge against China should be resisted, for it will force China to behave as an adversary, and in any case, despite its increased military spending, most of China’s assets are still a decade behind those of the United States. In sharp contrast, Jasjit Singh sees China’s rise, military modernization, and long-term strategy as very troublesome for India. From his perspective, China is moving to an active rather than defensive side of war planning, and its military modernization is taking place within a context in which ‘over 96 per cent of China’s nuclear arsenal and conventional military power has relevance only for its neighbors’.

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15

Singh is far more suspicious of China’s intentions, noting its assistance to Pakistan’s nuclear programme, and the country’s changed emphasis on military power in its 2004 White Paper on national defence. He concludes that India must prioritize its own defence modernization to try to close the capabilities gap with China, particularly emphasizing air power, to protect its interests while ‘embracing the dragon’, but that efforts to seek cooperative peace must be accompanied by a credible hedging strategy. The next pair of essays in the security section focuses on energy. Our decision to place these two chapters on energy within the rubric of security stems from the deep involvement of state-owned energy companies in China (and India) and the emergence of a new energy diplomacy that renders economic transactions part of an overall national security strategy for both countries. Here we find a remarkable convergence of perspectives, both at the level of positivist assessment and at the policy prescription level, between the Nehru Memorial Library’s Sudha Mahalingam and the University of Michigan’s Kenneth Lieberthal. As Sudha Mahalingam succinctly observes, ‘In the last two decades, energy security concerns have informed and dominated China’s diplomatic, strategic, commercial and scientific initiatives.’ These initiatives, which impact the world, have at their core a strategic concern for domestic political stability, as Lieberthal explains. The Chinese Communist Party justifies its claim to power on the delivery of economic growth and development for Chinese citizens, and if the country quite literally cannot fuel its growth, a crisis of social and political stability could result. As China’s energy mix continues to be reliant on hydrocarbon sources, and as its own domestic supplies cannot meets its needs, China has developed the ‘go-out strategy’ of commercial diplomacy in search of equity stakes abroad and long-term contract supplies to mitigate its sense of vulnerability. India and the United States have had, as Lieberthal and Mahalingam note, differing responses to this form of new mercantilism. For many in the United States, China’s equity oil strategy has been viewed as a security threat, as underscored by the ill-fated bid for Unocal tendered by China’s China National Offshore Oil Company (CNOOC) in 2005. Lieberthal argues that the overall liquidity of global energy markets means that China’s equity positions cannot ‘take oil off the world market’ to the disadvantage of other global consumers—but this political

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message has not yet been absorbed by policymakers or the general public in the United States. By contrast, India has viewed this as a moment of opportunity, and in recent years has formed collaborative ventures with China—an important aspect of the fast-growing economic relationship. The onetime rivals, previously in competition for control of fields in third world countries such as Angola, Nigeria, Kazakhstan, and Ecuador, signed a formal agreement in January 2006 to cooperate on overseas acquisitions.22 The agreement marks a strategic outgrowth of their co-ownership of a field in Sudan, and their cooperative bid for fields in Syria. This latter purchase was not welcomed by the United States, and marks an area where future foreign policy frictions are bound to occur.23 The final pair of essays covering security come from two analysts with direct and recent experience of the policymaking process in India and in the United States. Vikram Sood served the Government of India as the head of its intelligence organization, the Research and Analysis Wing. Ashley Tellis served as a consultant to the US Department of State, after serving as a senior advisor to the US Ambassador to India, and then on the National Security Council as a special assistant to the president of the United States. Their perspectives offer insights on the ways Washington and New Delhi prioritize security interests in the region. For Vikram Sood, the view from India’s neighbourhood is bleak and fraught with great peril. Its neighbours, particularly Pakistan and Bangladesh, are experiencing radical instability, and their resentment of India as the largest country in the region has precluded efforts to develop stronger economic ties within the region.24 Furthermore, China has effectively been able to exploit India’s poor relations with its immediate neighbours by establishing economic ties with them—creating

Carola Hoyos, Jo Johnson, Richard McGregor, and Andrew Yeh, ‘China and India Forge Alliance on Oil,’ Financial Times, 13 January 2006, available at www. lexis-nexis.com 23 Siddharth Varadarajan, ‘US Tells India to Back Off Syria Oil Deal,’ The Hindu, 28 January 2006. 24 For a pessimistic view of the limited economic relations in South Asia, see Kavita Iyengar and Devesh Kapur, ‘The Limits of Integration in Improving South Asian Security,’ in Tellis and Wills, eds, Strategic Asia 2006–07: Trade, Interdependence, and Security (Seattle: NBR Publications, 2006). 22

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17

what Sood terms a ‘reverse entrapment’ of India, a strategy of trying to restrict India’s power to the Asian subcontinent. In Sood’s view, the practice is most noticeable with Chinese economic and military aid to Pakistan—and the strong US–Pakistan relationship makes managing India’s relations with China and the United States all the more complex. Ashley Tellis offers a more optimistic picture of the convergence of United States and Indian interests in India’s extended neighbourhood. Tellis sees great scope for US–India cooperation in Central and Southeast Asia, and the Indian Ocean region. In each of these regions, the security interests as well as strategies employed to achieve them are, in Tellis’ view, greatly complementary. In Central Asia, for example, the American interest in helping these countries preserve their new autonomy (inclusive of preventing Russian re-absorption and limiting Chinese influence over the long term), resulted in a strategy encouraging Central and South Asian integration. Energy forms a centerpiece of this plan, which dovetails well with India’s growing needs. US interests in stabilizing Afghanistan, similarly, coincide with India’s. In Southeast Asia and the Indian Ocean, Tellis sees Indian and US interests as remarkably parallel, particularly now that India’s revived ‘Look East’ policy has spurred Indian foreign policy towards kindling economic ties with the region (and rekindling long-standing civilizational ties as well), and as both India and the United States have nearly identical interests in protecting the Indian Ocean sea lanes as well as deterring seaborne security threats. Intriguingly, Tellis assesses US and Indian interests with respect to China as fundamentally parallel—parallel in goals, parallel in strategy, and parallel in complexity, as both India and the United States pursue complicated ties with China, focused on furthering economic ties while the strategic relations unfold across a field of much greater ambivalence. The final section of the volume looks towards the future with a pair of essays that chart a course for future cooperation in light of the rapidly changing dynamics in Asia. C. Raja Mohan of the S. Rajaratnam School of International Studies, Nanyang Technological University (Singapore) provides the historical backdrop of the China–India relationship as the context for the kinds of decisions the United States will face in the future as it works to

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cement a strategic partnership with India. Taking a longer view on India–China relations, he makes several inter-related arguments which together offer both optimism as well as a cautionary note for US–India cooperation ahead. First, he notes that the systemic consequences of China’s rise, along with India’s, will assure that they will not merely seek their own place in the global system, but rather seek to transform the system itself in accordance with their needs. Second, and relatedly, he points out that the complex nature of India–China relations proceed, as they have for a very long time, upon their own logic of autonomy rather than in response to US demands. New Delhi seeks a better relationship with Beijing, while at the same time refusing to play ‘second fiddle’ in those interactions, neither behaviour the result of US–India interactions. This leads him to the insight that some degree of balancing behaviour towards China has been ‘in the very DNA of India’s geopolitics’. But most profoundly, he argues that India’s pursuit of power, and its desire to forge a relationship on its own terms with China, should not be understood as a triangular formation and will not necessarily imply a desire to see American power weakened—in his words, ‘India has little reason to look towards a weaker American role in Asia.’ Navigating the delicacy of these relationships will be the key to closer US–India cooperation in the coming decades. Finally, Richard Ellings of the National Bureau of Asian Research looks at the context and purposes of US–India strategic cooperation in light of these tremendous and fundamental shifts. With the other volume contributors, Ellings agrees that the balance of power has fundamentally changed in Asia, but that the future shape of international relations remains undetermined. This uncertainty poses challenges for strategic planning, but Ellings offers several areas for successful future US–India cooperation. In Ellings’ view, America shares interests with India on matters of containing nuclear proliferation in a multipolar world, multilateral collaboration (such as in the United Nations), economic relations (in particular, trade), and the pursuit of energy security—where, Ellings adds, India is unlikely to win a mercantilist competition with China for energy supplies. He further outlines space for productive US– India collaboration on the thorny, global public goods challenges, such as public health, environmental degradation, and preventing

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19

pandemics and the global spread of infectious diseases. It is precisely the promise of tackling these 21st-century challenges to national well-being while maintaining the global peace that so eluded the 20th century, where the United States and India can make the greatest mark in their strategic partnership.

2 THE ECONOMIC ARCHITECTURE OF CHINA IN SOUTHEAST AND CENTRAL ASIA Nicholas R. Lardy

China’s economic integration with the global economy over the last three decades is nothing short of extraordinary. In 1978 when Deng launched China on its path of economic reform it was a very modest participant in the global trading and financial system. Its total trade stood at USD 21 billion and its rank as a global trader was only 30th. By 2006 China’s trade had grown more than 80-fold to reach USD 1.76 trillion. It was the world’s third-largest trading country and its share of global trade was more than 10 times that of 1978. On current trends in 2007 China will surpass Germany to become the world’s second-largest trading country. To put the magnitude of China’s global trade in context, note that the USD 360 billion increase in China’s trade in 2006 was about twice the level of India’s total trade in 2004 of USD 188 billion. Similarly, on the eve of reform China had little connection with the international financial system. China’s external borrowing was miniscule and mostly in the form of short-term trade credits. Foreign direct investment was a glimmer in Deng Xiaoping’s mind. By 2006 this financial isolation had long since ended and China had become a major participant in international financial markets. Most obviously, foreign firms by year-end 2006 had invested USD 700 billion in China, and in the fourth quarter of 2006 China’s holdings of foreign exchange reserves exceeded USD 1 trillion, far and away the world’s largest. And Chinese firms, notably several of its largest petroleum companies, its largest telecom operators, and four of its five largest banks, had raised several tens of billions of dollars on international capital markets. Chinese firms have begun

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to invest abroad with the total amount in 2005 rising by more than 100 per cent to reach more than USD 12 billion, and then increasing to USD 16.1 billion in 2006. Cumulatively, through the end of 2005 Chinese firms had invested USD 64.5 billion abroad.1 The authorities also had introduced a qualified domestic institutional investor (QDII) programme, which for the first time had allowed Chinese citizens to invest in funds managed by Chinese domestic banks and that, in turn, invested in foreign stocks and bonds. By the end of 2006 the approved amounts exceeded USD 11 billion. The interaction of China’s growing trade and its substantial inflows of foreign direct investment are reflected in the increasingly important role of foreign-invested firms in exporting. Taking advantage of China’s relatively low-cost labour and its relatively advanced transport and other infrastructure, increasing numbers of foreign firms began moving their factories to China in the second half of the 1980s. Many of these firms thus began to use China as an export platform. As shown in Figure 2.1, by 1989 goods produced by foreign affiliates for the first time accounted for almost 10 per cent of China’s total exports. This share continued to rise gradually, reaching half of China’s exports in 2001 and almost three-fifths of total exports by 2005. A substantial portion of the exporting activity of foreign-invested firms in China involves the duty-free import of parts and components that are then assembled and exported as final goods. The value of these imports and associated exports is recorded separately by the Chinese Customs Administration and is identified as processing imports and processing exports, respectively. As shown in Figure 2.2, the processing trade has grown steadily and by 2006, the value of processed exports had reached USD 510 billion and accounted for a little more than half of total exports. A large fraction of processing trade is undertaken by foreign affiliates, but domestic firms in 2005 accounted for about one-sixth of processing trade exports.2 The increasing role of foreign firms in China’s trade and the large and growing share of processing trade are linked closely to State Administration of Foreign Exchange, ‘The First Report on China’s International Investment Position,’ 25 May 2006, available at http://www.safe.gov.cn (accessed 7 August 2006). 2 General Administration of Customs of the People’s Republic of China, China Customs Statistics, December 2006, p. 14. 1

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70% 60% 50% 40% 30% 20% 10%

19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

0%

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FIGURE 2.1 Exports of foreign affiliates as a share of China’s total exports, 1985–2006 600

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19 8 19 1 8 19 2 8 19 3 8 19 4 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 06

0

Processing Exports (LHS)

As a Share of Total Exports (RHS)

FIGURE 2.2 Processing exports, 1981–2006

China’s expanding role in Asian production networks. Over the past two decades the production process for a growing range of manufactured goods has become increasingly disaggregated on a geographic basis, what is sometimes referred to as vertical specialization. Each country specializes in the portion of the production process in which it has the strongest comparative advantage. High-income countries

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USD Billions

that are more technologically advanced predominantly produce high-value-added parts and components, whereas China, with its large pool of manpower, increasingly is the location of choice for the final assembly of a broad range of goods. This pattern is especially evident in electronic and information technology (IT) products. As shown in Figure 2.3, exports of these products soared from USD 16 billion in 1995 to USD 364 billion in 2006. As a share of China’s total exports, electronic and IT products rose from 11 per cent in 1995 to 38 per cent in 2006. Electronic and IT products are produced in China predominantly by foreign-owned firms using the processing form of trade. This means, importantly, that the parts and components required to produce the export goods are imported duty-free. As discussed below, this has become an important aspect of China’s trade with Southeast Asian countries. 400

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0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Exports (LHS)

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FIGURE 2.3 Exports of electronics and information industry products, 1995–2006

EXPLAINING CHINA’S TRADE PERFORMANCE China’s stellar trade performance can be attributed to several factors.3 First, the government gradually relaxed its monopoly on the 3 For details see Nicholas R. Lardy, Integrating China into the Global Economy (Washington: Brookings Institution Press, 2002) and Lee Branstetter and Nicholas Lardy, ‘China’s Embrace of Globalization,’ in Loren Brandt and Thomas G. Rowski, eds, China’s Great Economic Transformation (Cambridge: Cambridge University Press, 2008), pp. 633–82.

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conduct of foreign trade. Initially, 12 foreign trade companies run by the Ministry of Foreign Economic Relations and Trade conducted all trade. But gradually, trading rights were expanded and by the mid-1990s, the market for trading services had become reasonably competitive, allowing all domestic firms to seek opportunities to buy and sell in international markets. Second, China dramatically reduced its tariff and non-tariff barriers. As shown in Figure 2.4, in 1982 China’s average applied tariff rate was a relatively high 56 per cent. By the eve of China’s accession to the World Trade Organization (WTO) in 2001 the rate had fallen to 15 per cent. As China implemented its WTO commitments the tariff rates fell further. For example, by 2004 the average applied rate had fallen to 10.2 per cent, about a third the 29.1 per cent rate prevailing in India at the same time.4 Similarly, Chinese non-tariff barriers in the form of import quotas and import licensing requirements, which at their peak in the late 1980s restricted almost half of all import commodities, were entirely eliminated by the end of 2005. 60%

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FIGURE 2.4

05

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China’s applied tariff rate, 1982–2005

WTO, Trade Policy Review: China, April 2006, available at http://www.wto.org (accessed 30 October 2006). WTO, India, available at http://stat.wto.org/CountryProfiles/IN_e.htm (accessed 30 October 2006).

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Third, China’s trade expansion was facilitated by changes in foreign exchange and tax policy. Initially, the currency was highly overvalued, but in a series of steps the disincentive to export inherent in currency overvaluation was reduced as the currency lost 70 per cent of its value between 1980 and 1995.5 China also introduced in the 1980s a duty-drawback system that made possible the tradeprocessing regime and began to rebate the domestic value-added tax (VAT) on goods that were produced domestically but sold internationally. These reforms largely dismantled the bias against exporting that characterized the pre-reform exchange rate and tax regime.

CHINA’S ECONOMIC ARCHITECTURE IN SOUTHEAST ASIA During the Cold War, China’s diplomatic relations with Southeast Asian countries were strained at best, largely because China supported communist parties or insurgencies in every Southeast Asian state with the exceptions of Singapore and Brunei.6 The creation of the Association of Southeast Asian Nations (ASEAN) in 1967 was in large part motivated by the desire of the five original member states to contain the spread of communism. Indeed, until 1990–91 Indonesia, Singapore, and Brunei did not recognize the government of the People’s Republic of China.7 Formal dialogue between ASEAN and China began in July 1991 when China’s Foreign Minister, Chen Qichen, was invited to attend the opening ceremony of the 24th ASEAN Foreign Ministers’ Ministerial Meeting in Malaysia. This led to the convening of annual summit meetings between the leaders of ASEAN and China’s premier. By 2003, China joined the Treaty

5 International Monetary Fund, ‘People’s Republic of China—Recent Economic Developments,’ (Washington: IMF, 1996), p. 50a. 6 Bruce Vaughn and Wayne M. Morrison, ‘China–Southeast Asia Relations: Trends, Issues, and Implications for the United States,’ Congressional Research Service, 4 April 2006, pp. 5–6, available at http://www.fas.org/sgp/crs/row/RL32688.pdf (accessed 4 April 2006) 7 Relations were established with Singapore in 1990 and with Brunei in 1991. Relations with Indonesia, initially established in 1950, were suspended in 1967 but were reestablished in 1990, available at http://www.fmprc.gov.cn/chn/gjhdq/1205/default.htm

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of Amity and Cooperation in Southeast Asia and The ASEAN– China Joint Declaration on Strategic Partnership. In 2004, at the 8th ASEAN–China summit Chinese Premier Wen Jiabao proposed the creation of an Eminent Persons Group to evaluate the state of ASEAN–China relations and make recommendations for strengthening them further. Chinese Premier Wen Jiabao and ASEAN leaders marked the 15th anniversary of the ASEAN–China dialogue at a summit meeting in Nanning, China in October 2006. Initial efforts at forging closer ASEAN–China economic links began at the ASEAN Summit in 2000 where the leaders, in response to a suggestion from Chinese Premier Zhu Rongji, agreed to examine measures to enhance economic cooperation and integration with China, including the possibility of establishing a free trade area (FTA). This meeting led to the appointment of an ASEAN–China Expert Group on Economic Cooperation, which submitted a formal report in October 2001.8 At the 6th ASEAN–China summit in November 2002, the leaders of ASEAN and the then Chinese Premier Zhu Rongji signed a framework agreement on ASEAN–China Comprehensive Economic Cooperation, covering cooperation in goods, services, investment, and other areas. This marked the beginning of the process that could lead to a China–ASEAN FTA, sometimes confusingly referred to as CAFTA but officially referred to as ACFTA.9 In an interim step in the negotiation to reduce tariffs, the two sides agree to a so-called early harvest agreement, which took effect in January 2004. The agreement reduced tariffs on 600 agricultural products over a three-year period.10 The next important step was the signing at the 8th ASEAN–China summit in November 2004 of the Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Cooperation between the ASEAN and the People’s Republic of

Forging Closer ASEAN–China Economic Relations in the Twenty-first Century, a report submitted by the ASEAN–China Expert Group on Economic Cooperation, October 2001, available at www.aseansec.org/newdata/asean_chi.pdf (accessed 25 October 2006). 9 CAFTA is also commonly used to refer to the United States free trade agreement with the five members of the Central American Common Market. 10 Vietnam, Laos, Myanmar, and Cambodia were given until 2010 to eliminate these tariffs. 8

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China.11 The Agreement on Trade in Goods provided a schedule of tariff reductions, which began in July 2005.12 Negotiations to expand the Framework, which as its title suggests covers only goods, continue. It is difficult to judge what difference the Agreement on Trade in Goods will make to bilateral trade flows between China and ASEAN. It is important to note that ASEAN–China trade has grown quite rapidly since ASEAN–China relations began to warm in the early 1990s, that is, long before the process of bilateral tariff reductions that began in 2005. ASEAN 6 exports to China, which were only USD 4.5 billion or 2.2 per cent of total ASEAN exports in 1993, expanded to USD 38.6 billion or 7.4 per cent of total ASEAN exports in 2004.13 ASEAN 6 imports from China expanded from USD 4.3 billion or 1.9 per cent of total imports to USD 45.22 billion or 7.2 per cent over the same period. In short, in roughly one decade before the Agreement on Trade in Goods took effect, China’s share of ASEAN’s total trade more than tripled. And over the same period, the ASEAN share of China’s total trade increased by more than half to reach about 7 per cent. That is a remarkable accomplishment in light of the average annual 21 per cent growth of China’s total trade over the 11-year period. The rapid growth of trade between China and ASEAN has been accompanied by a substantial change in its commodity composition, particularly of ASEAN exports to China. In the early 1990s, primary products, such as wood and wood articles and mineral fuels, dominated ASEAN exports to China. As will be discussed in more detail below, a decade later ASEAN exports to China consisted primarily of semiconductors and other parts and components that are key inputs to China’s burgeoning export-processing industry, particularly electronics and IT products. One effort to estimate the additive effect on trade of an ASEAN– China FTA was made by the ASEAN–China Expert Group in 2001. Available at www.aseansec.org/16647.htm. Hereafter this will be referred to simply as the Agreement on Trade in Goods. 12 The Agreement called for starting the tariff reductions in January but they actually began on 20 July 2005. 13 ASEAN 6 includes the five original members of ASEAN (Indonesia, Malaysia, Philippines, Singapore, and Thailand) and Brunei Darussalam. Trade between China and Vietnam (which joined ASEAN in 1995), Laos and Myanmar (1997), and Cambodia (1999) is not material and not considered further. 11

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They projected that the creation of an ASEAN–China FTA would expand ASEAN’s exports to China by 48 per cent and China’s exports to ASEAN by 55.1 per cent.14 Although these percentage increases are large, they should not be taken seriously for three important reasons. First, they are based on the structure of protection that was prevailing in 1995. At that time, China’s average applied tariff rate was 36 per cent and a substantial number of tariff lines were subject to import quotas and licensing requirements. But, as already indicated, China’s import barriers were very substantially reduced in the run-up to its accession to the WTO in 2001. Estimating the trade expansionary effects by assuming that the initial structure of protection was that of 1995 rather than that of 2001 results in a very substantial overstatement of the potential trade creation effect of an ASEAN–China FTA. The second reason for the ASEAN–China Expert Group estimate not to be taken seriously is that the prospect of free trade between China and the members of ASEAN is far, far in the future, if ever. The terms of the Agreement on Trade in Goods fall far short of an FTA in several respects. First, the phase-in periods for tariff reductions are lengthy. For China and the ASEAN 6 tariffs on goods in what is referred to as the ‘normal track’ are being reduced to zero over a 6-year period that began in 2005. But for the four newer, lessdeveloped members of ASEAN, the phase-in period is 11 years, meaning tariffs will not be eliminated completely until the beginning of 2015. The second dimension in which the Agreement on Trade in Goods falls short of an FTA is that tariff phase-outs are even longer, and the ultimate tariff level that is potentially well above zero for goods that each country designates is being in the ‘sensitive track’. China and the ASEAN 6 can designate products in 400 tariff lines, accounting for up to 10 per cent of the value of imports in 2001, in the sensitive track. For these products, the tariffs must be reduced to 20 per cent by 2012 and to 5 per cent by 2018.15 But there is no requirement to ever eliminate the tariffs on these sensitive products; they can remain at 5 per cent indefinitely. China and the ASEAN 6 14 ASEAN–China Expert Group on Economic Cooperation, Forging Closer ASEAN– China Economic Relations in the Twenty-first Century, p. 148. 15 For the four least-developed members of ASEAN the deadline dates are 2015 and 2020, respectively.

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29

have decided to reduce import tariffs to 50 per cent until 2015, on a subset of these ‘sensitive track’ products, called the ‘highly sensitive list’.16 China and the ASEAN 6 can place products on up to 100 tariff lines on the highly sensitive list and there is no upper limit on the share of the total value of imports these goods account for. Tariffs on these products can remain at 50 per cent indefinitely. In short, the Agreement on Trade in Goods falls far short of an FTA, yet the estimate of the ASEAN–China Expert Group on the potential expansion of trade between ASEAN and China was based on the complete elimination of all import tariffs. Finally, the Agreement on Trade in Goods falls short of an FTA because, as its name makes clear, its scope is quite limited. China and ASEAN in their Framework Agreement on Comprehensive Economic Cooperation agreed in principle to reduce or eliminate non-tariff barriers, liberalize trade in services, and undertake other trade facilitation measures such as liberalization and protection of investment, harmonization of standards, opening of government procurement, streamlining and harmonization of customs procedures, the protection of intellectual property, and the development of dispute settlement procedures.17 None of these, however, are covered by the Agreement on Trade in Goods. Moreover, there appears to be only modest progress in negotiations on this broader agenda. In December 2006, China announced that ‘both sides have reached a consensus on service trade’ and that ‘talks on investment are underway’.18 But in several key areas there appears to be no progress. For example, Article 11 of the Agreement on Comprehensive Economic Cooperation called for the establishment of formal dispute settlement procedures among the parties within 1 year of the entry into force of the agreement on 1 July 2003. More than 3 years have passed since the deadline, but no dispute settlement procedures have been announced. Similarly, the Agreement on Trade in Goods did not reduce non-tariff barriers but merely called for parties to identify the non-tariff barriers that they would eliminate as soon as possible after the entry into force Fore the four least-developed members of ASEAN the deadline for this is 2018. Ramkishen S. Rajan and Rahul Sen, ‘The New Wave of FTAs in Asia: With Particular Reference to ASEAN, China, and India’ (unpublished draft, June 2004). 18 Qingfen Ding, ‘Age of the FTA,’ China Daily Business Weekly, 18–24 December 2005, p. 1. 16 17

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of the agreement on 1 January 2005. Two years have elapsed but it does not appear that any of the parties to the agreement have notified other parties of the non-tariff barriers they must eliminate. In addition, it appears likely that the rules of origin in the Agreement on Trade in Goods will substantially undermine the tariff reductions that have been negotiated between China and ASEAN.19 In short, the Agreement on Trade in Goods lacks the features that are likely to lead to deep economic integration. In this respect, the Agreement on Trade in Goods is similar to many of the trade agreements negotiated or being negotiated in Asia. Ellen Frost argues that they should be called ‘preferential trade agreements’ rather than free trade agreements as they fall far short of free trade.20 Yet a third reason that the Expert Group estimate should not be taken seriously is that the degree of protection provided to import competing goods in China is far less than what China’s import tariff schedule suggests. The estimate of the potential trade creation effect of an ASEAN–CHINA FTA is based on the assumption that the schedule captures the extent of protection provided in the base year, prior to negotiated reductions in applied tariff rates. I have already pointed out that using the 1995 tariff schedule as the starting point exaggerates the extent of protection China provided to imports when the Agreement on Trade in Goods was signed with ASEAN in 2004 and, thus, overstates the extent of trade creation inherent in any FTA. But in addition, we need to take into account that China’s actual tariff barriers are far smaller than those reflected in the applied most-favoured-nation (MFN) rates given in its tariff schedule. The 19 In any FTA or preferential trade agreement the rules of origin determine whether or not a good imported from a member of the group is eligible for a tariff rate less than the usual MFN rate. The rules of origin in the Agreement on Trade in Goods are modeled very closely on the rules that apply within the ASEAN Free Trade Agreement (AFTA). A large portion of trade within AFTA does not gain preferential tariffs because the importing country believes that the goods do not qualify under their interpretation of the rules of origin. In the absence of any dispute settlement procedures the exporting country cannot challenge these interpretations with the result that trade liberalization is substantially less than the schedule of preferential tariffs would suggest. 20 Ellen Frost, ‘Initiatives, Tools, and Results,’ Chapter 8 of The Asian Integration Movement and the Resurgence of Maritime Asia (Boulder, CO: Lynne Rienner, forthcoming).

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reason is that China provides for duty-free import of two important types of goods. First, foreign firms investing in China can bring in capital goods, completely free of duty, when they will be utilized in a production facility that is a joint venture or is wholly owned by the foreign firm. Second, as already noted, parts and components imported under China’s trade-processing regime are exempt from import duties. The effect of these and, perhaps, other smaller exemptions is captured by comparing China’s average applied MFN tariff with the ratio of import duties actually collected to the value of imports. The latter is shown in Figure 2.5. Even at the peak of 17 per cent in the early 1980s, import duties as a per cent of the value of imports was only about onethird the average applied tariff rate. By 2004, the ratio of import duties to the value of imports was only 2.2 per cent, only a fifth of the average applied tariff rate of 10.2 per cent.21 20% 18% 16% 14% 12% 10% 8% 6% 4% 2%

19

7 19 8 7 19 9 8 19 0 8 19 1 8 19 2 8 19 3 84 19 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 05

0%

FIGURE 2.5

China’s import tariff revenue as a share of GDP, 1978–2005

A large portion of the growth of ASEAN exports to China is related to China’s trade-processing regime. The share of ASEAN exports to China accounted for by HS categories 84 and 85, In India the ratio of import duties collected to the value of imports in 2004 was 14.1 per cent, more than six times the ratio in China. 21

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which includes computers and electronic products, rose from about two-fifths in 2001 to half by 2004. But in 2002, about two-thirds of ASEAN exports to China in these categories consisted of parts and components rather than finished goods.22 Indeed parts and components in HS 84 and HS 85 alone accounted for more than half of ASEAN’s total exports to China in 2002. Most of these goods already enjoy duty-free import into China; so the Expert Group estimate of the effect of eliminating tariffs applied to these goods results in an overstatement of the stimulus to ASEAN exports to China under an FTA. More generally, it would appear that the preferential tariff rates specified in the Agreement on Trade in Goods that China will apply to imports of ASEAN origin will not translate into import tariffs that are significantly lower than the MFN tariffs imposed on imports from other countries. Table 2.1 shows the average MFN tariff rate China applies to imports from WTO members and the reduced rates it applies to imports from ASEAN countries under the Agreement on Trade in Goods. Barring a successful conclusion of the Doha Round of trade negotiations, China’s average MFN tariff rate stays at the 9.8 per cent level achieved when its WTO obligations were fully implemented in 2005; whereas, under the terms of the Agreement on Trade in Goods, tariffs on an ever-growing share of Chinese imports from ASEAN countries will be cut. By 2010, China will eliminate tariffs on 93 per cent of all of the goods in its tariff schedule when they are imported from ASEAN countries. Recall, however, from Figure 2.5 that the ratio of import revenues collected to the value of imports in China in 2005 was only 2 per cent. If we assume no further reduction after 2004 in the actual average tariff rate, the maximum ASEAN tariff advantage in 2009 would be two percentage points; and this would occur only if tariffs on all imports from ASEAN countries were eliminated, that is, the Agreement on Trade in Goods were converted into a genuine FTA. Only if the ratio of import duties collected to the value of imports rises significantly over the next 5 years will ASEAN countries enjoy a significant average tariff preference in the China market. 22 Calculated based on detailed disaggregated data presented in Customs General Administration of the People’s Republic of China, China Customs Statistics Yearbook 2002 (Hong Kong: Goodwill China Business Information Limited, 2003).

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The same also appears to be true for China’s exports to ASEAN. As shown in Table 2.2, MFN tariff rates in the ASEAN 6 countries are relatively low, and more importantly, import duties collected as a share of the value of imports are even lower. Although it does not appear that ASEAN has published tariff rates that are comparable to those shown in column 2 of Table 2.1, it seems unlikely that ASEAN preferential tariff rates on imports from China could be lower than the effective tariff rates shown in column 2 of Table 2.2. TABLE 2.1 China’s import tariff rates, 2004–10 MFN rate 2004 2005 2006 2007 2008 2009 2010

ASEAN rate

10.4 9.8 9.8 9.8 9.8 9.8 9.8

10.4 9.9 8.1 6.6 NA 2.4 NA

Source: Column 1—World Trade Organization, Trade Policy Review: China, p. 65. Available online at http://www.wto.org (accessed 30 October 2006). Column 2—Jiang Wei, ‘Tariffs on ASEAN Goods to Drop’, China Daily, 22–23 July 2006, p. 2. TABLE 2.2 ASEAN 6 import tariff rates Average applied MFN rate

Import duties collected relative to the value of imports

2.6

Not available

Indonesia

6.9

2.8

Malaysia

8.4

1.2

Philippines

6.3

5.0

Singapore

0

0.1

Thailand

15.4

3.1

Brunei

Source: WTO country profiles, available at http://stat.wto.org/CountryProfiles. Notes: Column 1 data are for 2004 for Philippines and Singapore; 2003 for Brunei, Malaysia, and Thailand; 2002 for Indonesia. Column 2 data are 2001–03 for Malaysia; 2002–04 for Indonesia, Philippines, and Singapore; 2003–04 for Thailand.

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CHINA’S TRADE WITH CENTRAL ASIA In contrast with China’s robust trade with ASEAN, its trade with the Central Asian republics is quite modest.23 In 2004, trade with Central Asia accounted for only one-half of 1 per cent of China’s total trade, tiny when compared to the 7 per cent share of China’s trade accounted for by the ASEAN countries. Moreover, over 80 per cent of the bilateral trade flow is between China and Kazakhstan. China’s trade with the other Central Asian republics is de minimis. Tajikistan and Turkmenistan, for example, each account for about five one-thousandths of 1 per cent of China’s total trade. Kazakhstan’s dominance of trade between China and the Central Asian republics is likely to be reinforced over time as its exports of petroleum to China grow. Growth of petroleum exports to China are certain because of the China National Petroleum Corporation’s purchase of PetroKazakhstan in 2005 for USD 4.2 billion and the China International Trust & Investment Company’s (CITIC’s) 2006 purchase for USD 1.9 billion of the Kazakh oil assets of Nation’s Energy Corporation, a Canadian Company.24 China National Petroleum Company also completed a 962-km pipeline in December 2005 to pump oil from Kazakhstan to a refinery it operates in Xinjiang in Northwest China.25 On the other hand, because the total trade of the Central Asian republics is so much smaller than that of China (in 2004 USD 50 billion versus USD 1.2 trillion), China does loom much larger in the trade of the Central Asian republics, accounting for just over 10 per cent of their total trade. That share exceeds the 7 per cent share of ASEAN trade accounted for by China. Moreover, China’s role in the trade of the Central Asian republics has grown fairly rapidly since the mid-1990s. Also in contrast to the pattern with ASEAN, there is no formal architecture to the China–Central Asia economic relationship. No FTAs or economic cooperation agreements have been reached; indeed, none appear to be even under discussion. The major organization involving China and the Central Asian republics is the Shanghai Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. CITIC’s acquisition is subject to approval by Nation’s Energy Shareholders, courts in Alberta, and government authorities in Kazakhstan. 25 Mai Dou, ‘CITIC in US$1.9b Kazakh oil purchase,’ China Daily, 27 October 2006, p. 9. 23 24

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Cooperation Council (SCO). Established in 1991, its members are China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. But its principal focus is external threats and challenges to regional stability, notably terrorism. Although lip service is paid to developing economic collaboration within the Shanghai Five mechanism, the SCO remains a regional security organization, not an economic organization.

IMPLICATIONS FOR THE UNITED STATES AND INDIA China has made major efforts to improve its relations with the ASEAN countries since the early 1990s. It has scored considerable success. China was the first non-ASEAN country to join the Treaty of Amity and Cooperation in Southeast Asia and the first non-ASEAN nation to establish a Strategic Partnership with ASEAN. On the trade side, China was the first country to sign an agreement with ASEAN calling for the establishment of an FTA. The widespread fear a few years ago in Southeast Asia was that China was taking substantial amounts of foreign investment that might otherwise have gone to ASEAN countries. Today, in response to China’s willingness to provide preferential access to its market, China’s surging economy is increasingly seen as an economic opportunity for ASEAN firms. While China may claim substantially improved political and economic relations with Southeast Asia, a central theme of this article is that the improvement in economic relations has been and is likely to continue to be market driven. ASEAN–China trade expansion was very robust in the decade prior to the signing of the Agreement on Trade in Goods. The Southeast Asian countries have seen a sharp rise in their exports of semiconductors, integrated circuits, and other parts and components that go into China’s booming export-processing regime. This regime is strongly focused on electronics and IT products. Exports of these products from China reached USD 364 billion in 2005, almost two-fifths of total exports. China’s exports to Southeast Asia consist predominantly of finished goods, mostly machinery and equipment and electronic products. The large role of foreign-owned firms in China’s trade expansion, both imports and exports, confirms the market-driven nature of the trade expansion process.

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The Agreement on Trade in Goods between China and ASEAN is not likely to add more than marginally to bilateral ASEAN–China trade flows. This is true for two reasons. First, the actual tariff barriers as measured by the ratio of import duties that were actually collected relative to the value of merchandise imports, in both China and in the ASEAN 6 are extremely low. Second, the Agreement on Trade in Goods is limited to tariff reductions. As noted above, however, if the agreement is expanded to a genuine FTA that eliminates tariffs even on ‘sensitive track’ products, reduces non-tariff barriers, liberalizes trade in services, incorporates trade facilitation measures, streamlines and harmonizes customs procedures, provides for the protection of intellectual property and dispute settlement procedures, and simplifies the rules of origin that determine whether or not imports are eligible for preferential tariffs, then the trade expansion effects could become considerable. However, the schedule for the completion of negotiation on these issues, which could lead to much deeper economic integration, is not until 10 years after the entry into force of the Framework Agreement on Comprehensive Economic Cooperation, that is 1 July 2013. The implications for the United States of ASEAN–China trade expansion are inseparable from the implications of expanding US– China trade. The reason for this has already been suggested—the huge expansion in ASEAN exports to China has been driven by electronic parts and components that are assembled into final goods and are sold predominantly in the United States and, to a lesser extent, in Europe. The United States benefits from this triangular pattern of trade, primarily because the migration of assembly of consumer electronics and IT hardware products from other countries, predominantly in East Asia, to China has led to lower prices when compared to production in other locations in East Asia. As US imports from China have soared and contributed to a growing bilateral trade deficit, the share of the US deficit with other countries in the region has fallen dramatically.26 The United States gains from a security perspective as well as from improving ASEAN–China economic relations. Growing trade relations contribute to stability in Southeast Asia and enhance C. Fred Bergsten, Bates Gill, Nicholas Lardy, and Derek Mitchell, China: The Balance Sheet (New York: Public Affairs, 2006), p. 91.

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the prospect for a resolution of long-standing sources of tension, notably territorial disputes between China and ASEAN countries. The implications for India of China’s rise as a major global trader are stark. For India, the question is whether it can sustain its domestic growth and participation in the global economy based on the continued expansion of the output and export of services or, whether it, like East Asian modernizers, will ultimately have to create a more dynamic manufacturing sector. Manufacturing currently accounts for only 16 per cent of Indian economy, compared to 40.8 per cent in China.27 Sixteen per cent is unusually low for the manufacturing share of the Gross Domestic Product (GDP) for a country at India’s level of economic development. On the other hand, India’s service sector, which accounts for half of GDP, is somewhat higher than average for a lower income country. Observers, both inside and outside of India, acclaim India’s success in the development software, IT services, and IT-enabled services.28 That has led some to note that India focusses on software while China focusses on IT hardware. Although this has a kernel of truth, it obscures the vastly different scale of India’s software industry and China’s hardware industry. Software, IT, and IT-enabled services in India in 2005 accounted for only 4.1 per cent of GDP and employed only one-quarter of 1 per cent of Indian workers.29 Indian exports of software, IT services, and IT-enabled services, such as business process outsourcing (BPO) and call centres, in 2004 were only USD 17 billion.30 In comparison, in the same year China’s

More commonly cited output shares for manufacturing in China are higher but are for aggregates broader than manufacturing and/or are based on outdated information. In 2005 industry, which in Chinese statistical practice includes mining and utilities in addition to manufacturing, accounted for 49.2 per cent of output and what is referred to as secondary industry, which also includes construction, accounted for 54.6 per cent of output. National Bureau of Statistics of China, China Statistical Yearbook 2006 (Beijing: China Statistics Press, 2006), p. 61. The numbers for China just cited are based on the revisions to GDP that followed the 2004 economic census. These revisions raised the services share of GDP in 2004 by about 9 percentage points and lowered the share of manufacturing by about 5 percentage points. 28 Software includes the application, development and maintenance of software (software ADM). IT services include IT outsourcing such as remote systems management, consultancy, and Research and Development (R&D). IT-enabled services include business process outsourcing (BPO). 29 China and India: The Reality Beyond the Hype, A Deloitte Research Study, p. 6. 30 ‘The Bangalore Paradox,’ The Economist, 23 April 2005, p. 69. 27

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exports of electronics and IT hardware were USD 207.5 billion, more than 12 times India’s software and IT-related exports. Indian exports of these services were forecast to expand by about onethird to reach 23.4 billion in 2005. But in 2005, China’s exports of these products increased by 30 per cent to USD 268 billion, further widening the absolute export gap between the two countries. The small share of India’s output originating in manufacturing reflects long-term policies of discouraging foreign investment and the small-scale reservation policy that for decades reserved large parts of the manufacturing sector for small firms, thus denying many firms the opportunity to achieve economies of scale and making their goods non-competitive on international markets. Combined with high import duties on manufactures, these policies caused Indian manufacturing sector to grow both slowly and inefficiently. Largely as a result, India’s role in the global economy shrank for decades. For example, in 1950 India was one of the world’s leading exporters of cotton textiles but in the 1950s, 1960s, and 1970s, the industry steadily lost ground. By 1980 China’s share of the global clothing market was twice that of India’s. Although India introduced reforms in the industry in the 1980s, by 2004 China’s share of the global apparel market was 24 per cent, six times that of 1980, while India had increased its share from 1.7 per cent in 1980 to 2.9 per cent.31 In 1948, a year after achieving independence, India accounted for 2.2 per cent of global exports. By 1983 this had fallen to 0.5 per cent, a decline of more than four-fifths.32 From 1983 through 1991, India’s share of global exports stabilized at about 0.5 per cent. Although Indian trade growth has accelerated since its economic reforms that began in 1991, its share of global exports in 2005 was only 0.9 per cent, only two-fifths of the level of 1948.33 In short, India is still far from recovering from four decades of autarchic trade and development policies. Optimists argue that India’s growth and exports can continue to be led by services. A study by NASSCOM, the lobbying group China and India: Reality Beyond the Hype, A Deloitte Research Study, p. 4. L. Alan Winters and Shahid Yusuf, eds, Dancing with Giants: China, India, and the Global Economy (Washington: World Bank, 2006), Chapter 2, p. 28. 32 T.N. Srinivasan and Suresh D. Tendulkar, Reintegrating India with the World Economy (Washington: Institute for International Economics, 2003), p. ll. 33 India’s exports in 2005 were USD 89.8 billion; world exports were USD 10,393 billion. 31

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of the Indian IT industry, and McKinsey argued that IT services would account for 7 per cent of Indian GDP by 2010 and for 17 per cent of the growth between 2004 and 2010.34 Exports of IT services were expected to reach USD 60 billion by 2010. The study anticipated that the global market for off-shored IT services could grow eightfold and for BPO 11-fold over the same period. In addition, India could capture a portion of the huge USD 750 billion global market for engineering services. Currently, only about USD 10 to USD 15 billion of this is being off-shored, of which about 12 per cent goes to India. By 2020 the market for off-shored engineering services could reach from USD 150 billion to USD 225 billion. Optimists argue that India could capture as much as USD 50 billion if the country ‘builds the capacities, capabilities, infrastructure, and the international reputation to become the preferred destination for these complex, high-valued services’.35 There are several obvious weaknesses in the optimistic view on the future contribution of the Indian IT industry to economic growth and export expansion. First, even if the optimistic scenario is realized, the contribution of IT services to Indian exports will be modest in comparison to China’s growth of manufactured exports. For example, the NASSCOM/McKinsey projection of exports of USD 60 billion by 2010 translates into incremental exports of USD 7 billion annually. If the prerequisites mentioned above are met, India can capture an additional USD 50 billion in off-shored engineering services by 2020, which would translate into incremental exports of USD 3 billion annually. In comparison with the prospect of USD 10 billion in annual, additional Indian services exports, China in 2006 generated incremental manufactured exports of USD 203 billion.36 Second, human resource constraints may slow the expansion of Indian exports of software and other IT services from its 5-year compound rate of growth of 30 per cent annually. Staff shortages, particularly for experienced IT project managers, are reportedly

34 Cited in Simon Long, ‘Now for the Hard Part: A Survey of Business in India,’ The Economist, 3 June 2006, p. 13. 35 OECD, ‘National Accounts and Economic Statistics—Services: Item 21 c) iv: Measuring India’s Trade in Services,’ September 2006, available at www.oecd.org/ dataoecd/52/54/37386703.pdf (accessed 8 November 2006). 36 The General Administration of Customs of the People’s Republic of China, China Customs Statistics, December 2006, p. 14.

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leading to wage increases approaching about 20 per cent in 2006.37 Even NASSCOM acknowledges that limited human resources are the biggest constraint on the continued development of the IT sector. Finally, even if the human resource constraint on the development of the Indian IT sector can be overcome, services-led economic growth will not generate the job growth needed to lift out of poverty the 260 million Indians living on less than USD 1 per day. More generally, the IT boom may lead to rapidly rising wages for Indians with tertiary degrees, but more rapid growth of labourintensive manufacturing would accelerate the movement off the land of workers with basic literacy. Thus, it seems unlikely that India will be able to accelerate the expansion of its global economic footprint without adopting policies that would allow it to exploit its comparative advantage in labourintensive manufacturing. Wages in India are less than one-fifth the level prevailing in China, suggesting the huge potential in labourintensive manufacturing and assembly.38 There are important constraints, however, that limit the pace at which a transition to industrial-led growth might be made. One of the most important has been India’s historic underinvestment in infrastructure. In 2002, infrastructure spending in India was USD 18 billion, about one-seventh of China’s USD 128 billion. In 2003, the comparison was similar, USD 21 billion versus USD 150 billion. Of course, China’s economy is much larger but expressing infrastructure investment as a share of GDP still leaves a 3:1 advantage for China: 10.5 per cent of GDP versus 3.5 per cent in 2003.39 As a result, China’s highway network is seven times that of India and its lead-time for exports to the United States is about a third or a fourth that is required in India. Stunningly, Chinese ports already handle one-fifth of global container movements. Simon Long, ‘Now for the Hard Part: A Survey of Business in India,’ The Economist, 3 June 2006, p. 5. 38 In 2003 (the last year for which the data are available in this source) according to the International Labour Organization, average earnings per month in manufacturing in India was USD 23, in China it was USD 127. Available online at http://laborsta.ilo. org/cgi-bin/brokerv8.exe (accessed 13 November 2006). 39 China and India: Reality Beyond the Hype, p. 4. L. Alan Winters and Shahid Yusuf, eds, Dancing with Giants: China, India, and the Global Economy, Chapter 2, p. 38. 37

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A second constraint is the relatively high degree of import protection in India when compared to China. The Indian government has brought down applied tariff rates for manufactured goods by several percentage points in recent years, but as already noted, India’s average applied MFN tariff rate is about three times that of China and its ratio of import duties actually collected relative to merchandise imports is seven times that of China. Indian manufacturers participate in global production networks only to a limited degree because the high tariffs on imported parts and components in many cases make goods produced in India uncompetitive in world markets. The government did fully phase in the IT agreement by the end of 2004, which eliminates tariffs on a broad range of electronic products, parts, and components and it has indicated the intention of introducing a more effective system for import duty exemptions on other parts and components used in the production of manufactured exports. But with respect to the latter, Indian reforms lag those of China by about two decades. Finally, Indian labour laws are a handicap to the development of globally competitive manufacturing firms. Firms with more than 100 workers have been barred for several decades from laying off workers without government permission. This effectively encourages manufacturing firms to be more capital-intensive than they would be in a more market-oriented labour market, undermining Indian ability to develop its comparative advantage in labour-intensive manufacturing. Even though India may not have a realistic prospect of becoming a major exporter on the scale of China over the coming decade,40 increased investment in infrastructure, elimination of the remaining small-scale, set-aside restrictions in manufacturing, reduction of import restrictions, and labour market liberalization would increase the prospect for a more robust manufacturing sector that could contribute significantly to the expansion of Indian growth, employment, and exports.

L. Alan Winters and Shahid Yusuf, eds, Dancing with Giants: China, India, and the Global Economy, Chapter 2, p. 50.

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3 CHINA’S ECONOMIC RESURGENCE AND ‘FLEXIBLE COALITIONS’ Vivek Bharati

INTRODUCTION There is now enough evidence to show that China’s economic surge over the last two-and-a-half decades has been the most important global trend. Some like Thomas Friedman have argued that when the history of the present times is written, the most important development would not be 9/11 but the rise of China. Indeed, this appears to be the most debated subject among analysts of global economic and political trends, and continues to evoke mixed and even strong views. There are forecasts that China’s rise is not sustainable and its collapse is imminent. Others are convinced that the Chinese success is here to stay, and this juggernaut would continue to roll on at the pace it was doing over the last two-and-a-half decades. Both these extreme views have many takers and there are many who believe in treading the middle ground. Even though enough has been said from as many points-of-view as possible, our understanding of China must continue to evolve to keep pace with the evolution of China itself and inform our response to this unfolding phenomenon. During the second half of the 20th century, a number of developing countries in Asia, like Japan earlier, have demonstrated impressive economic performance. Thus, Taiwan, South Korea, Singapore, and even Thailand and Malaysia have sustained high growth rates over decades, sharply to reduce poverty and join the status of middle-income countries. Following Japan, South Korea has also gone on to join the ranks of the Organisation for Economic Cooperation and Development (OECD) and has notched impressive technological and industrial achievements.

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But none of these economies ever made the impact that China has. Since 1980, China has clocked an average Gross Domestic Product (GDP) growth rate of over nine per cent to emerge as the second-largest economy in the world in Purchasing Power Parity (PPP) comparisons. In recent years its GDP growth rate has risen to over 10 per cent. It has created the most decisive development outcome: the reforms that Deng Tsiao Ping initiated in 19781 have lifted over 300 million people out of poverty—the largest ever number in history to have benefitted from such rapid economic growth in less than three decades. China has been, perhaps, the most aggressive globalizer the world economy has ever encountered in terms of its sheer impact. Arguably, China’s impact on the global economy is far more than the rise of other Asian economies including Japan, and parallels the rise of the United States in the 19th century.2 Latest statistical comparisons in PPP terms by the World Bank show that China has administered a bigger shock to the global economy than what were created by the United Kingdom and United States over the 18th and 19th centuries. In 1979 China started with 2.9 per cent of world income and grew at an annual average of 6.6 per cent points faster than the world economy for 26 years. The nearest parallel to China was the growth of ‘United States over the period 1820–70 during which time the differential was 3.3 per cent points over 50 years (with a lower starting share)’.3 Although Japan, Korea and Taiwan recorded faster rates of growth than China over the first 25 years of their high-growth episode, ‘in terms of an expanding share of world output, China’s growth spurt has been much greater than any other yet seen’.4 In PPP terms, it is already the world’s second-largest economy accounting for 12.1 per cent of Global GDP in 2004 (United States: 21.3 per cent; Japan: 7.1 per cent; India: 5.8 per cent) and contributed 24 per cent of the James Kynge, China Shakes the World (New York: Houghton Mifflin, 2006), p. 15. Kynge argues that China’s reforms were not brought about by clear top-down policy initiatives but change happened because of defiance of policy. ‘Much of the crucial impetus behind the creation of wealth during this period (1980s) sprang not so much from the implementation as from the miscarriage of central government policies.’ 2 Oded Shenkar, The Chinese Century (Philadelphia: Wharton School Publishing, 2005), Chapter 1, p. 1. 3 The World Bank and the Institute of Policy Studies, Dancing with Giants: China, India, and the Global Economy (Washington DC: The World Bank, 2006), p. 5. 4 Ibid., p. 6. 1

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world’s economic growth between 2001 and 2003.5 Considering that China has continued to sustain GDP growth at over 10 per cent after 2003, this contribution to world GDP measured in PPP terms has become bigger, particularly after the United States economy has slowed down in the current year. (When seen together with Japan, Association of Southeast Asian Nations [ASEAN], and now increasingly India, Asia has emerged as the second-biggest driver of the global economy. Asian growth is one of the key factors behind the impressive global economic growth in recent years.) In terms of exports, ‘China is arguably the largest shock we have seen thus far’6. During the 10-year period ending 2004, China accounted for 9 per cent of the growth in world exports of goods and services, close to 10.7 per cent share of the United States. It accounted for nearly 8 per cent of the world growth in imports during the same period, a share second only to the United States. China is today the world’s third-largest trading nation behind the United States and Germany with over 7 per cent share of world exports of goods and services and over 6 per cent share of world imports. One dimension of China’s growth is its rising dependence on foreign trade, which at nearly 65 per cent of GDP is more than twice that of European Union (EU) and more than thrice that of United States and Japan. This is one reason why China’s economic surge has impacted almost all countries of the world.7 In a short period of time, therefore, China has come close to becoming the second-biggest growth pole of the world after the United States. Seen this way, China is poised to play a constructive role in the global economy as it creates multipolarity, thus lessening the burden on the United States of sustaining global economic growth and provides an opportunity to countries hitherto dependent on the United States market, to diversify into other markets. In the future, a recession in the United States would be less of a shock International Monetary Fund, ‘China’s Growth and Integration into the World Economy,’ Occasional Paper 232, (Washington DC, 2004), p. 1. 6 Ibid., p 7. 7 The pace of urbanization indicates the unprecedented scale and speed of China’s transformation. In 1949, only five Chinese cities had a population of more than a million. By 2000, the number had risen to 40. But these are early years, and over the next four decades the urban population in China would double from the present 400 million to 800 million, making this the biggest urbanized country in the world and this indicates the gigantic dimensions of future size of the consumption market. See James Kynge, China Shakes the World (New York: Houghton Mifflin, 2006), pp. 28–32. 5

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to the global economy than it was a decade ago or is even now. With India joining the Asian party, this multipolarity in the global economy would become even more pronounced in the future. Thus far, China’s biggest global impact has been felt in the manufacturing space and on global commodity balances. By emerging as the largest consumer in the world in a number of commodities, China has brought about a global commodity boom as commodity producers have run into capacity constraints. This boom is expected to last till new investment creates fresh capacities across the board. In 2005, China’s consumption of aluminium, copper, lead, nickel, tin, zinc, iron ore, steel, and coal ranged between 22 per cent and 32 per cent of global consumption, with these shares being much bigger than those of the United States.8 It consumes nearly 50 per cent of world’s cement. Even in some of the farm commodities such as wheat, rice, palm oil, cotton, and rubber, China is now the world’s biggest consumer thus playing a key role in determining their global price cycles. China’s growth now impacts the economic performance of a number of commodity-based economies in Africa and Latin America as also the Organization of the Petroleum Exporting Countries (OPEC), even though its consumption share of oil is about a third of the United States. More importantly, China has redefined the global manufacturing landscape to emerge as the fastest growing exporter of manufactured goods and has exerted a downward pressure on prices of manufactured goods, particularly on labour-intensive manufactures, where it has emerged as the leading player. ‘China-based factories make 70 per cent of the world’s toys, 60 per cent of its bicycles, half its shoes, and one-third of its luggage’.9 Its impact is now being increasingly felt further up the technology ladder and value-chain, and it builds half of the world’s microwave ovens, one-third of its television sets, a quarter of its washers and one-fifth of its refrigerators; these products represent the fastest-growing segment of its exports. Manufacturers in other countries increasingly rely on Chinese components or sub-assemblies to stay competitive.10 The World Bank, op. cit., p. 11. Oded Shenkar, op. cit., p. 2. 10 Ibid., p. 3. 8 9

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China’s reforms began with agriculture and during the first half of the 1980s, its agriculture growth surged by nearly 6 per cent per annum. Subsequently, labour-intensive manufacturing became the key driver. And now, manufacturing which remains the key engine of growth and contributes nearly 50 per cent of GDP11 is becoming increasingly sophisticated. It is noteworthy how quickly China has been able to enlarge its manufacturing capability from low-value, basic and labour-intensive manufactures to high-value-added goods employing advanced manufacturing technologies. China’s manufacturing surge has had a devastating impact on the sector across the world, particularly in advanced countries where many manufacturing clusters have been decimated yielding ground to the Chinese onslaught.12 The Chinese manufacturing story has yet to make its full impact felt and the onslaught would continue for many years to come. From less than a quarter in 1990, well, more than half of China’s exports now comprise medium-high to high-technology products ranging from electronic hardware and machinery, including personal and notebook computers, DVD players, LCDs, cell phones to telecom and communication equipment, and many other advanced technology products. China is today the world’s largest exporter of electronic hardware. The United States, the acclaimed technology powerhouse of the world suffered a deficit of USD 36 billion in its trade with China of advanced technology products in 2004.13 China is moving from subcontracting to development and design, and further to branded production.14 Chinese firms, which began as small businesses with subcontracting are now fiercely competing with foreign firms in domestic (and even some Asian) markets, and are poised to becoming global players. This is not a freak occurrence but the consequence of wellplanned thrust on acquiring technological capabilities. In the first phase of post-reform development 1980–95, China focussed on labour-intensive manufacturing, but subsequently, the emphasis 11 India’s economy in contrast is dominated by services that account for over 50 per cent of the GDP and manufacturing contributes only 17 per cent of the GDP. 12 See James Kynge, op. cit., for the impact on Italian textile and silk clusters in Prato and Como, pp. 75–85. Even the Mexican textile industry has suffered heavily. The Indian toy industry was nearly wiped out. 13 Ernest H. Preeg, The Emerging Chinese Advanced Technology Superstate (Arlingonton, VA: Manufacturers Alliance, June 2005). 14 Oded Shenkar, op. cit., p. 39.

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shifted to high-technology products. The shift is not confined to manufacturing alone but encompasses development of national Research and Development (R&D) capability. During 1995– 2002, China’s R&D expenditures grew by 22 per cent per year, compared with 6 per cent in the United States. These expenditures are now estimated to be higher than those of Japan, more than 60 per cent of the EU level and about 40 per cent of the United States level.15 According to an OECD report, China has already overtaken Japan to become the second biggest spender on R&D. In 2004, China spent USD 136 billion on R&D when compared to USD 130 billion spent by Japan, and as a proportion of GDP, this expenditure has doubled from 0.6 per cent in 1995 to 1.2 per cent in 2004. During the same period, the number of researchers in China rose from 77 per cent to 926,000 that are a close second to the 1.3 million in the United States.16 The Chinese use a mixture of strong negotiations combined with fiscal and other incentives to motivate foreign investors to set up R&D bases in China or form technology-sharing joint ventures with Chinese companies.17 The result is that nearly 60 per cent of national R&D is carried out at the enterprise level. In addition, the Chinese are rapidly increasing their science and technology expenditures at government-owned laboratories and universities. They have revamped and reformed their higher education system to improve both quality and quantity. The Chinese are now estimated to be churning out 70 per cent more engineering doctorates than the United States, and are projected to produce more than four times the US number by 2010. China is already making the third-largest patent filings globally.18 This is one aspect that differentiates China’s rise from that of other Asian countries, particularly Japan, in that China is obsessed with becoming a knowledge superpower, a leader in Ibid., p. 5. OECD report and its Head of science and technology division, Dirk Pilat, quoted in Business Standard, 5 December 2006, New Delhi. 17 Oded Shenkar, op. cit., pp. 66–69. 18 Xinhua New Agency, 14 September 2006, reported the development by Chinese Academy of Sciences: ‘China’s newly upgraded generic 64-bit CPU chip, dubbed Longxin IIE, was accredited by experts yesterday, marking a major step forward in the country’s ambitions to control its own intellectual property rights in microprocessors.’ ‘Experts believe that Longxin IIE, equivalent to pentium 4 processor, is next only to those produced in the United States and Japan.’ 15 16

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innovation, and it has created a huge infrastructure and ecosystem (hi-tech parks with incubators, enterprises, and universities in one place)19 to support R&D activity, and is also focussing on creating a world-class university system. The Chinese government is also sending large numbers of Chinese students to the United States and other countries and wooing them back with incentives to work in R&D establishments in its newly created hi-tech parks. The bulk of the R&D work is currently on development work, to alter products for the fast-growing Chinese market, rather than basic scientific research. However, the ambition of becoming a world leader in knowledge creation has been made amply clear by the Chinese leadership. The decision to send the first Chinese on the moon by 2008, the holding of the Olympics, and the Shanghai World Expo are just expressions of that ambition.20 Make no mistake, China has ambitions to be the most powerful and biggest economy of the world and second to none in innovation. It is now devoting huge resources to biotechnology as it feels that following IT biotech is the next frontier of innovation. Today, it has developed the capability of copying biotechnologies developed in the United States and Europe and is now focussed on becoming the innovation leader by creating intellectual property. Another difference that marks China’s rise is that even as it moves up the manufacturing value-chain, it will not vacate the labour-intensive manufacturing space to emerging competitors, the way Japan, South Korea, Taiwan, and Singapore did in the past because of increases in wage costs. True, wage costs are rising China has begun establishing huge hi-tech parks that are much bigger in scale than one sees in the United States. One of China’s biggest technology parks is in Xian, the capital of Shaanxi province. It is a ‘35 square kilometer Chinese silicon valley housing 7,500 companies and supported by more than 100 universities that churn out 120,000 graduates a year, half in computer sciences alone. And that is just the start. The Xian High-tech Indsutries Development Zone will eventually span 90 square kilometers at a cost of 100 billion yuan (USD 12 billion)’. The Economist, 6 May 2006, p. 67. 20 See James Kynge, op. cit., pp. 31–32 on how ‘China is remaking itself in the image of its superpower mentor, the United States—only more quickly and on a larger scale’. Examples are China’s huge investments in infrastructure such as over 30,000 km of expressways that will become 86,000 km by 2030, bigger than the US system. The Qinghai–Tibet railway, 800 km of which runs at over 14,500 feet above sea level, and the Three Gorges Dam are gigantic efforts signaling the scale of the Chinese vision and the determination to achieve it. 19

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in China’s east coast that led the manufacturing revolution. But this is only causing labour-intensive production to move inwards to provinces in the hinterland that continue to offer vast pools of labour migrating from agriculture in search of opportunities in secondary and tertiary sectors. Therefore, the competitive and downward pressure on manufacturing prices exerted by China would continue for years to come. China would be the first Asian manufacturing force that would compete at all ends of the manufacturing value-chain ranging from light manufacturing to hightechnology products. This dimension of China’s growing manufacturing prowess must weigh upon economic policy in all countries. Also because what will sustain China’s manufacturing competitiveness is the large size of its domestic market that creates economies of scale and lowers the risk of setting up large capacities. For instance, currently China’s middle class offers a market of over a trillion dollars for industrial products alone, which in size is the biggest in any other emerging economy.21 It is not surprising that China’s entry into global markets in any sector is voluminous and decisive, and the sheer scale of its operations confers a competitive advantage. Over the last decade and a half, China’s manufacturing sector has got increasingly integrated into the global production chain.22 The share of parts and components in China’s non-fuel imports has increased from 15 per cent in 1992 to 31 per cent in 2004 and from 5 per cent to 15 per cent in China’s exports.23 Thus, China is increasingly weaving a web of interdependence with other economies, particularly those in the Asian region. China is not just a competitive threat but also a presents an exciting economic opportunity for other countries. Yet another feature of China’s rise is its growing role in global financial flows. It accounted for 9.4 per cent of global Foreign Direct Investment (FDI) inflows in 2004, and if one adds the inflows to Hong Kong, the figure rises to 14.7 per cent. China’s total FDI liabilities amounted to 4.1 per cent of world’s GDP in 2004, a figure broadly in line with China’s share in global GDP measured in nominal dollars. The World Bank, op. cit., p. 29. R. Nicholas Lardy, ‘The Economic Future of China,’ lecture at Asia Society, Houston, 29 April 2002, available at http.//www.asiasociety.org/speeches/lardy.html 23 The World Bank, op cit., p. 63. 21 22

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Some portfolio equity flows are also taking place, even though these remain a small fraction of FDI inflows. The total stock of inward FDI amounted to around 30 per cent of GDP in 2004.24 Outward flows of FDI are small even though they have begun to rise and the stock amounted to 2.2 per cent of GDP in 2004. No less important is the role being played by China’s huge and mounting foreign exchange reserves that are being parked in advanced country debt markets, particularly in US treasury bills. At the end of September 2006, China’s forex (foreign-exchange) reserves stood at USD 988 billion and adding Hong Kong’s USD 131 billion, the figure rises to USD 1,019 billion. China’s total reserves parked outside, largely in the United States were 37.3 per cent of GDP in 2004. At the end of September 2006, China’s total holding of US treasury bills was USD 342 billion, with Japan being the biggest investor with a total holding of USD 639 billion. If one adds Hong Kong’s holding, the figure for China rises to USD 392 billion.25 In terms of the balance sheet of foreign assets and liabilities, while China’s foreign assets constitute low-yielding debt, its liabilities take the form of high-yielding equity or FDI.26 The huge inflows of FDI into China have implications about the availability of these flows for other emerging markets, while the sustained rise in China’s reserves have sparked off debates about the dependence of the US foreign account and the dollar on China, on the one hand, and their implications for China’s financial and monetary system, on the other. In sum, China’s economic rise in the late 20th century has redefined the global economy and can be compared to the rise of the United States in the previous century. With the United States and EU it now forms the world’s third-biggest economic pole, and has emerged as the second-biggest contributor to world trade and GDP growth after the United States. It has changed the global economics of manufacturing production and is rapidly moving up the hi-tech value-chain without vacating the space it occupies in labour-intensive manufactures. It has declared ambitions of becoming the world leader in technology and innovation and is focussed on rapidly

Ibid., pp. 81–92. Earth Policy Institute, ‘Major Foreign Holders of US Treasury Securities,’ September 2006, available at http://www.earthpolicy.org/updates/2006/update62_data.htm 26 Ibid. 24 25

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enhancing its R&D capabilities. China’s economic rise is matched by its growing importance in global financial flows as a source of large forex reserves on the one hand and the hottest emerging market destination for FDI on the other.

II The most commonly perceived and discussed aspect of China’s rise in the global economy is its phenomenal competitiveness, particularly in manufacturing, and its huge and mounting trade surpluses. Its latest annualized trade surplus was USD 155 billion in October 2006.27 China’s trade surpluses arise largely from its trade with the United States and EU. During the first 9 months (January– September) of 2006, China’s trade surplus was around USD 110 billion of which the United States accounted for USD 102 billion and the EU USD 62 billion.28 What is not adequately emphasized is the pattern of interdependence that China has woven in Asia and the trade deficits that it runs with a number of Asian countries, particularly its neighbours in East and Southeast Asia. During the same period, that is January–September 2006, China incurred a trade deficit of USD 59 billion in its trade with Asia. Indeed, Asia now accounts for 66 per cent of China’s imports and 47 per cent of its exports. The largest trade deficits during this period were with Taiwan (USD 49 billion), Korea (USD 34 billion), Japan (USD 18 billion), and Philippines (USD 8 billion), followed by Saudi Arabia, Malaysia, Thailand, Iran, and Australia. All the 10 largest trade deficits were with Asian countries.29 The trade deficit with ASEAN was USD 14 billion. China’s growing economic links with ASEAN has transformed the relationship and their bilateral trade has multiplied manifold from only USD 2 billion in 1980 to USD 130 billion in 2005, and is projected to reach USD 200 billion by 2010.30 This figure may, in fact, be reached earlier considering The Economist, ‘Emerging Market Indicators,’ 11 November 2006, p. 106. Ministry of Commerce of the People’s Republic of China. 29 Ibid. 30 Donald Greenlees, ‘ASEAN Hails the Benefits of Friendship with China,’ International Herald Tribune, November 2006, available at http://www.iht.com/ articles/2006/11/01/news/asean.php 27 28

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that the rate of trade growth between 1990 and 2006 exceeds 20 per cent. ASEAN is now China’s fourth-largest market for exports and it’s the third-largest source of imports. China is poised to become ASEAN’s largest trade partner supplanting the United States. It is noteworthy that both China and ASEAN regard each other’s economies and industrial structures as complementary and mutually advantageous. With China’s growing manufacturing competitiveness over the last two decades, and the rise in wages in ASEAN, components, and subassemblies from the latter countries are increasingly being exported to China, where they are put together as finished products and re-exported to North American, European, and even other Asian and developing country markets. China is proactively strengthening its integration with ASEAN and last year, it slashed tariffs on 7,000 items of import. Southeast Asian economies are now looking forward to the China–ASEAN FTA (Free Trade Agreement), which is planned to take off in 2010, to reduce their dependence on Western and United States markets.31 Once formed this would be the most populous FTA with over 1.8 billion consumers. China’s economic rise has offered a growth opportunity to the ASEAN countries and also the prospect of reducing the risk of their exports being too dependent on the United States. The growing interdependence between China and ASEAN is being reinforced by aid and investment flows. In some ASEAN countries, China has already displaced the United States as the largest aidgiver.32 ASEAN countries have already made a total net investment of over USD 40 billion in China, and the latter’s investment in ASEAN though small at USD 158 million is now beginning to rise. Indeed, ASEAN countries expect China to emerge as a major source of FDI flows in the future. China has committed USD 5 billion of soft loans to support Chinese companies in investing and setting up business ventures in ASEAN. Over three million tourists from ASEAN (onefifth of total outflows) visited China in 2005 and the same number of Chinese (one-third of outflows) tourists visited ASEAN in 2005.33 31 President Gloria Arroyo of the Philippines, Chairperson of ASEAN, at the China– Asean business summit, 2006, quoted in International Herald Tribune. 32 Joshua Kurlantzick, China’s Charm: Implications of China’s Soft Power, Carnegie Endowment Policy brief, (Washington DC: Carnegie Endowment, June 2006). 33 GOV.cn, Chinese government’s official web portal, ‘China ASEAN Vow to Expand Trade Links,’ 31 October 2006.

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There can be little doubt that ASEAN is poised to seamlessly integrate into greater China comprising Hong Kong, Taiwan, and to a growing extent South Korea. China is already Japan’s largest trading partner. In 2004, China’s trade with Japan grew from 28 per cent to USD 167 billion to become bigger than US–Japan trade. While Japan’s trade with China has grown rapidly in recent years, its trade with the United States and EU has tended to stagnate. Japan’s FDI into China is also on the rise. Similar is the case with South Korea which derives its biggest trade surplus from China, and its trade with the latter is poised to become as big as that with the United States and Japan. South Korea today invests more in China than in the United States. In Asia, therefore, China has already displaced the United States to either become most Asian countries’ largest trading partner or is on the way to becoming one. And it is doing this by fostering a trend towards greater regionalization of trade in East and Southeast Asia. ‘Exports and imports have been growing faster within the region than between the region and the rest of the world’.34 There is a redivision of labour taking place between China, on the one hand, and Japan and to some extent, South Korea, on the other. As their costs of production are rising, Japan and South Korea are vacating labour-intensive segments of industry and outsourcing them to China. There is an industrial restructuring taking place across East and Southeast Asia, and this would accelerate as regional and free trade arrangements come into force in the future. (Apart from ASEAN, China is also discussing FTAs with South Korea, Taiwan, and Japan.) This industrial restructuring is also driving intra-regional flows of FDI. For example, in 2004 nearly three-fourths of China’s entire FDI liability35 was from neighbouring countries in East and Southeast Asia, reinforcing the regional economic integration being forged through trade and financial flows. This trend would continue into the future and apart from trade, intra-regional flows of FDI would also accelerate becoming even more important than FDI flows to the region from other parts of the world. 34 Jagdish Sheth, and Rajendra Sisodia, Tectonic Shift. The Geoeconomic Realignment of Globalizing Markets (New Delhi: Sage Publications, 2006), p. 273. 35 The World Bank, op. cit., p. 93.

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The implications of this growing Asian economic integration brought about by China’s blistering growth and continuing competitiveness would be far-reaching in the years to come. China including ASEAN, Taiwan, along with Japan and South Korea, could become a formidable economic powerhouse with the potential of exercising both complementary and countervailing forces on the global economy as powerful as the United States. It would appear that trade and economic integration in Asia would generate compulsions for geopolitical and security rearrangements in the region. Yet, even as they get closely integrated into China’s economy, the desire to diversify economic options makes many ASEAN countries look to India to provide that balancing force. ASEAN accepted India as full dialogue partner in 1995. Thailand entered into a FTA with India that became operational this year, and Singapore too has signed a Comprehensive Economic Cooperation Agreement (CECA) with India that includes trade in both goods and services. Singapore’s political leadership has often likened ASEAN to a bird that needs two wings, China and India, to fly. Significantly, countries such as Singapore and Malaysia have strong presence of both the Chinese and Indian diaspora. Several Southeast Asian nations like Indonesia, Philippines, and Vietnam have had territorial conflicts with China, and so does Japan. In 2005, however, China, Philippines, and Vietnam peacefully resolved their conflicts over Spratlys Islands by agreeing to jointly prospect for natural resources (oil and gas) in the region. Japan too remains wary of China and has supported India’s entry into ASEAN and APEC, although the latter remains a discussion forum without a clear trajectory into the future. Japan enjoys strong economic relations with India and continues to provide aid to support infrastructure development in India. A number of leading Japanese companies have made huge investments into India, and Suzuki, in fact, makes more money in India than it does in Japan. Apart from the strain created by strident nationalistic posturing by China over the colonial past, Japan is wary of the strategic implications of China’s rise and is increasingly raising its engagement with India. Over the last one year, Japanese funds have begun aggressively to invest in Indian stocks, and there is now a prospect of much higher inflows of FDI into India. South Korea too maintains a substantive economic engagement with India and its chaebols have developed strong footholds in the Indian market.

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Taiwan is also displaying a growing interest in India and there is a noticeable increase in the number of business delegations coming to India. China’s trade with South Asia has grown rapidly, but unlike with ASEAN where it runs a trade deficit, China enjoys a huge trade surplus with South Asian Association for Regional Cooperation (SAARC) countries excluding India. In 2005, China’s exports to Pakistan, Bangladesh, Sri Lanka, and Nepal, in that order, were over four to 100 times bigger than imports from these countries. China had a trade surplus with Pakistan of USD 2.6 billion, with Bangladesh of USD 2.3 billion, with Sri Lanka of USD 900 million, and Nepal of USD 179 million. These numbers show that China’s economic integration is more pronounced with middle- or high-income countries in ASEAN and East Asia. Lower-income countries in the South Asian region that are dependent largely on labour-intensive exports, textiles in particular, are not getting the same benefits in their trade with China as ASEAN. True, China’s growing market does offer an export opportunity for emerging countries in Asia. But this opportunity is limited to middle- or higher-income countries that have developed manufacturing capability in capital goods, components and subassemblies. Low-income countries, particularly those in Asia that are dependent on labour-intensive consumer goods exports, have very little to export to China and are also, in fact, suffering the impact of China’s export surge in items of their interest in other markets.36 Countries such as Pakistan and Bangladesh have suffered stiff competition in textile exports.37 In fact, they would face even more competitive pressures once restraints on China’s textiles exports are removed in the US and EU markets in 2008. Foremost among these countries could be textile exporters in South Asia such as Bangladesh and Pakistan. India’s textile exports could also come under pressure, though unlike Pakistan and Bangladesh it is not critically dependent on textile exports. Debapriya Bhattacharya, and Syeed Ahamed, ‘Rise of China and its Economic Implications for the Low Income Neighbours,’ Mimeo (paper presented at Observer Research Foundation [ORF] seminar, November 2006). 37 Ibid. The paper explains China’s negative impact on Bangladesh’s textile exports to the United States. 36

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To mitigate this possible future impact, China has moved quickly to enlarge its economic engagement with Pakistan by announcing investments in its infrastructure, including nuclear energy and also setting up two special economic zones where Chinese businesses would invest, and one of these would be focussed on textiles. China has also announced an FTA with Pakistan to integrate it into China’s economy. These are just some of the wide-ranging economic initiatives announced by China’s President Hu Jintao during his latest visit to Pakistan. In Pakistan’s case, economic cooperation seems to be dictated more by strategic and security considerations, as normal trade relations have not brought about the degree of mutual benefit and trade-induced division of labour as seen in the case of ASEAN. The growing importance of the Gwadar Port in Baluchistan for China’s maritime interests and its links with West Asia and the close military ties between the two countries are factors that seem to outweigh the impact of trade imbalances. Similarly, China is forging close economic and security links with Bangladesh and Sri Lanka. China’s rise has, therefore, generated contradictory impulses. On the one hand, we see its neighbours seizing the economic opportunity offered by China to create rapid economic integration and enmeshing of production systems between China and East and Southeast Asian economies. Yet, despite enjoying trade surpluses with China, countries of ASEAN, Taiwan, South Korea, and Japan continue to seek political and economic counterweights to China. On the other hand, we see that despite the lack of economic congruence and low levels of mutual benefit through trade, the SAARC nations excluding India seem to be courting China for strategic reasons and security ties seem to be motivating greater economic engagement. Thus, national interests in the region continue to be an amalgam of a complex interplay of factors and each country seeks to exploit regional and global contradictions to maximize its space and room for manoeuvre. In the aggregate, these national interests are responding to China’s rise by forming ‘flexible coalitions’ that need not converge across economic and strategic spaces. At the same time, it is evident that China is having multiple impacts across Asia. Its diverse and competitive capabilities across the manufacturing value-chain ranging from low-cost labour-intensive manufactures to high-end electronic machinery is providing both an economic opportunity to some countries and

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posing a competitive threat to others. It is also evident that where China does not confer economic advantage through trade, it is seeking to create linkages through strategic and military cooperation, and providing investments and loans to support infrastructure development.

III The rise of the other Asian economy, India, and its rapidly evolving engagement with China need to be situated in this context. India–China trade has gathered momentum over the last few years. In 2005, total trade turnover grew by 37 per cent to reach around USD 19 billion, with a trade surplus of USD 0.83 billion in China’s favour.38 Trade turnover increased by 27 per cent in the first 7 months of 2006 to reach USD 13.65 billion and was driven by a 60 per cent jump in India’s imports from China. Although imports reached a figure of USD 7.5 billion, India’s exports increased marginally by 2 per cent to reach USD 6.2 billion, creating a trade deficit for India of USD 1.2 billion in contrast to a surplus of USD 1.4 billion in the same period last year. Stagnation in exports was brought by a fall in exports of iron ore and steel.39 Despite the rapid growth in bilateral trade, India’s share in China’s trade remains small, it is the 13th biggest export market for China and is its 17th biggest source of imports. In contrast, China has emerged as India’s second largest trading partner and with trade turnover expected to touch USD 24 billion in 2006, it is poised to overtake the United States as India’s largest trading partner. During his visit to India in November 2006, Chinese President Hu Jintao and Indian Prime minister Manmohan Singh have set a target of USD 40 billion trade turnover for 2010. China has offered to sign an FTA with India. India’s trade pattern with China is that of a raw material and natural resource-based product supplier to a manufacturing nation. Over 50 per cent of India’s exports to China in 2006 comprise just one item, iron and other ores, with another 10 per cent coming from cotton and cotton yarn. With a fall in export of iron ore and steel this year, the export basket is slowly diversifying towards machinery 38 39

Ministry of Commerce of People’s Republic of China. Embassy of India, Beijing.

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and chemicals, even though the machinery exports are confined to a few items. The key point is that India’s exports to China remains concentrated in two–three items only. In contrast, China’s export basket is far more diversified although the bulk of China’s exports to India in 2006 or nearly 45 per cent were accounted for by machinery and another 13 per cent by chemicals. In 2006, China’s exports of electrical machinery to India have grown at an annualized rate of 109 per cent and some other items of machinery have also grown at an exponential rate.40 It is evident that if the USD 40 billion trade turnover target were to be achieved, India would have to diversify its trade basket to China. The current lack of diversity in India’s export basket with China is partly a reflection of the imbalance in the comparative economic profile of the two countries. Although manufacturing is the strongest feature of China’s economy and contributes around 50 per cent of its GDP, in India’s case it is the services sector that has driven the economy for most of the last decade and a half. Currently, manufacturing accounts for less than 20 per cent of India’s GDP. India’s services exports are growing rapidly and have a global market share of over 3 per cent, whereas its merchandise exports have a global market share of less than 1 per cent. India is moving fast to address this weakness. One of the key initiatives of the current government has been to set up the National Manufacturing Competitiveness Council (NMCC), and the prime minister is monitoring its progress. After languishing for nearly a decade, India’s manufacturing growth rate has now improved to double-digit rates and there are signs of growing competitiveness. India’s market share of merchandise exports, bulk of which are from manufacturing, has started inching up, as the export growth rate has improved in recent years. But this is nowhere near the impressive performance of China and India still remains a marginal player in global merchandise trade. The Indian approach to trading with China has also become more confident in recent years. As late as 5 years ago, Indian business associations were quick to raise alarm over spurts in imports from China in labour-intensive goods. But gradually, the fear of China has given way to exploring the opportunity that China

40

Ibid.

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provides both as a market and source for cheaper manufactured goods. Some Indian companies have set up manufacturing facilities in China, whereas Indian IT companies have set up operations to serve the Chinese market for software and IT services. In 2003, India and China reached a bilateral agreement to apply the Bangkok Agreement that enjoins both sides to grant preferential treatment beyond the most favoured nation (MFN) status to each other’s goods in select sectors and products. While India is yet to accept the Chinese proposal to enter into a FTA, the government is engaged in weighing the pros and cons, and a joint working group set up by both sides has made numerous and wide-ranging recommendations to boost trade between the two countries that include improvement of logistics and connectivity, and banking links.41 During Hu Jintao’s visit to India last November the Chinese reiterated their proposal for an FTA, and a decision is to be taken by next November. During the visit the two countries also agreed to cooperate in civilian nuclear energy. China and India have also agreed to form a joint venture to bid for energy resources in other parts of the world and reduce mutually disadvantageous competition in this area. Even as bilateral trade grows, the fate of the FTA would be governed by India’s perceptions about the transparency of China’s cost regime. India is yet to agree that China is a ‘market economy’ and has often resorted to anti-dumping duties to counter what it perceives to be unfair competition from China. Till 2004, India had initiated 70 anti-dumping cases against China and levied anti-dumping duties in 55 cases.42 China had initiated only two anti-dumping cases against India and levied duties in only one of them. Interestingly, neither side has so far challenged any of the anti-dumping initiatives in the World Trade Organization (WTO). India supported China’s entry in the WTO and so far, both sides have worked closely with each other in the Doha Round. What is important is that despite the overhang of the border conflict, India and China have decided to sidestep it and consciously made an effort to improve relations in other areas, particularly trade and economic cooperation. Report of the India–China joint study group on comprehensive trade and economic cooperation, 2005, available at http://www.hinduonnet.com/thehindu/nic/0041/ report.pdf 42 Ibid., p. 28. 41

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The impact of China’s surge has been felt in India in many ways, from being a formidable competitor in manufactured goods to becoming a large trading partner. In fact, China’s economic pull will make it India’s largest trading partner by 2007, pushing the United States to the second spot, and there is a good prospect that bilateral trade turnover target of USD 40 billion by 2010 could be achieved even earlier. Yet the ‘trust deficit’ that has marked the relations between the two countries would take some effort before both countries can treat each other as friends and not just business partners. For instance, despite the rapid increase in trade flows, investment flows have lagged behind, not exceeding a few hundred million dollars on both sides, and a number of FDI proposals remain unimplemented. India continues to be suspicious of foreign investments proposed by China’s state-controlled companies, particularly those owned and managed by the Chinese army. There were media reports43 of a move by the Indian government to officially identify sectors where investments from specified countries including China would be forbidden, but the government denied this on the eve of Hu Jintao’s visit to India. The Chinese raised this issue during Hu’s visit and efforts are being made to address this issue. The Chinese have just allowed Tata Consultancy Services (TCS), India’s largest software company, to bag a contract from a Chinese public sector bank, indicating that China is not suspicious of Indian companies, and the latter could participate in Chinese government procurement. This is a strong signal that China wants to infuse the bilateral relationship with some trust. Perhaps more importantly, it would like Chinese companies to fully exploit the growing business opportunity in India. Even though both China and India reach out to each other and other countries in the region, it is evident that India’s economic interaction in the region is a fraction of China’s economic presence in the region. In 2005, India’s trade with ASEAN of USD 18 billion is compared poorly with China–ASEAN trade of over USD 130 billion. India’s trade with its South Asian neighbours is smaller than China’s trade with them. More significantly, India runs a trade surplus in South Asia, offering little incentive to its neighbours for integrating their economies with India’s, in the manner that China has integrated ASEAN’s economies. India’s initiatives seem to be

43

Business Standard.

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yielding better results with ASEAN and Japan than with its neighbours in SAARC. Therefore, even though India is trying to enlarge its space in Asia, it remains constrained by the much smaller pull of its economy, compared to that of China’s. With a rapid opening-up of the economy and reduction in import duties close to ASEAN levels, India too is substantially enlarging the global engagement of its economy. Over the last 4 years the GDP growth rate has averaged 8 per cent, and trade turnover this year is expected to touch USD 250 billion and growing at over 30 per cent per annum. As we look into the future, India’s success in Asia would depend a great deal on its success in sustaining high rates of economic growth, enhancing the competitiveness of its economy, and creating more interdependence through aggressive trade policies. This may sound contradictory to the flexible coalition idea expressed earlier. But it is not. First, even as China is poised to become India’s largest trade partner, there are signs that strategic competition between the two may continue. China would continue to enlarge its presence in South Asia, and India would do the same in Southeast and East Asia. Second, India’s growing economic presence on the global stage provides an option both to ASEAN and Japan, Taiwan and South Korea to diversify their risk of being too dependent on the Chinese economy. China’s rapid rise is compelling India to catch up and also counter its economic forays like FTAs with ASEAN and other countries of the region. This competition is promoting both the quest for trade diversification, on the one hand, and further economic integration and interdependence in the region, on the other. China would continue to aggressively look at trade opportunities in India, as it also needs to reduce its dependence on the United States and European markets. Likewise, Indian business today is getting increasingly alive to opportunities offered by China. The prospect of China becoming India’s largest trading partner has created one more dimension to the emerging Asian landscape. Seen from a strategic perspective, India’s rise has added another option to the countries of the region and this would sustain the ‘Flexibility of Coalitions’ as outlined earlier. The post-Cold War period has seen the demise of ideological conflict triggered by an eyeball confrontation between capitalism and socialism. The ideological conflict of the Cold War made the coalitions of nations

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relatively ‘Inflexible’, as they were forced into a straightjacket by economic ideology. Today the world system is driven by only one economic system and that is capitalism. A distinguishing feature of capitalism is competition and risk diversification. Even though nation-states pursue economic advantage by integrating themselves into the global capitalist system, they continue to explore economic and security options that balance their economic or military dependence on one economy or country. In the global capitalist system, when private sector exuberance and market forces would continue to drive economic relationships even between strategic competitors, government-managed foreign policies of nation-states would seek to balance this exuberance by forming coalitions to manage this risk. Beyond a point, even the private sector would seek risk diversification to reduce dependence on one market or country. Relations between nation-states would thus be governed by interplay of ‘global’ market forces and ‘national’ foreign policies. China’s rise has created an option for countries to form flexible coalitions in a world dominated by the United States. India’s rise would make coalitions even more flexible, particularly in Asia and vis-à-vis China. The end of ideological conflict has not brought about an end of military conflict. There is a fear that the growing interdependence among nations in a globalized capitalist system would probably fail to make the world system peaceful and free of military conflict. This fear would lend more force to flexible coalitions as nation-states would like to juggle around with as many economic and security options as they can. Although the consolidation of globalized capitalism would bring ideological uniformity, it would increase both economic and security opportunity for nationstates as well as the practice of opportunism by them. Hitherto, the Asian balance of power has been redefined by the rise of China; it has been able to offer a countervailing force to the United States by the sheer pace and size of its economic expansion. In the future, India has the potential to further rearrange Asia’s economic and security matrix. Provided, of course, that India can deliver on the economic promise that it has begun to forcefully demonstrate over the last few years. The key questions for the future are whether China’s rise is sustainable and whether Asian economic integration would give rise to an economic bloc that can sink its political differences and evolve common security arrangements.

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IV The multiple impacts of China’s rise would get magnified over the years if it sustains this growth rate over the coming years. The now well-known Goldman Sachs’ projections of 2003 for BRIC (Brazil, Russia, India, and China) countries show that China’s economy would almost be as large as that of the United States by 2040, and would even surpass it by 2045 to become the largest economy and nearly twice as big as the Indian economy that would rank at number three, behind the United States. The World Bank too has made projections up to 2020 on the assumptions that if China and India grow at 6.6 and 5.5 per cent, respectively, till 2020, and world economy grows by 3.2 per cent, China’s share in the global economy at current exchange rates would increase from the 4.7 per cent in 2004 to 7.9 per cent in 2020. India’s share would rise from 1.7 per cent to 2.4 per cent. What is noteworthy is that the share of the United States remains constant at 28.5 per cent, while Japan and Germany lose their importance somewhat. Even though the United States would continue to remain the dominant economic force by a good margin, China’s contribution to world growth would rise to 16 per cent in the next 15 years, up from 13 per cent over the last decade. Thus China would continue to be the second-biggest driver of global economic growth over the next decade and a half after the United States, which is projected to contribute 28.6 per cent of global growth.44 India’s contribution would remain marginal when compared to that of China. If China and India’s GDP growth rates were raised to 8.6 and 7.6 per cent, China and India’s shares of global GDP in 2020 would increase to 10.9 per cent and 3.2 per cent, and their contributions to world growth to 20.1 per cent and 5.5 per cent, respectively.45 In the future, if both China and India sustain rapid economic growth, they would exercise differential impacts on countries. Productivity improvements in their exports would reduce the costs of their goods for importing countries and thus, generate real income gains for the consumers of these goods; generally, those countries would also gain from the growth opportunity provided 44 45

The World Bank, op. cit., pp. 4–5. Ibid., p. 5.

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by the economic advance of these two countries, but some countries that export similar products, particularly clothing and electronics, would suffer from competition.46 Overall, the world will gain as a result of the two countries’ economic growth. However, simple simulations based on Goldman Sachs’ projections made in a paper in 2004, show that by 2025, China’s share of global oil consumption could rise to over 16 per cent, a figure close to United States’ 19.5 per cent. China and India’s combined share would rise to 22.7 per cent, and put together, they would represent the world’s largest oil market. It does appear that the joint venture of China–India, formed this November for joint global bidding for energy projects would have enough work to do over the next two decades. Similarly, China and India’s combined share in global energy consumption is projected at 28.8 per cent in 2025, and this would be higher than the share of United States, Germany, and Japan put together. By 2025, China and India’s combined automobile market would be over 17 per cent of the world’s automobile market, much bigger than the US share of 12 per cent. The implications of these numbers for the shift in both production of automobiles and auto components and also energy-producing equipment is obvious. The point is that the future, particularly after China’s sustained rise, if supported by India, would make Asia the biggest growth driver of the global economy. It is entirely possible that, by that time, China, India, Japan, Taiwan, and South Korea—and ASEAN and SAARC too—could all be fused into one huge free trade area, comprising the biggest consumer market of over 3.5 billion people. Doubtless, this would become the centre of the global economy and a converging point for global trade flows ranging from manufactures to commodities. No less significant is the implication of the rise of China and India for global financial flows. By 2025, China and India could account for over 15 per cent of the global stock market capitalization. Even though this is projected to remain significantly behind the United States’s projected share of 35 per cent, it would be much bigger than stock market sizes of Japan and Germany. Thus China and India would account for the largest chunk of portfolio investments outside the United States, and both Mumbai and Shanghai 46

Ibid., p. 14.

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would emerge as the new financial hubs of the world. Yuan along with the euro and the dollar would be three most powerful currencies of the world, with the rupee closely following behind. The global corporate landscape would have undergone a radical change. A large number of Indian and Chinese companies would rub shoulders with US, Japanese, and European multinationals. Some of the world’s biggest corporate headquarters would be housed in Mumbai, Bangalore, Shanghai, and Beijing. Indian and Chinese multinationals would own some of the leading brands of the world. But all of this would be possible only if China defies doomsayers who predict that the country is close to collapsing under the weight of its contradictions.47 This is because a collapsing China would wreak havoc not only on Asia by pulling down a number of other Asian economies but also on commodity-producing countries in all continents, before it collapses. The economic crisis triggered by the collapse of China could be much bigger, and the financial turbulence that it could unleash would be more formidable than the contagion released by the Asian financial crisis of the mid-1990s. The United States and the European Union would also feel the tremors that would cut deep and wide across the global economy. By becoming the most aggressive globalizer in history, China will ensure that it does not suffer alone.

V Thus far, China has defied all predictions of an imminent collapse. When China signed the WTO deal, it was predicted that it would fail to compete in the global system and this would produce largescale economic failure and unemployment, and the triggered popular unrest, as a result, would bring the country down. It took balanced scholarship to rightly point out then how China’s competitive ability was being underestimated and how the country would be able to meet the WTO challenge comfortably.48 In fact, by all accounts, China has met all its WTO obligations and commitments on time.

47 48

Gordon Chang, Minxin Pei. Nicholas Lardy, op. cit.

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China’s vulnerabilities are now fairly well documented, even though there is no consensus on how they will play out overtime. The central political argument is related to growing inequalities across both regions of town and country, decaying of state-run social security systems including healthcare, galloping corruption among party managers, centrifugal forces and growing indiscipline within the party, authoritarianism and lack of rule of law in dealing with the rising peasant and worker protests, and the growing institutional incompatibility between a rapidly growing economy generating inequalities, on the one hand, and lack of democracy, on the other. In addition, lack of an institutional framework to enforce environmental standards is producing environmental degradation on a gigantic scale, placing limits on the sustainability of growth. The economic argument is related to the unsustainability of high rates of investment and the current exchange rate system in the face of high non-performing loans and fragility of the banking and financial system. The economic and political arguments get intertwined when rising protests, high unemployment, and inequality are situated in the context of a possible economic slowdown with one feeding into another. It is not possible for this article to assess whether China is sitting on a political time bomb. A recent report for the United States Congress provides a comprehensive documentation of the growing trend of protests by workers and peasants. The report recognizes that ‘recent demonstrations have been broader in scope, larger in average size, greater in frequency and more brash than those a decade ago’.49 But the protests have tended to remain localized and workers and peasants have yet to develop a countrywide network in tandem with students and intellectuals, while the ruling party should be able to manage the problem through accommodation and negotiation.50 Organizational weakness of these protests is also to be seen alongside the growing satisfaction of the educated, middle and upper classes that have benefitted from economic growth. The privatization of the urban housing market has created millions of beneficiaries from rise in asset values and they would like the system

49 Thomas Lum, Social Unrest in China, CRS report for Congress (Washington DC: Congressional Research Service, May 2006). 50 Ibid.

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to continue flourishing. ‘Opinion surveys suggest that despite frequent public protests in the countryside as well as in the cities, the central government still enjoys a considerable degree of support.’51 The ruling party has now seriously woken up to the political challenge and has reduced or eliminated a number of taxes on peasants. Building of a harmonious society has now been proclaimed a national goal to be addressed during the 11th 5-year plan. Protests around rural land (owned by farmers’ collectives) remain a critical issue that needs to be addressed. Farmers are now refusing to accept confiscation of their land for urbanization and commercial uses and are fighting for better compensation. The ruling party has failed an attempt to bring a legislation to create property rights for peasants, as conservatives within the party prevailed against the move. But this only goes to show that political initiatives are in the pipeline and the Chinese ruling establishment could put its arms around this problem before it escalates beyond control. What must be recognized is the capacity and efficiency of the Chinese government in determinedly addressing problems and issues that are accorded national priority. The only caveat is that physical problems such as building highways or railways are easier to address and the ones that involve social and political processes require some change and reform that erodes the power of the party and attacks vested interests that have developed around it over the years, particularly around land.52 The Chinese state and party has become a huge business and money-making establishment, and this is what makes change management difficult. There are numerous reports and substantial evidence that involvement of city and provincial party officials with businesses, in many cases—even as hidden partners— has created huge vested interests that the central leadership is finding difficult to handle. But then, survival also motivates determined action and China is far more effectively governed today and people are much better off than the time when Mao led the peasant revolution. There is a problem and it’s a huge one too. The issue is whether the Chinese leadership’s administrative and political ability to manage problems is keeping pace with the blistering speed of

51 52

The Economist, ‘A Survey of China,’ 25 March 2006. Ibid.

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change and the resulting contradictions too.53 For example, most of the environmental targets the government set in 2001 to be achieved by 2005 have been missed. Here, in fact, lies the rub. The rapid rate of growth is throwing up new problems and contradictions at an equally rapid clip. But even while it tries to deal with these issues, it is apparent that China faces a political compulsion to sustain high rates of growth. It needs to keep the rate of investment high so that the GDP growth is fast enough to create more employment for rural migrants displaced from land. In this context, it has been argued that the need to sustain the pace of employment generation is also the reason why China seems reluctant to allow a quicker appreciation of its dollar exchange rate than it has. Chinese exports work on thin profit margins and even three to four per cent erosion in margins could lead to closure of some export enterprises and raise unemployment. Another argument is that the compulsion to sustain high rates of investment adds to non-performing loans and that, in turn, adds to the fragility of the financial system. True, these are important challenges that China faces. But it has also shown that over the years it has managed to respond to these challenges, and some of the fears about the inability of China to deal with these problems could be exaggerated. Nicholas Lardy has shown that China did appreciate its trade-weighted exchange rate by 30 per cent between 1994–2002, and undervaluation is a more recent phenomenon.54 And this was achieved during a period when ‘China was experiencing large-scale employment losses in both state-owned units and in the manufacturing sector (which accounts for almost all of China’s exports)’.55 Further, ‘keeping the bilateral exchange rate between the dollar and the renminbi at an undervalued rate... affects too small a share of China’s total employment growth to guide China’s overall exchange rate policy’.56 Yes, there are dangers posed by rapid accumulation of reserves and the costs of sterilization that it imposes on the banking system57 but the fact remains that ‘even in banking which many regard as John Thornton, ‘China’s Leadership Gap,’ Foreign Affairs, November–December 2006. 54 Nicholas Lardy, ‘China’s Role in the Revived Bretton Woods System: A Case of Mistaken Identity,’ Institute for International Economics, working paper, March 2005. 55 Ibid. 56 Ibid. 57 Ibid. 53

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the weakest link in China’s economy, there has been some progress. There is less talk now about a possible banking crisis than there was at the beginning of the decade’.58 China has also managed to reduce the role of the state-owned enterprises (SOEs) in the economy and has retrenched as many as 20–30 million workers in them through closures, mergers, privatizations, and so on, and many of them have found new jobs. The SOEs now account for less than a third of GDP.59 Further reform towards market-based systems rather than those administered by the party and delivered through SOEs would hold the key to sustainability of growth. Thus far China has continuously moved forward to bring about this transition. Savings and Investment rates could decline over the longer term but their impact on growth could be offset by a more educated and efficient work force, to provide market signals and guide both the real and financial components of the economy, supported by modern legal systems.60 In sum, a response to China’s rise cannot be based on the assumption that it would collapse. Its spectacular arrival as a leading global player has to be acknowledged and strategies defined to deal with its continued success in the future. Equally, China’s weaknesses are to be rigorously followed and analyzed because if and when China falters, the consequences would be substantially global and countries would have to find ways of adjusting to the impact. But even if that is done, for India and the United States or any other country for that matter, China’s arrival should be taken as given. And our response must focus on how to continuously improve and sustain the long-run competitiveness of the domestic economy with a focus on innovation and accelerate our engagement with the global economy.

The Economist, ‘A Survey of China,’ 25 March 2006. Ibid. 60 Dwight Perkins, China’s Recent Economic Performance and Future Prospects (Japan Center for Economic Research, 2006). 58 59

4 THE CASE OF CHINA AND THE GLOBAL ENVIRONMENT1 DIZZYING GROWTH, DEVOLUTION OF POWER, ENVIRONMENTAL DISASTER Elizabeth Economy

INTRODUCTION The rise of China as an economic power is one of the great stories of the latter half of the 20th century. Twenty-five years of reform have produced staggering results: hundreds of millions of Chinese have been lifted out of poverty, China’s economy has grown at a rate of 8–12 per cent annually, and the country currently ranks as the third largest economy and third largest exporting nation in the world, after the United States and Germany. At the same time, this growth has occurred without much consideration for the country’s environment. Building upon centuries of environmental degradation and pollution, the very rapid industrialization of the last quarter century has contributed to some of the highest rates of air and water pollution in the world, severe land degradation, and a range of emerging resource challenges. For the rest of the world, China’s environmental practices are increasingly setting off alarm bells. China is now one of the largest contributors to virtually every global environmental challenge: climate change, the illegal timber trade, and marine pollution, among them. Moreover, even as the world marvels at China’s dizzying growth rates, the environment is impinging on future growth, 1 The author would like to thank Sarah Miller and Jaeah Lee for their excellent research assistance.

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harming the health of the Chinese people, and contributing to serious social unrest, all of which threaten to send China’s growth trajectory off track. There are some signs of hope. China’s leaders have significantly ramped up the attention they are devoting to the environment, and levels of investment in environmental protection have increased steadily. Beijing has also begun to experiment with the new policy approaches that were designed to take advantage of its evolution towards a market economy and its growing integration with the world economy. Till date, however, Chinese leaders have been unable or unwilling to take the necessary political and economic steps to reverse the overall negative trends they are confronting in environmental degradation and pollution. China’s economic, social, and political welfare—and to a large extent, that of the world—over the next decade, will all be shaped by how effectively the country’s leaders and the people integrate environmental protection with economic development. For the United States, the environmental challenge that China presents is a politically complicated one. Over all, both American and Chinese leaders consistently stress the environment—an arena of potential fruitful collaboration between China and the United States, and enthusiasm generally abounds, at least rhetorically, for identifying new cooperative ventures. At times, however, the political temperature in Washington rises, and the environment becomes a source of contention in the dialogue about China. Serious concerns over China’s contribution to transboundary air pollution, which carries mercury and other contaminants to US land, as well as China’s significant contribution to global climate change, top the list of US policymakers’ concerns. Yet Washington’s real response to this challenge remains limited. The United States itself is a leading contributor to climate change and is a laggard in its response. Moreover, financial constraints limit the ability of the United States government agencies to move aggressively in cooperative ventures. Thus, real cooperation has been limited in scope. Nonetheless, the private sector— multinationals and international non-governmental organizations (INGOs)—pursues a wide range of collaborative efforts, and the US government, as a whole, continues to place the environment on the positive side of the ledger in the bilateral relationship.

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AN ENVIRONMENTAL SNAPSHOT On the domestic front, China faces the full range of environmental challenges: air pollution, land degradation, and water quality and availability. The air in over half of China’s cities is polluted,2 and 100 million people are exposed to very serious pollution.3 According to the Vice-Minister of China’s Ministry of Environmental Protection (MEP) Pan Yue, five of the world’s 10 most polluted cities are in China.4 Acid rain affects one-quarter of China’s land and one-third of its agricultural land, diminishing agricultural output, eroding buildings, and contributing to respiratory problems. Regional haze results in 70 per cent of crops yielding anywhere from 5 to 30 per cent, less than their potential.5 The sources of China’s air quality challenge are multifold: its overwhelming reliance on coal for its energy needs, its poor energy efficiency and conservation practices, the energy demands of a growing urban population, and the rapidly increasing role of automobiles in the transportation sector.6 China also suffers from serious land degradation. Deforestation, along with the overgrazing of grasslands and over-cultivation of ‘China Reports Cities Suffering from Severe Air Pollution,’ People’s Daily Online, 6 September 2006, available at http://english.peopledaily.com.cn/200609/06/ eng20060906_299854.html 3 Jonathon Watts, ‘A Growth Stream, or a Way to Get Filthy Rich?’ The Guardian, 6 November 2006, available at http://www.guardina.co.uk/environment/2004/ nov/11/water.china 4 Pan Yue interview with Der Speigel, March 2005. 5 W.L. Chameides, H. Yu, S.C. Liu, M. Bergin, X. Zhou, L. Mearns, G. Wang, C.S. Kiang, R.D. Saylor, C. Luo, Y. Huang, A. Steiner, and F. Giorgi, ‘Case Study of the Effects of Atmosphereice Aerosols and Regional Haze on Agriculture: An Opportunity to Enhance Crop Yields in China through Emission Controls,’ Proceedings of the National Academy of Sciences 96, no. 24 (23 November 1999). 6 China relies on coal for approximately 70 per cent of its energy needs, consuming some 2.1 billion tons in 2005. It is the largest consumer of coal in the world and the largest emitter of sulfur dioxide. Coal consumption is expected to double during 2000–20. Low utilization of energy efficiency technologies in China’s buildings and industries are also a problem: buildings in China consume two–three times the energy of those in developed countries in comparable climates. Urbanization is a third challenge. Per capita energy consumption for urban residents is 250 per cent more than that of their rural counterparts. Finally, perhaps the greatest future challenge is in China’s transportation sector. By 2050, Chinese officials estimate that China will have more cars on the road than in the United States. 2

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cropland, has dramatically changed the landscape of the country. Deforestation contributes to biodiversity loss, soil erosion, and local climate change. Overall, almost 40 per cent of China’s land is affected by soil erosion.7 The world’s highest water erosion rates occur in China in the Loess Plateau, where 1.6 billion tons of topsoil is washed into the Yellow River on an annual basis.8 In addition, China, which is roughly the same size as the United States, is now more than one-quarter desert, and desertification is advancing at a rate of roughly 1900 sq. miles annually.9 According to the State Forestry Administration, desertification affects 400 million people.10 The most serious environmental challenge China confronts, however, is ensuring access to clean water. China has 7 per cent of the world’s water resources but is home to 20 per cent of the world’s population.11 The country’s annual per capita water supply is 25 per cent of the global average, and by 2030, per capita water supply is expected to fall from 2,200 m3 to below 1,700 m3. Demand for water is expected to triple from 120 to 400 billion tons during 1995–2030. And according to one Chinese expert, cities in the north-eastern regions of the country could run out of water in 5 to 7 years.12 Water pollution is also a significant problem. In a survey of 44 Chinese cities, officials discovered that groundwater pollution was a serious problem in 42 of them.13 More than three-quarters of the water flowing through China’s urban areas is considered unsuitable for drinking or fishing, and 30 per cent of river water monitored by the Chinese government is worse than Grade 5 (not suitable for ‘One Third of China’s Land Areas Still Suffer from Soil Erosion,’ China Economic Net, 2 June 2005, available at http://en.ce.cn/Life/environment/200506/02/ t20050602_3963132.shtml 8 ‘Soil and Trouble,’ Science 304, no. 5677 (11 June 2004): 1614–15. 9 ‘China: A City Built on Mao’s Order Fights an Encroaching Desert,’ IPS News Service, 8 November 8 2006. 10 ‘China Launches Unprecedented Forestry Programs,’ available at http://www.China.org.cn/baodao/english/newsandreport/2002july1/12-2.htm 11 Daniel Griffiths, ‘Drought Worsens China Water Woes,’ BBC News, 31 May 2006, available at http://www.news.bbc.co.uk/2/hi/asia-pacific/4754519.stm (accessed 31 May 2006). 12 Ibid. 13 ‘360 Million Chinese without Safe Drinking Water, Chronic Urban Shortages,’ Agence France Presse, available at http://www.terradaily.com/2005/050323134122. 7a89bgj1.html (accessed 23 March 2005). 7

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agriculture or industry). Agricultural run-off and untreated wastewater from rural industries have caused serious degradation in several of China’s largest and most famous lakes, such as the Tai and Dianchi. In a 2007 survey of 585 cities, MEP found that only 42.5 per cent properly treated sewage before disposal.14 These environmental challenges have also produced a range of economic, social, and political problems for China’s leaders. The health of the Chinese people is endangered by the country’s air and water quality: the World Bank has estimated that 750,000 people die prematurely in China from respiratory diseases related to air pollution, and hundreds of millions drink water contaminated with heavy metals and fecal matter. In a number of Chinese cities and towns, the lack of water has begun to impinge on economic development. Xi’an—home of the terracotta warriors—for example, announced that it lost USD 250 million in industrial output in 2004 because the city did not have enough water to run its factories. All told, China’s MEP estimates that environmental pollution and degradation cost the Chinese economy the equivalent of 10 per cent of gross domestic product (GDP) annually. Perhaps most troubling for China’s leaders, the environment has become one of the leading causes of social unrest. The Chinese media have reported that there were 50,000 environment-related protests in China during 2005, some of which spiralled out of control, resulting in violence and even deaths. In 2006, MEP Minister Zhou Shengxian said that mass protests were increasing by 30 per cent every year, with growing participation by the middle class, causing ‘a great threat to social stability’.15, 16 China’s approach to environmental protection is modelled on the country’s economic reform strategy: maintain a small central bureaucracy, devolve authority to local officials, engage the international community, and support private initiative—in this case, non-governmental organizations (NGOs) and the media.

‘60% of Chinese Cities Suffer from Air Pollution,’ China Daily, 13 June 2007, available at http://www.chinadaily.com.cn/language_tips/2007-06/13/content_899359. htm 15 ‘China Sees Environmental Accident Every Other Day: SEPA,’ available at http:// english.gov.cn/2006-04/19/content_257882.htm 16 Li Fangchao, ‘Environment Issues to be Addressed More Urgently,’ China Daily, available at http://www.chinadaily.com.cn/cndy/2006-05/04/content_582498.htm (accessed 4 March 2006). 14

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The result of this strategy has been a patchwork of environmental protection, in which very few cities—those with proactive leaders, relatively high per capita GDP, and strong ties to the international community—have begun to make strides in improving their environmental situation, even though most of the remaining country falls further behind. China’s leaders have not provided a felicitous, institutional infrastructure and policy environment for effective environmental protection. The system is characterized by weak enforcement of environmental protection laws, widespread corruption, constraints on the activities of NGOs and the media, still nascent rule of law, significant subsidization of natural resources such as water that promotes waste, and fines that are set too low to encourage behavioural change. Underpinning China’s environmental challenges, therefore, is not only the rapid industrialization of the past quarter century but also the political approach to environmental protection that is insufficient to meet these challenges.

REGIONAL AND GLOBAL IMPLICATIONS China’s domestic environmental problems are playing out dramatically on the world stage. China has become the first or second largest contributor to many of the world’s most vexing environmental challenges: climate change, illegal timber trade, and marine pollution. At the same time, China’s strong engagement with the international community provides it an access to new technologies, with financing and policy approaches that enhance its ability to change course. Till date, China’s record in utilizing this access effectively, to address global environmental issues is mixed, suggesting that only a strong economic incentive embedded in the environmental policy approach itself—one that is clearly and immediately realized—is enough to overcome both the drive to develop and the institutional weaknesses within the political system.

CLIMATE CHANGE Climate change has the potential to wreak havoc on the economic and social well-being of much of the world. It promises changing agricultural patterns, rising sea levels, melting glaciers, increased pestilence, more frequent and severe storms, and drought, among other economic and environmental challenges. Over time, while the

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world’s most industrialized countries and regions—the United States, Japan, and the European Union (EU)—have been the dominant contributors of the greenhouse gases that cause climate change, China has emerged as, perhaps, the most significant actor for determining the future course of this global environmental challenge. As a result of its reliance on coal to fuel its economy, China’s emissions of CO2 have tripled over the past 30 years, and are now second only to those of the United States. One study by the Netherlands Environmental Assessment Agency suggests that China surpassed the United States in becoming the world’s largest emitter of CO2 in 2006,17 3 years earlier than had been anticipated by the International Energy Agency.18 China already uses more coal than the United States, the EU, and Japan—combined. (India, which lags well behind China in its overall consumption of coal, is nonetheless on track to become a major CO2 contributor over the next 10 years, and is already the fifth largest contributor of greenhouse gases, globally.) Indeed, unless China takes a dramatic action to reconstitute its energy mix or takes advantage of the most advanced clean coal technologies, the increase in global warming gases from China’s coal use will probably exceed that of all industrialized countries combined over the next 25 years, surpassing by five times the reduction in such emissions that the Kyoto Protocol seeks.19 For China itself, the impact of climate change is predicted to be quite significant. According to the World Bank, a 1 m rise in the sea level will cost China’s economy 2.4 per cent of GDP. A 5 m rise will cost 11 per cent.20 At the same time, Chinese meteorologists are concerned that precipitation may decline by as much as 30 per cent by 2040 in the Huai, Liao, and Hai river regions.21 The Tibetan glaciers are also at risk of melting by 2100, which would be devastating not only for the 300 million farmers in China’s western region but ‘China Overtakes U.S. as Top CO2 Emitter: Dutch Agency,’ available at http:// www.reuters.com/article/topNews/idUSL2080219120070620 18 Tom Holland, ‘Pollution Woes Can Turn China into Green Industry Leader,’ South China Morning Post, 3 April 2006. 19 Keith Bradsher and David Barboza, ‘The Energy Challenge: The Cost of Coal,’ The New York Times, 11 June 2006, p. 1. 20 Tom Holland, op. cit. 21 ‘Less Greenhouse Gases to Help Balance Precipitation in China’s Major Rivers,’ Xinhua News Agency, 8 July 2006, available at http://www.china.org.cn/english/ environment/174074.htm 17

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also for Beijing’s plans to divert water to the north-east. Shanghai and other parts of coastal China could be largely submerged as sea levels rise in the East China Sea. At one level, China’s policy response to global climate change has been impressive. It signed on to the Kyoto Protocol to the United Nations Framework Convention on Climate Change (as an Annex 2 country22); it joined the Asia–Pacific Partnership on Clean Development and Climate, and it has outlined a series of important domestic policy initiatives that were designed to improve its energy use pattern. In December 2007, China took centre stage at the climate change summit in Bali, Indonesia, expressing a strong commitment of mapping out a framework, to come into effect after the Kyoto targets expire in 2012.23 Still, China continues to maintain that developed, not developing countries, like the United States and Western Europe, should bear the brunt of international emissions reduction targets.24 Within the framework of Kyoto, the international community has expressed a significant excitement concerning the potential for China to be a leader in the key mechanism undergirding the convention: the clean development mechanism (CDM) and carbon trading market.25 According to one report, China already accounts for 44.5 per cent of the carbon credits trading under the CDM26, and successes are being touted in the Chinese and international media. Nanjing Iron and Steel, for example, has installed the most advanced equipment to 22 Unlike Annex 1 signatories, Annex 2 countries have no obligations to meet targets or timetables for greenhouse gas emissions reductions. 23 ‘China Welcomes “Bali Roadmap” on Climate Change,’ available at http://news. xinhuanet.com/english/2007-12/18/content_7275993.htm 24 ‘China Says Developed Countries Should Take Lead in Fighting Climate Change,’ International Herald Tribune, 12 March 2008. 25 The Clean Development Mechanism (CDM) was developed so that developers of registered projects to reduce greenhouse gas emissions or produce clean energy can earn carbon credits that they can then sell to polluters that have mandatory emissionreduction targets in other countries. In general, countries such as Brazil, India, and China are considered good hosts for such projects because it is cheaper to take action than in more advanced countries where tougher emission measures are already in place. Projects might include funding alternative energy production, waste heat and gas recycling projects, and reforestation efforts among others (Eric Ng, ‘China to Pace Trade in Carbon Credits,’ South China Morning Post, 23 May 2006). 26 Antoanta Bezlova, ‘Investors on e-mission to China,’ Asia Times, 29 November 2009, available at http://china.notspecial.org/archives/2006/11/index.html

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capture emissions from its blast furnaces and will use that gas to generate power. It will then sell carbon credits to an Italian government fund through the World Bank. Similarly, Juhua, a Chinese chemical company, is selling CO2 credits to Japanese companies. According to an Asian Development Bank expert, there is the potential for China to generate an annual revenue stream of up to USD 2.25 billion from participating in CDM projects.27 At the same time, some red flags are being raised both inside and outside China concerning new bureaucratic obstacles to CDM that may, in fact, diminish China’s attractiveness to international partners over time. For one, the government has favoured CDM proposals that transfer technology and advance the country’s capacity in renewables, energy efficiency, and methane recovery. At the same time, it has tended to discourage reforestation projects and proposals that reduce emissions of HFC-23—a greenhouse gas with global-warming potential that is more than 11,000 times that of CO2—because they do not involve enough capital or provide technology transfer. China also wants manufacturers simply to transfer the technology to China, instead of importing the equipment. Li Junfeng, secretary general of the Chinese Renewable Energy Industries Association said that overseas investors have been put off by low profitability and the requirement that 70 per cent of a project’s infrastructure must be locally made.28 In the wind power industry, Chinese firms are outproducing foreign competitors like Suzlon Energy, reducing incentives to import foreign turbines. But China’s deficit in skills and experience has created a bottleneck in supply, and has also raised concerns over the quality of locally made windmills.29 Moreover, Beijing has been setting new curbs on foreign engagement. The government has insisted that the main benefits of projects—both financial and technological—should be reaped by China. As one report noted, ‘Beijing considers emissions reductions ‘ADB to Help China Tap into Multi Billion Dollar CDM Potential,’ available at http://www.adb.org/media/printer.asp?articleID=10594 28 Irene Wang, ‘Bidding System Hampers Wind Energy Industry,’ South China Morning Post, 27 October 2006. 29 ‘China Joins Wind Turbine Business,’ International Herald Tribune, available at http:// www.iht.com/articles/2007/04/02/business/wind.php 27

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a national resource like oil or gas and limits overseas investment to less than 50%’. Some foreigners also complain that this means putting risk in the hands of someone who does not have the necessary experience.30 Finally, the Chinese government is attempting to direct CDM projects towards certain areas, and away from others by taxing the profits of projects at different rates, for example, reforestation is taxed at a higher rate than renewable energy projects because of a preference for energy-related projects. Similarly, even though much of China’s CDM activity till date has been in the realm of industrial gas projects such as eliminating HFC-23 (a gas used for refrigerants), the Chinese government has stated that it does not want any more HFC projects. It wants energy efficiency and renewable energy projects that will help alleviate poverty in the countryside.31 In addition to the Kyoto Protocol, China has joined the Asia– Pacific Partnership on Clean Development and Climate that involves six Asian–Pacific countries: Australia, China, India, Japan, the Republic of Korea, and the United States. The Partnership is premised on the idea that a regulatory framework such as Kyoto is not the most effective way to meet the challenge of global climate change, and stresses instead that developing and implementing of ‘marketworthy technologies’ will be more effective. Till date, however, the partnership is characterized overwhelmingly by information-sharing, some capacity building, and continued research into improving technologies. Although they are all important aspects of developing an effective response to climate change, they do not represent actual emission-reducing activities. It is also unclear what the incentive will be to implement these new policy changes or technologies in a country such as China, unless the incentive and enforcement structure are reformed. On the domestic front, the Chinese leadership has also announced a series of steps to improve its pattern of energy use, even as it increases an overall energy consumption. Premier Wen Jiabao has promised to decrease the energy use per unit of GDP ‘China’s Fierce Kyoto Rules Irk Foreign Investors,’ Reuters, available at http:// www.planetark.org/dailynewsstory.cfm/newsid/38241/story.htm (accessed 25 September 2006). 31 ‘State of the Carbon Market Report Update Shows Strong Impact of Asia in the Market,’ World Bank Press Release, available at http://web.worldbank.org/wbsite/ external/countries, 28 November 2006. 30

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by 20 per cent by 2010; China has pledged to increase the percentage of renewable energy, in its overall energy mix to 10 per cent by 2010, and there are tough energy efficiency codes in place for new construction throughout China. Such targets and efforts, however, have often proved elusive in the past. In 2002, the Chinese government pledged to cut SO2 by 10 per cent by 2005, whereas the result was an increase of 27 per cent.32 Moreover, China is building one new coal-fired power plant per week, and few of these are being built to Western standards because it requires importing of costly equipment.

THE TIMBER CASE A second issue of concern is China’s growing impact on the global trade in illegal timber. China’s booming economy and its efforts to protect its own forests have made it the second largest importer of wood products in the world, and Chinese demand for timber and timber products is growing exponentially. During 1993–2005, imports more than tripled, and according to the international environmental NGO World Wildlife Fund (WWF), China’s demand for timber, paper, and pulp, is likely to increase by 33 per cent again during 2005–10.33 China is now the world’s largest plywood producer and exporter. Its export market grew from less than 1,000,000 m3 annually in 1998 to more than 11 million m3 in 2007.34 China is also rapidly becoming the number one producer of furniture, floorboards, and various paper products. The United States, Japan, and the EU provide a large and growing market for China’s timber products. At the same time, China’s urbanization plans for the next two decades necessitate enormous investments in housing and infrastructure, and will increasingly put demands on the world’s timber resources. Over the past almost a decade, China’s leaders have also become increasingly concerned about their own forest resources, putting

32 Keith Bradsher and David Barboza, op. cit., ‘Pollution from Chinese Coal Casts a Global Shadow,’ The New York Times, 11 June 2006, available at http://www.nytimes. com/2006/06/11/business/worldbusiness/11chinacoal.html 33 Dennis Chong, ‘Russia: Industry Plunders Forests,’ Standard, 27 March 2005. 34 ‘China Reports Strong Timber Trade Data for 2007,’ FORDAQ, available at http:// timber.fordaq.com/fordaq/news/China_timber_trade_16578.html

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human and financial capital behind efforts to protect their muchdiminished forests and undertake reforestation campaigns. These efforts became especially urgent in the aftermath of the flooding of the Yangtze River in 1998, in which at least 3,000 people were killed, 52 million acres of land were inundated, and USD 20 billion in economic damages was incurred. Rampant logging, along with the destruction of wetlands was blamed, and Chinese leaders banned logging throughout much of Western China. The result has been an ever-growing outward quest for China to fill its timber needs, as well as those of the international community, from the forests of the rest of the world. With such rapid and dramatic growth in Chinese demand, little has been done in the majority of timber-rich countries to think strategically about how to manage their remaining forest resources and to protect against rampant illegal logging. Already, an estimated 50 per cent of China’s total timber imports are reported to be illegal.35 The illegal timber trade between East and Southeast Asia alone is estimated at USD 2.5 billion, annually.36 Chinese logging companies are a principal source of this illegal timber trade. These companies, now present throughout Southeast Asia, Russia, Africa, and the Amazon have been cited and fined for their poor logging practices. According to the INGO Global Witness, for example, Chinese companies are carrying out largescale, unregulated logging and miming operations in Myanmar: ‘Large parts of forest along the China–Myanmar border have been destroyed, forcing [Chinese] logging companies to move even deeper into Myanmar’s forests in their search for timber.’37 Within Africa, illegal timber exports to China have been soaring, with estimates as high as 70 per cent of total timber exports from Gabon, and as much as 90 per cent from Equatorial Guinea. Even for African countries that have attempted to protect their forests, China poses a significant challenge. In the case of Mozambique, for example, Chinese middlemen hire local licence holders to cut

‘A Choice for China: Ending the Destruction of Burma’s Northern Frontier Forests,’ briefing document by Global Witness, October 2005, p. 24, available at http://www. illegal-logging.info/item_single.php?item=document&item_id=261&approach_id=1 36 EIA/Telepak, ‘Stemming the Tide: Halting the Trade in Stolen Timber in Asia,’ p. 1. 37 Ibid. 35

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timber, then funnel it through informal ports, and transfer it to Chinese ships offshore.38 Russia too, has become an increasingly important source of China’s timber imports. Over 40 per cent of China’s total log imports are now derived from Russia. This burgeoning trade poses a particular challenge: ‘[Siberia and Russian Far East] forests are host to one-fifth of the world’s forests, the value of biodiversity in the region is immeasurable. Besides some of the wildest, most pristine places on the planet, Russia’s forests are home to a number of endangered species…As well, they play an important role as carbon sinks to mitigate clime change, second only in effectiveness to Brazil’s dense Amazon forest. Once these forests are irresponsibly cut for shortterm gain, these values are gone forever.’ China is already the top export destination for Russia’s timber, and WWF estimates that as much as 20–50 per cent of this Russian timber is illegally logged.39 Illegal timber trade is flourishing for several reasons. There is little government oversight in either China or the timber-rich countries. There are few controls placed within the host countries on loggers and virtually none at the point of cross-border trade either by land or by sea into China’s ports. Illegal practices such as logging without a licence, logging in protected areas, taking protected tree species, and logging outside of concession boundaries are widespread practices wherever China does business. Responsibility for better management of the world’s forests remains overwhelmingly a job for the governments that manage these forests. Given the global environmental security implications, however, China as well as the United States should become far more deeply engaged. Responses from the Chinese side take two forms: denial and pledges to improve. Cao Qingyao, the spokesperson for China’s State Forestry Administration, for example, stated in February 2006, It’s a common responsibility of the world’s countries to protect and develop forest resources but not the responsibility of a single country or region. The Chinese government has consistently performed its internationally shared responsibilities, opposed to and firmly cracked down

38 39

Thornton testimony, p. 6. Dennis Chong, op. cit.

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on illegal deforestation and illegal imports. China enforces rigid control over imports.40

Or as Lei Jiafu, Vice Head of the Chinese State Forestry Administration stated in January 2005, ‘It is out of the question that the country would satisfy its domestic demands by increasing tree felling from neighboring countries.’41 In other instances, under fierce pressure, China has pledged to improve its practices by promising, for example, to work with the Indonesian government to stem the import of illegal timber. This was precipitated by the seizure of two Chinese-owned vessels carrying large amounts of illegal logs. However, China has not taken any action to enact the commitments. This was followed by a pledge to ‘only allow in timber [from Burma] which has been lawfully licensed’.42 When China failed to take action in the case of Burma, the Myanmar government arrested more than 400 mainland workers and put them in jail for 8 months until June 2006, when Beijing and Rangoon reached agreement. In the immediate aftermath, Chinese checkpoints were closed to log transports,43 but more recent inspections have indicated that the illegal timber trade between the two countries is reviving. China has also signed on to a number of regional and global agreements to combat the illegal trade in timber, including the Santiago Declaration, the International Tropical Timber Agreement, an East Asian Forest Law Enforcement and Governance agreement, and a memorandum of understanding with Indonesia concerning cooperation in combating illegal trade of forest products. However, China does not have any regulations or mechanisms in place to monitor effectively whether logs are imported legally or illegally.

MARINE POLLUTION China’s contribution to marine pollution is an issue that remains below the radar of much of the international community but is of ‘China Able to Handle its Timber Demand,’ People’s Daily Online, 28 February 2006, available at http://www.ilegal-logging.info/news.php?newsID+1290 41 ‘A Choice for China,’ Global Witness report, op. cit., p. 24. 42 ‘China Must Act on Pledge to End Illegal Burmese Timber Imports,’ press release Global Witness, 8 March 2006. 43 ‘400 Illegal Logging Workers Sent Home from Myanmar,’ Reuters, 18 June 2006. 40

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serious concern to the world’s environmental activists. The international environmental NGO WWF reports that the Yangtze delta has become ‘the biggest cause of marine pollution in the Pacific’.44 China has 18,000 km of coast lines and 3 million km of sea areas. In February 2008, China reported that the offshore sea area suffering from serious pollution now exceeds 160,000 square km, almost doubling in size over the past decade.45 Coastline inspections by MEP and the State Oceanic Administration found that in ‘nearly half of the 20 coastal cities inspected, more than 50 per cent of the sewage is discharged into the sea untreated’.46 Gao Ying, an expert with the journal Oceanographic Studies, argued that the Yangtze River Delta, Pearl River Delta, Bohai Rim Area, Liaoning Province, and Shanghai are all suffering from increasing pollution.47 Overall, China dumped 31.7 billion tons of wastewater into the Pacific in 2005, which represented nearly a 100 per cent increase from 2000,48 and accounted for 60 per cent of the total wastewater produced by the country.49 According to the China Ocean Quality Reports, 80 per cent of this pollution arises from land-based activities.50 Primary pollutants include heavy metals such as cadmium, copper, and arsenic.51 In the East China Sea, which is among the world’s largest fisheries, 81 per cent of the sea was rated CategoryFour for pollution—not suitable for fishing—this represents an expansion from 53 per cent in 2000.52 According to China’s State Oceanic Administration, of the 18 coastal ecological monitoring zones, six were deemed unhealthy, seven moderately healthy, and only five healthy. There were 270

‘On the Water Front,’ The Guardian, 11 November 2004. ‘China’s Polluted Sea Area Almost Doubles,’ CRI, 27 February 2008, CRIEnglish. com, available at http://news.rednet.cn/c/2008/02/27/1448452.htm 46 ‘China Admits to Marine Pollution Problem,’ United Press International, 5 August 2004. 47 ‘Marine Protection Action,’ Business Daily Update, 16 October 2006. 48 ‘Fishing for a Solution,’ Business Daily Update, 16 October 2006. 49 ‘China Drafts National Program to Protect Marine Environment,’ Xinhua News Agency, 19 October 2006, available at http://www.gov.cn/english/2006-10/19/content_418156.htm 50 ‘Fishing for a Solution,’ Business Daily Update, 16 October 2006. 51 Kevin Huang, ‘Alert over Cadmium in Pearl River Estuary,’ South China Morning Post, 29 March 2006, p. 5. 52 ‘One of the World’s Top Fisheries Dying,’ Xinhua New Service, 17 August 2006. 44 45

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wastewater discharge points in fishing areas, posing a great threat to the safety of marine life and the quality of seafood, and another 70 were found in scenic areas, threatening surrounding natural environments.53 China also pollutes the waters of Cambodia, Malaysia, Thailand, and Vietnam. Rivers flowing through these countries are delivering at least 637,000 tons of nutrients—which contribute to toxic algal blooms and dead zones (de-oxygenated areas of sea)— to the coastal waters of the Sunda Shelf. Over 50 per cent of these nutrients originate in China.54 China’s own assessment of the roots of its large and growing contribution to marine pollution is not surprising: rapid growth of coastal areas, poor enforcement of marine protection, and wastewater treatment laws.55 In addition, bureaucratic politics complicate efforts to respond to marine pollution problems. The recent case of Bohai Sea Clean-Up Campaign underscores the complicated nature of China’s marine protection effort. In November 2006, MEP announced that the Bohai Green Sea Action Campaign, underway since 2001, ‘effectively controlled the pollution from waste water and rubbish treatment plants, oil decks and improved coastline bio-agriculture’.56 On this basis, similar Green Sea Action Plans for seven provinces, municipalities, and autonomous regions, as well as the Pearl River Delta and Yangtze River Delta areas were announced. The State Oceanographic Administration, which maintains an overall responsibility for marine issues and monitoring, however, offered a very different assessment, arguing that ‘almost no river that flows into Bohai is clean and it will become a dead sea in a matter of a dozen years if no effective measures are taken to curb the pollution’. The agency’s experts pointed out that the content

‘Heavy Pollution of China’s Marine Zones,’ China Daily, 10 January 2006, available at http://www.china.org.cn/english/2006/jan/154654.htm 54 ‘Integrated Water Management Key to Cleaning Up Oceans,’ United Nations Environment Programme press release, 19 October 2006, available at http://english.sepa. gov.cn/zwxxhjyw/200610/t20061019_94871.htm 55 ‘China’s Political Advisors Call for Efforts to Save “Dying” Sea,’ Xinhua News Service, 9 March 2006, available at http://english.investtg.gov.cn/News_Content. asp?ID=133 56 ‘Marine Protection Action,’ Business Daily Update, 16 October 2006. 53

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of heavy metal detected in the mud of the sea bottom was 2000 times that of the national standard. Fish were losing their reproductive abilities, and there were no large groups of any variety of fish, crab, or other crustaceans to be found.57 Forty-three out of 52 rivers flowing into the Bohai Sea were severely polluted.58 (The Bohai Sea absorbs nearly 5.7 billion tons of sewage and another two million tons of other solid waste, every year.59) When Chinese media highlighted the differing assessments, Vice-Minister of MEP Zhu Guangyao, stated, ‘We are authorized by the State Council to release the latest information about the national campaign to clean up the Bohai Sea, which started in 2001 and is led by MEP, but we’ve noticed that some government department has published their views in their own interest.’ State Oceanographic Administration officials, meanwhile, commented that their statistics, based on regular surveys by more than 8,000 monitoring posts along the mainland coast, should be telling and that their ‘grim’ assessment was not included in MEP’s official report.60 In support of such marine clean-up campaigns, China has set out a number of ambitious goals for wastewater treatment promising to treat about 70 per cent of its urban wastewater by 2010, and to try to decrease pollutants by 10 per cent. The government has also announced plans to invest over USD 2.5 billion in clean-up efforts in the Bohai Bay.61 There are currently 145 wastewater treatment plants under construction in coastal areas.62 China has also promised to shut down heavily polluting projects and punish violators to ensure that by 2010 at least 85 per cent of the sewage and 80 per cent of the waste are properly handled; offshore oil producers, shipping companies, and ports in the area have been ordered to prevent oil

‘China’s Political Advisors Call for Efforts to Save “dying” sea,’ Xinhua News Service, 9 March 2006, available at http://english.investtg.gov.cn/News_Content. asp?ID=133 58 Jiangtao Shi, ‘Bohai Sea Will Be Dead in 10 Years,’ South China Morning Post, 19 October 2006. 59 Ibid. 60 Jiangtao Shi, ‘Marine Pollution Divides State Bodies,’ South China Morning Post, 20 October 2006, p. 4. 61 ‘China To Spend 18 Billion Dollars To Clean Up Bohai Bay: Report,’ Agence France-Presse, 25 February 2008, available at http://www.terradaily.com/reports/ China_to_spend_18_billion_dollars_to_clean_up_Bohai_Bay_report_999.html 62 ‘Marine Environment Threatened by Sewage,’ China Daily, 17 October 2006. 57

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leakages and the disposal of waste at sea and all aquatic farms and coastal engineering projects will be obliged to adopt environmental protection efforts.63 It has also joined the relevant conventions and organizations such as the United Nations Environment Programme (UNEP) Global Programme of Action for the Protection of the Marine Environment from Land-based Activities, which offers information-sharing and capacity-building assistance, as well as financing for some projects. Past experience with marine clean-up campaigns, however, does not bode well for the future. As one Chinese expert commented about the Bohai Sea project, ‘One third of the scheduled projects have still not started and “many” other projects have been left uncompleted as a result of unfulfilled investment commitments.’64 Moreover, previous pushes by the Chinese government to improve the rates of industrial and municipal wastewater treatment have largely failed. In 2004, MEP inspected the sewage treatment plants that had been built during the 10th 5-Year Plan and found that only half of them were actually working: the other half were closed down because local authorities considered them too expensive to operate.

LOOKING FORWARD: CHINA’S NEXT STEPS China’s extraordinary economic development has contributed to significant degradation and pollution of the country’s resources. Air and water pollution, land degradation, and the declining availability of resources such as water now top world statistics and are beginning to affect the country’s economic growth, public health, and social stability. At the same time, this economic dynamism, transformation into a market economy, and integration into the global economy, enable China’s leaders to experiment with a new platform of policies. The CDM and carbon market are rooted in a belief that China’s growing

63 ‘China Vows to Better Protect the Bohai Sea,’ Xinhua News Agency, 7 August 2006, available at http://www.china.org.cn/english/government/177150.htm 64 ‘China’s Political Advisors Call for Efforts to Save “dying” sea,’ Xinhua News Service, 9 March 2006, available at http://english.investtg.gov.cn/News_Content. asp?ID=133

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economy and transition to a market economy will permit new approaches to environmental protection to succeed. What will China look like a decade from now, and what kind of impact will it exert on the global environment? Broadly speaking, China’s leaders know what needs to be done to transform the country from one of the world’s greatest pollution contributors to one of the world’s environmental protection leaders. The development of an institutional framework for environmental protection and access to new technologies and policy approaches—as well as continued economic growth—are all necessary for China to meet the environmental, public health, and economic needs of its people over the long term, and diminish the country’s impact on the global environment. In concrete terms, at least three preconditions need to be met: economic growth continues at 8–10 per cent per year, providing the economic wherewithal to invest in environmental protection; China’s integration into the global economy continues to afford it an access to a wealth of environmental technologies and policy approaches; and critically, Beijing and local authorities develop the institutional incentives and disincentives for an effective environmental protection. China’s leaders and urban planners must also take advantage of sweeping societal changes such as the process of urbanizing 400 million people by 2030 to utilize the most energy-efficient building technologies, environmentally sound transportation infrastructure, and wastewater treatment and water recycling efforts. China’s leadership also increasingly realizes that the country cannot become a modern efficient economy, fully integrated into the international system without establishing an independent judiciary, realistic natural resource pricing, tougher fines and enforcement, and greater transparency and official accountability. The MEP needs to gain in bureaucratic strength. Beyond its elevation in 2008 to cabinet-level status, it needs additional financial and human resources. Only then will MEP be equipped to ensure that an enforcement of tough energy standards or pollution control is a top priority. Beijing must also find a mechanism—whether political or economic—to spur local leaders to do the right thing or face the loss of their jobs. In fact, in 2007, Beijing announced plans to evaluate local officials not only on how well they govern their economy but also on how well they protect the environment. How

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effectively this policy will be implemented, however, remains to be seen. Protection of NGOs and an open media are needed to bring increased pressure to bear on local authorities and businesses—both domestic and international—to adhere to environmental laws and regulations. China’s transportation sector has the potential to undermine much of the leaders’ efforts to improve air quality by increasing the mix of renewables in its energy supply. As China’s transportation sector grows, the Chinese government must also move to reduce gasoline subsidies, thereby encouraging growth in the range of alternative fuel vehicles. The desire of China to be a global power with influence that extends well beyond the economic realm should also motivate the country to become an example in the environmental arena. In the short term, the Olympics is providing a spur for environmental protection, in particular for Beijing and the surrounding areas. But even here the city has fallen short of its clean air goals. In addition, more needs to be done on the international front. For example, China should voluntarily adopt targets and timetables for reducing its contribution to climate change that will be enforced no matter the post-Kyoto regime. If these structural changes are made, other aspects of environmental policy will fall into place. Cleaner production and a wide range of environmental technologies will not be simply staged experiments, but rather viable policy approaches and mechanisms for protecting the environment. Overall, in 10 to 20 years, China has the potential to transform the global environment by leading in environmental protection rather than by leading in environmental pollution, but it will require the transformation first of all of the country’s own economic and political infrastructure.

HOW DOES THE UNITED STATES FIT IN? As China moves to improve its environmental protection record even while continuing to grow its economy, the United States has an important role to play in moving this effort forward. Many in the United States and the rest of the world are rightly concerned about China’s contribution to climate change, the loss of marine

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biodiversity and declining fish stocks, and the devastation of many of the world’s most environmentally significant forests. Yet the United States is a significant contributor in its own right to several global environmental problems. In this context, addressing the challenge of China’s role has as much to do with identifying specific areas of cooperation as it does with establishing the United States itself as a leader in addressing challenges such as global climate change and the illegal timber trade. With regard to energy use and climate change, for example, the United States should take steps to improve its own energyefficiency record, enhance energy conservation practices, and expand the use of alternative energies, all areas in which the United States lags well behind Japan, for example. Similarly, the United States has an important role to play in reversing the trends in the illegal timber trade. The value of the wood-based products, which the United States imported from China alone during 2006, was estimated at USD 3 billion. Import and procurement regulations that insisted on a verifiable chain of timber processing from the point of origin would be a first important step towards slowing the growth of the illegal timber trade. Certainly, there is significant room for the United States to work with China to build capacity within the country to address these global environmental challenges. Many INGOs, multinationals, universities, and US government agencies are already active in joint technology development, training, and the provision of new policy approaches, particularly with regard to global climate change. The INGO Natural Resources Defense Council (NRDC), for example, has been working intensively with the Chinese government to develop and implement energy-efficiency codes for new buildings in China. In the lead-up to the Olympics, with US government assistance, Beijing’s 42 new Olympic dormitories housing 17,000 athletes were all LEED-certified. General Electric and other US firms are actively engaged in pushing alternative energies, more fuel-efficient engines for aircraft and locomotives, and clean coal technologies. Nonetheless, there is always the potential for more such cooperation. There is not yet an economic or technological incentive, equivalent to CDM or the carbon market, to encourage stronger Chinese action on issues such as the illegal timber trade or marine pollution. In the case of timber trade, INGOs have a long list

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of measures that they would like to see China adopt: join timber certification programmes such as those in the United Kingdom and the United States; increase domestic production through policy reforms such as fees, regulations, tax reforms for legal and sustainable wood sourcing; and establish verification systems for sourcing into China.65 None has received any traction till date. In one promising case, however, WWF, along with other international NGOs, is working with a Chinese company, Shanghai Anxin Flooring Company, to bring its practices up to world standards. Anxin’s Beijing factories have already passed ISO certifications; and in Brazil, where the company does much of its logging, it has established strict rules against logging on steep slopes and in important wildlife habitats.66 Since much of China’s challenge rests at the level of enforcement, the United States and several US NGOs, such as the American Bar Association, also have ongoing efforts to support the development of rule of law and civil society. These efforts speak to the core of the environmental protection effort in China today. The reality, however, is that much of the burden and opportunity for China to become a leader in addressing these global environmental challenges rests within China itself. The CDM and carbon market alone will not be sufficient to prevent Chinese greenhouse gas emissions from swamping efforts by the rest of the world to reduce their contributions. No amount of capacity building, training, and even technology transfer from the international community can transform China’s contribution to the illegal timber trade and marine pollution. Real change will only arise from a strong central leadership and from the development of a system of political and economic incentives within the country that make environmental protection a much easier, more institutionalized effort for local officials and the Chinese people. This may mean raising the price of natural Kerstin Canby, ‘Questions About the Legality of China’s Wood Product Imports,’ Forest Trends, Vancouver (January 2006). 66 ‘Practical Actions to Combat Illegal Logging, Summary of a Multi-Stakeholder Dialogue on Best Practice for Business and Civil Society,’ in Linda A. Kramme and Sarah P. Price, eds, The Forests Dialogue, summary report. Hong Kong, SAR, PRC, 7–10 March 2005, available at http://research.yale.edu/gisf/assets/pdf/tfd/logging/ TFD%20Illegal%20Logging.pdf 65

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resources, such as water, to encourage conservation and recycling. Fines should be increased and penalties enforced for polluting factories. And there must be greater accountability among local officials, whether through political incentives, such as promotion opportunities, grassroots oversight, transparency, and fairness in the judicial system, or even more significant moves towards political reform. Without such reforms, much of the work of China’s environmentalists, and certainly that of the international community, will continue to be at the margins and the threat that the environment will become a more politically charged element in the Sino–US relationship will only increase.

5 GROWING INDIA–CHINA ECONOMIES, LINKED ENVIRONMENTAL CONCERNS, AND EMERGING SCENARIOS P.S. Ramakrishnan

INTRODUCTION India and China are now being seen as two rapidly growing economic powers in the Asian region, the former having got into this a little over a decade ago, whereas the latter had an early start, arising out of post-cultural revolution disillusionment. From an environmental perspective, both India and China have had a long history of exploitation of their natural resources. Most of these exploitative processes are external to the region, whether it be for fuelling the industrialization of the already industrialized world that occurred earlier, or now for supporting the industrialization process within the country itself, further impacting upon the already depleted natural resource base. Rapid industrialization has also adversely affected the quality of air and water arising from industrial pollution. From a global perspective, the International Energy Agency (IEA) in one of its latest report predicted that China would become the world’s top emitter of greenhouse gases by 2030.1 In this context, IEA has recommended a rapid expansion in the use of renewable energy sources, including biofuels for vehicles. It says nuclear power could also make a

1 See ‘World Faces “dirty, insecure” Energy Future,’ available at http://www. newscientist.com/article/dir10460-world-faces-dirty-insecure-future.html

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major contribution to cutting fuel imports and curbing CO2 emissions, but only if governments facilitate push for private investment in this area. It is heartening to see the rapidly emerging Indo–US collaboration, in the area of atomic energy use for peaceful purposes. The IEA predicts that even if the suggested steps are taken, CO2 emissions will still rise; but will be 16 per cent less than with business as usual. If policy actions from governments are not forthcoming—it says, energy demand and CO2 emissions could both increase by more than 50 per cent, threatening severe and irreversible environmental damage, with severe ecological and economic consequences. With China now being the second-largest emitter, it has implicitly taken the position, that by controlling its population based on one-child-per-family norm, it is contributing to global environmental health.2 It is in this context that the differentials that exist in the manner in which environmental problems are currently perceived in India and China, and the possible remedial measures that get debated with possible corrective measures emerging and/or likely to emerge in the future are to be viewed. In the area of environmental activism, even though the non-governmental sector unlike in India is still weak in China, there seems to be a growing tendency in China towards organized collective action through the available legitimate channels. In other words, Chinese workers are trying to exert mass pressure within the existing hierarchical power structure, rather than challenging it from outside, which implies that China is not likely to create an independent civil society and move towards democratic governance, in the near future.3 No doubt, China’s leaders are concerned with environmental protection, but they have been unable or unwilling to take the necessary political and economic steps to reverse the overall negative trends that China is confronted, on environmental degradation and pollution on the ground.4 This is the context in which the efforts of the Chinese government to develop Environmental Protection Industry (EPI), and the Task Force Draft Report of 2003 of China Council for International Cooperation on Environment and Development (CCICED) on financial mechanisms to promote Available at http:/en.wikipedia.org/wiki/kyoto_protocol Anonymous, Asia Program Special Report, no. 124, September 2004, Woodrow Wilson International Center for Scholars, Washington DC, p. 20. 4 Elizabeth Economy, ‘The Case of China and The Global Environment: Dizzying Growth, Devolution of Power, Environmental Disaster’ (this volume). 2 3

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environmental protection,5 though interesting initiatives, have to be seen. The developing economies like India and China, therefore, have to tackle the emerging pollution problems linked with industrialization and at the same time sustainably manage their natural resources not only to confront the rapidly emerging, climatechange-lined global warming, but also to give a better quality of life to the vast majority of the rural poor. Industrialized agricultural practices do create their own environmental problems in a variety of different ways—pollution of the air, land, and water, land degradation, and biodiversity-based natural resource depletion, etc. These rapidly emerging changes in the rural environment scenario have implications also for ‘coping’ with climate change because of C-sequestration-linked natural resource degradation. This is the context in which some of the key issues linked with environment and sustainable development in China, are compared and contrasted with the situation prevailing in India. Starting with a discussion on sectoral issues such as water and industrial pollution, the emphasis shifts towards issues that are linked with sustainable management of natural resources (natural and human-managed), which happens to be the key buffer against industrial pollution. With a wide range of minority ethnic societies living in both the countries, whose value systems tend to be distinct in many ways from the vast majority of others, using ‘knowledge systems’ (traditional and formal), and linking the two together appropriately, becomes an important issue for nature conservation-linked human security too. Such an approach forms the basis for what follows.

THE UNFOLDING DEGRADATION OF SOCIO -ECOLOGICAL SYSTEMS CHANGING WATER LANDSCAPE Water is a key issue for sustainability of agriculture-driven, large, rural, human population, and sustainable management of the biological 5 Summary report of the Task Force on Financial Mechanism for Environmental Protection, the Third Phase of CCICED, 2003. Recommendations to Promote the Development of Chinese Environmental Protection Industry (EPI), draft version, 27 July 2003.

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resources. With a monsoonic climate determining water availability for much of the land-based livelihood activities on which the people in the region are dependant, this key resource becomes critical in the context of the skewed distribution of the rainfall during the year. Intensively managed, irrigated, ‘green revolution’ agriculture is a major factor for subsurface aquifer water depletion in the two countries, and the situation is alarming (Box 5.1). BOX 5.1 Depleting water resources • In China, water tables are falling almost everywhere, where the land is flat; particularly, the northern half of the country is quite literally drying out, a region that accounts for nearly 40 per cent of China’s grain harvest; the water table is falling by roughly 1.5 m per year. • The Yellow River, the cradle of Chinese civilization, going intermittently dry, ran completely dry for the first time in China’s 3,000-year history in 1972, failing to reach the sea for some 15 days. In 1997 however, it failed to reach the sea for 7 months out of the year. • With hundreds of major projects planned in upstream provinces to withdraw water—for industrial and urban use, for power projects, and for irrigation—the Yellow River could one day become an inland river, never reaching the sea. • The Indian scenario is no better, even though ‘green revolution’ agriculture is confined to a small segment of the Indian plains. The extraction of water from aquifers is suggested to exceed recharge by a factor of two or more, with the freshwater aquifers being pulled down by 1–3 m per year. • Farmers in the Indian state of Gujarat, for example, are drilling their irrigation wells some 1.5 m deeper each year; a futile pursuit of rapidly falling water tables, unless sufficient recovery period is offered for restoring the water table. • In India, state governments give cheap or free electricity to farmers, who use it to pump water out of underground aquifers faster than natural recharge through rains, instead of rain recharging them. Although the subsidies are often defended in the name of the poor farmer or urban food buyer, most of the money ends up in the pockets of richer farmers, who can afford electric pumps. Source: R.L. Brown, C. Flavin, and H. French, State of the World (New York, London: W.W. Norton and Company, 1999).

Meanwhile, during the last few decades, damming the rivers has been seen as a way out, to compensate for the rapidly depleting, ground water resources; and also to meet with the increasing energy needs, for intensified agriculture on a larger scale, and for

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rapid industrialization. Increased water availability on a large scale is also seen as a way to alter the cropping patterns, by bringing in crops based on market demands, even if they happen to be high in water demand. Bringing in too much of water into an otherwise arid zone, and the attendant changes that societies are tempted to make in the cropping patterns to capitalize upon market demands are likely to throw up a whole range of sustainability issues. Such an emerging scenario is seen under many situations in the Indian context itself—the problem of intensive rice–wheat rotational cropping done in the ‘green revolution’ agricultural areas of Punjab, Haryana, and western Uttar Pradesh, and similar intensifications in land use that have occurred in the Chinese agricultural context, are examples where unsustainable water use can be seen as one of the culprits for land degradation. On the other end of the spectrum, we do have large tracts of arid lands in both the Indian and Chinese context, where sustainability of even traditional, dryland agriculture is becoming more and more a critical issue, in the context of rapidly breaking down traditional agricultural systems, without any meaningful alternative being put in place that are acceptable to the traditional rural communities living in these regions. It is also pertinent at this stage to mention a word on the damming of rivers that cut across national boundaries. The current concerns that have been expressed about the damming of the mighty river Brahmaputra at its origin in the Tibetan plateau is a case in point. On one side is a large population living across the border in the north-eastern India and Bangladesh, for whom Brahmaputra happens to be the lifeline for food security, which will be severely threatened; and on the other side are the possible adverse consequences emerging from excess of water in an otherwise arid zone of the Tibetan plateau, with possible implications for land-use sustainability concerns, emerging from excess water coming in, and the consequent efforts towards intensifying and even diversifying land use. On the other side of the Chinese border would be a scenario of deprival of its vital water source, and the possible emergence of environment-linked human security, sufferings, and conflicts that could spill over national boundaries. It is in this context that the ongoing discussions in India, both at governmental and non-governmental levels, on the issue of damming and interlinking of rivers to form a larger network so that water is made available for intensified agriculture and other uses even in rainfall-deficient regions, has to be seen. With an unevenly

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distributed monsoonic rainfall, across space and time, such a project seems to be justifiable. However, a closer scrutiny of its implications raises a number of concerns (Box 5.2). BOX 5.2 Manipulating river waters: the issues • Manipulating river flow may have smaller or larger consequences depending upon the socio-ecological system. • In the context of the peninsular India, where the rivers are rain-fed in the background of a long history of geological evolutionary process, manipulating water availability in the river systems could possibly have major impacts, compared with the Indo–Gangetic alluvial plains. • It is well known that upstream manipulations will have very many adverse impacts on downstream regions, restricting the supply of downstream sediments and linked, nutrient availability; large-scale manipulation of hydrological processes and excess water availability could lead to land degradation and site desertification. The move towards an ‘ever-green revolution’ of agriculture from the ‘green revolution’ in Haryana and Punjab is a case in point. • Manipulations of this magnitude will have implications not only on the mainland ecology but also on coastal mangrove ecosystems and marine biodiversity itself, deprived of nutrient flow from the land. • Mega-scale landscape alterations may lead to short-term gains in agricultural productivity, but the longer-term socio-ecological consequences still remain to be rigorously evaluated. Source: P.S. Ramakrishnan, Ecology and Sustainable Development (Government of India, New Delhi: National Book Trust of India, 2001), p. 198. P.S. Ramakrishnan, R. Boojh, K.G. Saxena, U.M. Chandrasekhara, D. Depommier, S. Patnaik, O.P. Toky, A.K. Gangawar, and R. Gangwar, One Sun, Two Worlds: An Ecological Journey (New Delhi: UNESCO and Oxford & IBH, 2005), p. 286.

An interesting ongoing debate, among a group of earth and atmospheric scientists, which is now going on is about interlinking of rivers, and its implication on acceleration of climate change itself, in the Indian context. They conclude that there is a strong possibility of the weakening of the monsoon system itself! Their argument emerges from the calculated conjecture that the river water and sediment load that flow into the sea has a role to play in determining monsoon rainfall pattern. This raises a large number of questions on the wisdom of river interlinking that it answers—again an environmental uncertainty that needs to be very carefully analyzed and evaluated.

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GROWING URBAN SPRAWL Overwhelming urbanization of the landscape is another emerging scenario in the region; China is well ahead of India in this respect. During the last few decades, conversion of arable land into urban sprawls has become a matter of concern; the rate at which this has occurred in the Pear River Delta region, which once used to be a major grain basket of China, is indeed a glaring example of the kind of problems that face this region. According to government estimates, some 200,000 hectares of arable land in China is suggested to disappear each year, due to urbanization and industrialization. It is predicated that by 2030, China could have 828 million city dwellers, if the present rate of urbanization continues. A major population problem arising from all this is a large floating population in the Pearl River Delta, and a rapidly emerging similar scenario in the Jitai Basin, the grain basket of China.6 With rapid industrialization and an urban-centred economy now emerging in India too, it is heartening to see this becoming more and more a debatable issue with non-governmental organizations (NGOs) and in the media. The rapidly enlarging urban sprawls of the older metropolis, Mumbai, Delhi, Kolkatta, and Chennai and the rapidly emerging ones like Bangalore, Hyderabad, Pune, etc., give a foretaste of what will follow, over time. Following the Chinese example, ongoing efforts that are to have earmarked industrial economic zones, very often by converting arable rural landscape, are already becoming a major factor for rural–urban/rich–poor conflicts. That this issue is being well debated in the media and through environmental activism, by itself augurs well for developing more sustainable land-use policies, involving all stakeholders. Industrialization and urbanization have resulted in a profound deterioration of the quality of air both in India and China, the main 6 M. G. Wolman, P. S. Ramakrishnan, P. S. George, S. Kulkarni, P. S. Vashishtha, Z. Shidong, Z. Qiguo, Z. Yi, J. F. Long, C. Rosenzweig, and W. D. Solecki, eds, Growing Populations, Changing Landscapes: Studies from India, China and the United States (Indian National Science Academy, Chinese Academy of Sciences and the U.S. National Academy of Sciences Publication, Washington DC: National Academy Press, 2001), p. 299.

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sources being vehicular emissions and untreated, dirty, coal-based industrial smoke, and the absence of adequate pollution control mechanisms. With about 251 million metric tons of carbon equivalent emitted in 2001, India is fifth in the world in carbon emissions, behind the United States, China, Russia, and Japan. However, India’s per capita carbon emissions is relatively low—at 0.25 metric tons of carbon per person in 2001.7 India’s per capita carbon emissions were less than one-quarter of the world average, and 22 times less than that of the United States. In other words, India stands fifth in the world in carbon emissions, behind USA, China, Russia, and Japan. According to an estimate,8 China’s rapid industrialization will lead to increased carbon dioxide emission into the atmosphere, thereby exceeding USA’s by 2010. China will account for 39 per cent of the increase in carbon dioxide, as its emissions would more than double in the period to 2030. This is largely because it is reliant on getting its electrical power from ‘dirty’ coal-fired power stations, rather than relatively clean, gas-fuelled plants. The IEA, which advises industrialized countries, predicted that global carbon dioxide emissions would increase by 55 per cent between now and 2030, unless tackled effectively, from now on. Arising from uncontrolled urbanization is also the problem of developing huge urban slums. Increasing problems that are linked with urban waste disposal and pollution levels in the air, water, and on land are all that contribute to a generally poorer quality of life for the vast majority in the two emerging economies; this big divide between the rich and the poor also contribute towards rapidly emerging human security issues in these urban sprawls.

DEGRADING ECOSYSTEMS AND DEPLETING BIODIVERSITY India and China are not only faced with intense population pressure but also have to deal with a rich ethnic diversity of minority communities. In such a rural landscape, one is dealing with at least three broad typologies of socio-ecological systems (Box 5.3). Arising from such a rich socio-ecological diversity, sustainable management of agriculture and natural ecosystems are becoming 7 8

Available at http://eia.doe.gov/emeu/cabs/indiaenv.html Available at http//en.wikipedia.org/Environment_of_China

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BOX 5.3 Typologies of rural, socio-ecological systems in the India/China context • Traditional societies living close to nature and natural resources in biodiversity rich areas, conservation-linked, sustainable conservation of natural- and human-managed ecological systems, and their sustainable management with sustainable livelihood/development concerns are the issues. • Marginalized rural communities living in the rural plains under a monoculture of rice or wheat or other crop species that are traditionally cultivated, but operating under a situation where natural biodiversity is already depleted, with implications for food security and sustainability of these socio-ecological systems. • Rural communities with highly intensified ‘green revolution’ agriculture that is now already under threat due to rapid land degradation is arising from intensification of land use—in the context of higher fragility of the tropical soil system, in contrast to better-buffered temperate soil.

Source: P.S. Ramakrishnan, 2001, op. cit.

more and more a concern in both countries. One is dealing with three distinct land-use problem scenarios in them: (i) Sustainable conservation of forest biodiversity and linked developmental sustainability for the minority ethnic–traditional societies who often inhabit biodiversity ‘hotspots’ where natural resources are rapidly degrading, arising from pressures to the region, and introduction of inappropriate, formal, science-based modern technologies for land management, without any consideration for the traditional value systems to which these communities are still attached; (ii) On the other extreme, ‘green revolution’ agriculture in both the countries have raised a whole range of socio-ecological concerns linked with land degradation, arising from petro-based energy that subsidized intensive, modern agricultural practices, under a relatively more fragile tropical soil environment; (iii) In between lie a whole range of biodiversity-depleted situations where the ‘green revolution’ agriculture has not been able to penetrate for one reason or the other, and at the same time, accelerated land degradation occurs,9 arising K. L. Chadha and M. S. Swaminathan, eds, Environment and Agriculture (New Delhi: Malhotra Publication, 2006), p. 900. ERSEC, Promoting Environmentallyfriendly Agriculture Production in China: Resource Management for Sustainable Intensive Farming, ERSEC-Ecological Book Series 1 (UNESCO, China: Tsinghua University Press & Springer, 2005).

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from ecologically stressed environmental conditions (limited water and/or nutrient availability). In short, apart from diversity in natural ecosystem diversity, one has to note the fact that one is dealing with a whole range of agricultural systems too, ranging from swidden (variously termed as shifting agriculture, slash-and-burn agriculture, etc.) and raising up to the modernism.10 In all these three situations, community participation in designing the developmental processes have been a major casualty. Large-scale land degradation arising from continued exploitation of natural ecosystems, rapid depletion of subsurface soil water resources, and unacceptable levels of fertilizer and nutrient loads on land and water bodies have been the ultimate consequences. Environmental uncertainties caused by all of this will get exacerbated, owing to climate change in conjunction with other ‘global change’ phenomena. To cite a recent report, climate change will harm China’s ecology and economy in the coming decades, resulting in large drops in agricultural output and increasing instability in yearto-year agricultural production, said a recent Chinese report issued by six government departments including the State Meteorological Bureau, the China Academy of Sciences, and the Ministry of Technology.11 The report said that if no measures are taken in the latter half of the century, production of wheat, corn, and rice in China will drop by as much as 37 per cent. The year 2006 had been a disastrous year for loss of life (with 2704 people killed) and property damage (economic losses worth USD 27.2 billion) through typhoons, f loods, and droughts. It may be noted here that China, in any case, remains prone to natural disasters, because of its geography, with a natural disaster in one way or the other affecting around 400 million people and an average of 50 million ha of farmland every year. This report has come in the wake of a hotter than average year, in 2006, and predicted M. J. Swift, J. Vandermeer, P. S. Ramakrishnan, J. M. Anderson, C. K. Ong, and B. Hawkins, ‘Biodiversity and Agroecosystem Function,’ in H. A. Mooney, J. H. Cushman, E. Medina, O. E. Sala, and E-D Schulze, eds, Functional Roles of Biodiversity: A Global Perspective, SCOPE Series (Chichester, U.K: John Wiley, 1996), pp. 261–98. 11 ‘China Report Warns of Agriculture Problems from Climate Change,’ Associated Press, 03 January 2007. 10

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that the average temperatures in China would rise by 2° or 3°C in the next 50–80 years, and that this would cause further acceleration of change. The report added that evaporation rates for some inland rivers would increase by 15 per cent, whereas China already faces a severe water shortage, especially in the northern part of the country. Similar situations could also be emerging in the Indian subcontinental region.

COPING WITH GLOBAL ENVIRONMENTAL CHANGE: WHERE DO WE STAND? INDUSTRIAL POLLUTION CONTROL In the area of industrial pollution control, the two countries have a long way to go, even though there has been increasing interest in both countries on clean technologies. India’s high concentration of pollution is not due to the absence of a sound environmental legal regime, but due to a lack of environmental enforcement at the local level. Regulatory reforms aimed at improving the air pollution problem in cities such as New Delhi have been difficult to implement. With an environmentally proactive Supreme Court and a well-entrenched, non-governmental, environmental watchdog well in place, controlling environmental pollution in the Indian context offers quite a bit of hope. Some isolated efforts are also on to promote more environmental friendly fuel such as compressed natural gas (CNG) for vehicles plying in urban centres. The problem of combating environmental pollution in China is equally serious; the hope lies in the effective implementation of what is contained in the strategies identified in the Chinese governmental document.12

NATURAL RESOURCE MANAGEMENT: A BUFFERING MECHANISM In recent times, global warming-related climate change issues have been a matter of international concern, but often without the fuller realization that this is indeed a part of the larger ‘global change’ Information Office of the State Concil of the People’s Republic of China, Environmental Protection in China (1996–2005) (Beijing, June 2006). 12

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phenomenon, an ongoing process right from the time of the industrial revolution era of the Western world. The climate change has to be seen as an integral component of a whole range of other set of ecological processes, which has been triggered by industrial revolution—land-use and land-cover change, land degradation and desertification, biological invasion by exotic species, and the consequent biodiversity depletion that is arising from all this. In other words, pollution control measures through ‘green technologies’ have to be further strengthened through sustainable management of natural resources in general, and biodiversity, in particular, to strengthen mitigation efforts in India and China through carbon sequestration. Such an approach will be an effective buffer against pollution too. Through optimal carbon-sequestration measures; this will also address many of the international concerns. In this effort, there is an increasing realization today than ever before that ‘knowledge systems’—‘traditional ecological knowledge’ (TEK) have also to be taken on board along with the textbook-based ‘formal knowledge’ that we have been using so far.13 Such a linkage between knowledge systems to evolve sustainable management technologies is being seen more and more as the key to relate to a value system that local communities understand and, therefore, are able to participate in the development process itself. Indeed, such an approach to development will not only address a whole range of direct benefits that communities derive through non-timber forest products (NTFPs), but also a range of indirect benefits accruing to them—such as through sustainable water and soil fertility management, and linked, nutrientcycling processes within the ecosystem.

SUSTAINABLE WATER MANAGEMENT In order to ensure water availability which is becoming a critical issue, there is an increasing tendency in the region to see water management P. S. Ramakrishnan, ‘Science and its Shortcomings in Environmental Management: The Social Angle,’ in N. Polunin and J. Burnett, eds, Surviving with the Biosphere (Edinburgh: Edinburgh University Press, 1993), pp. 209–32. P. S. Ramakrishnan, Ecology and Sustainable Development (Government of India, New Delhi: National Book Trust of India, 2001), p. 198. P. S. Ramakrishnan, R. Boojh, K. G. Saxena, U. M. Chandrashekara, D. Depommier, S. Patnaik, O. P. Toky, A. K. Gangawar, and R. Gangwar, One Sun, Two Worlds: An Ecological Journey (New Delhi: UNESCO and Oxford & IBH, 2005), p. 286. 13

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on a large scale through damming the major river systems, as the solution to address this problem. While this is one of the pathways available in the Indian context, there is an increasing interest towards diversified approaches. India, for example, has a large tradition of small-scale community-based water management. Reviving these traditional systems where they are available14 and creating such cheap, water-harvesting systems where such a tradition is not available,15 are rapidly emerging as environmental-friendly possibilities; NGOs have an important role to play in these efforts. What is emerging in the Indian context is to have an appropriate balance between the ‘big’ operating on a regional scale and the ‘small’ at the local level. This opens up possibilities of cooperation in this area which is not only critical for the two countries, but also will enable to tackle some of the emerging trans-national concerns in sharing river water. Water management also implies ensuring quality. Apart from industrial pollution control measures which are important, there is an equally urgent need to manage natural resources that filters out pollutants that may still be lurking within the soil system. This is the context in which the sustainable management of forestry which is also important from the point of carbon sequestration and carbon-trading opportunities that it offers, and the available sustainable agriculture options—are critical.

MOVING TOWARDS SUSTAINABLE FORESTRY So far, forestry management practices in India and China have been based on text-book-based, sylvicultural knowledge. However in recent times, there is an increasing realization that even though this knowledge base is important, we need to integrate the social and cultural dimensions to ensure community-participatory, sustainable forestry practices, particularly when one realizes that a substantial section of the population in both countries happen to be forest-dwellers. Approaches have a rich TEK base that emerges from the rich cultural diversity that we share in common. A. Agarwal and S. Narain, Dying Wisdom: Rise and Fall and Potential of India’s Traditional Water Harvesting Systems (New Delhi: Centre for Science & Environment, 1997). 15 B. P. Kothyari, K. S. Rao, K. G. Saxena, T. Kumar, P. S. Ramakrishnan, ‘Institutional Approaches in Development and Transfer of Water-harvest Technology in the Himalaya,’ in G. Tsakiris, ed., Advances in Water Resource Technology (Rotterdam, Holland: A. Balkerma, 1991), pp. 673–78. 14

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Socio-culturally valued species, ecosystems (for example, sacred groves), and socio-cultural landscapes provide the necessary basis for such an approach to sustainable, forestry-linked natural resource management.16 It is in this context, the recent initiative of International Union of Forestry Research Organization (IUFRO) on traditional forest knowledge (TFK) has to be seen as an effort to look at possibilities of providing social, cultural, economic, and environmental benefits through sustainably managed forests and forested landscapes with a view towards: (i) devolution of forest management authority to local and indigenous communities in many countries; (ii) recognition of the limitations of formal science and ‘scientific management’ of forests and the role of TEK; and (iii) bridging the gap that now exists between the forest scientists, forest managers, and local/indigenous communities in the development of improved policies and practices for the sustainable management of forest resources. With a forest cover of around 20 per cent in both the countries, there is a long way to go in building a secure forest cover to combat problems emerging from the still ongoing deforestation, even though now on a much-reduced scale, in the name of rapid industrialization of the two nations. Further, much of the afforestation programmes are focussed around plantation forestry which in both countries are undertaken by the concerned forest officials, and often delinked from community concerns in forestry, and, therefore, have a limited purpose. China has a major afforestation initiative and claims to have 6.67 million ha of afforested area per year.17 India, on the other hand, claims to have created a more modest average of about 8–9 million ha of forest plantations in a 5-year period, during the 7th and 8th 5-Year Plan. However, there are a few silver linings here and there in the Indian context (Box 5.4), though they are only indicative of the possibilities P. S. Ramakrishnan, ‘Conserving the Sacred: From Species to Landscapes,’ Nature & Resources 32, UNESCO, (1996): 11–19. P. S. Ramakrishnan, K. G. Saxena, and U. Chandrasekhara, Conserving the Sacred: For Biodiversity Management (New Delhi: UNESCO and Oxford & IBH Publication, 1998), p. 480. 17 Information Office of the State Council of the People’s Republic of China, Environmental Protection in China (1996–2005) (Beijing, June 2006). Ministry of Environment and Forests, National Forestry Action Programme, India (Government of India, New Delhi, 1999), p. 177. 16

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that a bottom-up approach in regenerating natural resources can have a dual benefit in that the communities share the benefit at the national level through income generation, and the international community is benefitting through sequestered carbon; while at the national level, local communities have the economic benefit—both directly and indirectly through improved natural resource base.

BOX 5.4 A few examples of isolated initiatives in the Indian context • In the 1980s, as the National Tree Growers’ Cooperative Federation, a bottom-up initiative in the Indian context, over a period of time, has been able to get a deeper understanding of location-specific land-use-based social realities and has been able to get community participation in rural forestry-based restoration of degraded lands. Although recent reports suggest that the forest cover in India and China is on the increase, sustainable rural forestry has to get more and more focussed around local values through TEK that is available with communities. • In the area of watershed management, there also exist isolated examples of community-participatory approaches. One of the earliest attempts in India to have an integrated land-use development that is linked with water management, and with community participation, was in the Himalayan foothills of the Shiwaliks, near Chandigarh in north-west India. Using an Institution, the Hill Resource Management Society (HRMS), as the driver, water conservation measures were initiated through earthen check dams to cope up with erratic rainfall and the consequent severe shortage of water for agriculture. The Sukhomajri model that is redeveloping the existing agriculture, animal husbandry, horticulture, and fisheries, linked it with rural forestry initiative, thus creating an ecological buffer. HRMS, with membership provided for each household, was used as the instrument for conf lict resolution. • Reviving the traditional Johads, dug-out tanks with earthen embankments, to store the limited rain water of the monsoon season in the semi-arid, drought-prone Alwar District of Rajasthan in north-west India, a highly committed NGO, Tarun Bharat Sangh, Alwar region, now boasts of over 3,000 such tanks spread over 650 villages. The increased underground seepage, and the consequent rise in water table, arising out of this massive effort, has helped in regenerating half a dozen seasonal rivulets into perennial systems. This is apart from the direct economic benefits that are arising to local communities through improved land quality, and the consequent changes brought about in cropping and other land-use systems, animal husbandry, and many indirect benefits to the community-managed forests that got regenerated, with water acting as a trigger. Source: P.S. Ramakrishnan, 2001, op. cit.

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However, replicability of these isolated experiences lie in a critical evaluation of these success stories that are largely focussed around TEK; modern ways of institution-building have to be linked with formal, traditional ways of doing it in order to ensure effective community participation. It is in this context that the first successful attempt to find and redevelop shifting agriculture-affected land in Nagaland in north-east India, and address forestry-linked agricultural issues. TEK as the trigger has to be seen as a major factor for the success of this initiative involving over 1,200 villages, which lies in that traditional knowledge linked with institution-building, and also has been used as the vehicle for this natural resource management initiative.18

MOVING TOWARDS SUSTAINABLE FOOD SECURITY Sustainable agriculture not only demands an efficient use of water and nutrients, largely based on locally available resources, but also demands a regulated cropping—done in a manner that would contribute towards sustaining soil fertility. Application of wrong technology and/or over-exploitation of natural resources may give short-term gains but could often lead to ecological degradation that would no longer be sustainable by man. If one were to consider intensely managed modern agriculture or even the agricultural systems that are untouched by modernism and are rapidly breaking down, there is an increasing interest now to evolve integrated farming system models both in India19 and China 20, where the objective is to curtail to the extent possible, external energy subsidies and/or strengthen buffers within the landscape by strengthening rural forestry initiative, and/or through agroforestry practices, appropriately integrating fisheries/animal husbandry with agriculture, are additional options that are available to deal with these two socio-ecological situations—where agricultural systems are breaking down. Such system-based approaches can be further strengthened by addressing more specific issues at the local level—such as through a P. S. Ramakrishnan, op. cit. K. L. Chadha and M. S. Swaminathan, op. cit. 20 Li Wenhua, Agro-Ecological Farming Systems in China, UNESCO-MAB Series, volume 26 (Carnforth, Lancs: Parthenon Publication, 2001), p. 433. 18 19

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sustainable soil fertility management initiative [the recently developed sustainable soil fertility technology in India which has gone up now to the Chinese shores], 21 or through water management initiative as discussed above. In these two situations, formal knowledge-based technologies for agriculture has to be moderated through TEK-linked inputs to address sustainability concerns. On the other end of the spectrum are very traditional agricultural systems like the shifting agriculture which is prevalent in the region. The Nagaland experience with shifting agriculture, which has defied a solution over the last more than 100 years through a community-participatory, agricultural forest fallow management model, is worthy of evaluation, adaptation, and introduction into similar shifting agriculture-impacted situations in the developing tropics. The lessons learnt while dealing with this development initiative were twofold: (i) TEK plays a major role in redevelopment of agriculture and (ii) integrating the traditional ways of institutionbuilding with the modern elective processes is critical to ensure community participation in the developmental process which is linked to a value system that local communities understand and appreciate.

GENERAL CONSIDERATIONS The Asian–Australian monsoon is an important component of the Earth’s climate system that influences the societal and economic activity of roughly half the world’s population. Recent studies suggest that changing monsoon patterns in the past has contributed to human migrations in the tropical rain belt, for example, the decline of Tang dynasty in China.22 However, those changes that occurred in B. K. Senapati, S. Naik, P. Lavelle, and P. S. Ramakrishnan, ‘Earthworm-based Technology Application for Status Assessment and Management of Traditional Agroforestry Systems,’ in P. S. Ramakrishnan, R. K. Rai, R. P. S. Katwal, and S. Mehndiratta, eds, Traditional Ecological Knowledge for Managing Biosphere Reserves in South and Central Asia (New Delhi: UNESCO and Oxford IBH, 2002), pp. 139–60. 22 G. Yancheva, N. R. Nowaczyk, J. Mingram, P. Peter Dulski, G. Schettler, J. F. W. Negendank, J. Liu, D. M. Sigman, L. C. Peterson, and G. H. Haug, ‘Influence of the Intertropical Convergence Zone on the East Asian Monsoon,’ Nature 445 (2007): 74–77. 21

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the past are on a geological time scale. What we are witnessing today on a global scale with new emerging industrialized economies like the most populous India and China and many others on the scene, is that the global environmental changes are likely to get magnified unless these emerging countries are supported by the developed world, and the developed world itself accelerates its own move towards global environmental protection. Having said that, these two developing countries themselves are also to strengthen the process of internal dialogue in the area of environmental protection that is linked with sustainable development. Here comes the role of the NGO sector in the area of awareness generation among all stakeholders, top to bottom, and to ensure checks and balances on the decision-making processes at all levels.

NGO MOVEMENT IN THE TWO COUNTRIES In the Chinese context, during the ‘cultural revolution’, human conquest of nature was a popular theme, though this situation has somewhat changed now; in recent times, there is an increasing awareness of China’s degrading environment. China today is experiencing dynamic environmentalism but no environmental movement; simply stated, right across the Chinese society there is an increasing concern for the environment, but with little environmental activism. In other words, Chinese environmentalism fails to conform to the definition of a social movement, though environmental conflicts do arise. From a situation where the Chinese media had a superficial covering of governmental reports and events like tree-planting activities, in recent times, it is not uncommon to find articles that are critical of the government; still, the environmental media remains controlled. Even though the educated youth do recognize the gravity of China’s environmental dilemma which has even led to a few instances of student participation in environmental campaigns, these still remain isolated exceptions. In spite of all this, Chinese state has taken a few steps in recent years to address environmental issues with some success. However in recent times, web-based environmental activism through the most influential NGO ‘Friends of Nature’ is quietly underway.23 Subsequently launched ‘green-web’ and ‘Han Hai Sha’ Guobin Yang, ‘Weaving a Green Web: The Internet and Environmental Activism in China,’ China Environment Series, issue 6. 23

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are some of the other initiatives that have had isolated local impacts. These efforts give some hope for the future in harmonizing a ‘top-down’ decision-making process of the Chinese political leadership with a bottom-up approach in environment-linked sustainable development. In contrast to the situation in China, the NGO sector-based environmental movement is well entrenched in the Indian context contributing significantly to the decision-making process at all levels. Starting with the efforts made by non-governmental environmental groups and scientific expertise to resist the putting up of a hydroelectric project in one of the best-conserved tropical rainforest area of the ‘Silent Valley’ in Kerala,24 which received considerable international attention too, India could proudly claim to have one of the largest NGO environment-linked sustainable development movement that is comparable with any that exists elsewhere in the world. Indeed, this sector has played a crucial role in auditing India’s environment from time to time, starting with one of the first ‘state of India’s environment’ reports published in the early 1980s itself.25 These efforts have had their impacts on the governmental decision-making process in the area of environment-linked developmental process itself. What does all this imply? In a regional context, knowledge systems-based community-participatory approaches contributing to more sustainable economic development are the key to ensure ecological, security-linked human security.26 Sustainable development has to be based on a value system with which different sections of the society would relate at once. In this effort, knowledge systems in the area of natural resource management that we have discussed in detail earlier, has a key role to play. With a rich assemblage of ethnic

P. S. Ramakrishnan, ‘The Need to Conserve Silent Valley and Tropical Rain-forest Ecosystems in India,’ Environmental Conservation 11: 170–71. Centre for Science and Enviornment, The State of India’s Environment, 1982: A Citizen’s Report (New Delhi: Centre for Science & Environment, 1982), p. 189. 25 Centre for Science and Environment, 1982, op. cit. 26 P. S. Ramakrishnan, ‘Linking Knowledge Systems for Socio-ecological Security,’ in Hans Gunter Brauch, John Grin, Czeslaw Mesjasz, Heinz Krummenacher, Navnita Chadha Behera, Béchir Chourou, Ursula Oswald Spring, and Patricia Kameri-Mbote, eds, Facing Global Environmental Change: Environmental, Human, Energy, Food, Health and Water Security Concepts, Vol 2 ( Peace Research and European Security Studies, AFES Press, Germany [in press], 2008). 24

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diversity and a substantial section of minority groups existing in both the countries, sustainable development based upon a value system that communities understand and appreciate, is critical for avoiding human conflicts and, thus, ensuring human security in the region. In the larger context, one is concerned with global environmental protection in the context of the Kyoto Protocol. First, both the countries are rapidly trying to catch up with the rest of the developed world, therefore, the environmental challenges for the future extend beyond the borders of both India and China. Having said that, comparatively speaking, India does have a definite edge over China in environmental conservation-linked sustainable development already with many checks and balances in place, so as to effectively harmonize the top-down planning and development processes with a bottom-up-approach corrective mechanism well in place. In the ultimate analysis, what one is arguing for is a democratic process that enables human societies to be as close to nature as possible through the construct of ‘cultural landscapes’, whether it be urban or rural. In other words, what one is arguing for is cultural diversity-specific management of natural resources. Such an approach will contribute towards sustainable management of natural resources and will also link human well-being and human security—which are critical for us in the region— to cope with emerging socio-ecological uncertainties that are arising from ‘global change’ and ‘globalization’.

6 SECURITY CONCERNS AND CHINA’S MILITARY CAPABILITIES THE EAGLE, THE DRAGON, AND THE ELEPHANT Jasjit Singh1

The likely emergence of China and India, as well as others, as new major global players—similar to the advent of a united Germany in the 19th century and a powerful United States in the early 20th century—will transform the geopolitical landscape, with impacts potentially as dramatic as those in the previous two centuries. In the same way that commentators refer to the 1900s as the ‘American Century’, the 21st century may be seen as the time when Asia, led by China and India, comes into its own. A combination of sustained high economic growth, expanding military capabilities, and large populations will be at the root of the expected rapid rise in economic and political power for both countries.

—Mapping Global Futures2 Actual trends since the NIC (National Intelligence Council) report cited above was issued only tend to support its central conclusions. China continues steadfastly along its upward trajectory to build its national comprehensive power. A quarter century after it commenced its four modernizations, and with the changes in the world environment that are due to the Union of Soviet Socialist Republics’ (USSR’s) disintegrating, setting off concerns and hopes of China

Director, Centre for Air Power Studies, New Delhi, E-mail: airpowerindia@ yahoo.co.in 2 US National Intelligence Council, Mapping Global Futures (Washington DC: Government Printing Office, 2004). 1

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imploding, with many questions raised as to how China would manage its liberalizing economics with authoritarian political systems, the certainty of its continuing rise to greater power and influence is clear. This has, in fact, added to the strategic uncertainties related to China’s rise to power, the most crucial of these being how it will employ its ‘comprehensive national power’ in future? Although Sun Tzu and Confucius are more important than ever before to help us come to an objective assessment, two major factors would have to be taken into account to ensure that this is not done as an abstraction: the nature of great power relations, and broader strategic and security trends in the world. At the same time, emergence, or rather re-emergence, of India as a major player in world affairs assumes importance for Indians, but it also has many implications for the way the global order is likely to play out in the coming years and decades. It can be stated with reasonable confidence that India’s rise to power is well set on the rising trajectory, although it has enormous challenges to cope with. One of the biggest challenges would be managing its own rise to power and its relationships with other centres of power. In an increasingly globalizing, interdependent world, even small countries like Singapore and Israel would play a crucial role in influencing world affairs. Others like failing states or states with fragile societies and governments, often debilitated by long years of internecine warfare and violence and/or decades of suppression of human rights—like Afghanistan, Somalia, the Congo, North Korea, Pakistan, and Iraq—have a profound impact through their negativity in the face of human aspirations for peace, prosperity, and human dignity. Still others like the liberal democracies of the West who face increasing challenges of demographic imbalances, radical jihadi terrorism threatening the very way of civilized life, and secular practices, continue to influence the course of events. But within this larger complex landscape, and for a variety of reasons, three key players—the United States, China, and India—and their relations among themselves and with the rest of the world— stand out as the core strategic triangle of the future that would exercise increasing influence on world events at large, and security issues in Asia, in particular. However incongruent it may appear, the shape of events in future would greatly depend on the interaction between the eagle, the dragon, and the elephant.

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GLOBAL CONTEXT A closer look at the nature of the international order, as it evolved since World War II should help us to get pointers for the future. My basic point concerns what the conventional wisdom would have us believe—that bipolarity was the central characteristic of the international order since then; but this is more a myth than a reality, unless viewed solely from a Euro–Atlantic perspective and almost entirely in military-economic and ideological terms. The Cold War and the consequent confrontation were considered bipolar in nature to the extent that the United States and the USSR, respectively, kept trying to attract other countries to their sides to expand their leverages especially against each other in what became apparently an ideological conflict. But this does not inevitably lead to a conclusion that the international order itself was bipolar, even though the power and dominance of the two super powers (and the intrinsic weaknesses of the developing countries) did give such an impression. It was clearly the Yalta order, but the ‘bipolarity’ of the Cold War was diffused by a number of factors and developments, among which the following stand out: 1. Pursuit of national interests through independent policies in what India conceptualized as ‘non-alignment’ (which has been, but must not be confused with the non-aligned ‘movement’ or NAM—a loose grouping of nations to maximize their options where their national interests converged). 2. The breaching of the Communist bloc very early on by Yugoslavia’s defection from it in 1948, but without embracing the capitalist–democratic model or renouncing the Leninist–Marxist framework completely. This was further breached by a number of Organisation for Economic Co-operation and Development (OECD) countries staying out of formal alliance system. 3. But perhaps the greatest factor that fractured the integrity of the Communist bloc was the Sino–Soviet split by early 1960s, narrowing the bipolarity clearly to the Euro–Atlantic framework. This split acquired new dimensions after 1962 Sino–Indian war and reached its climax in the Sino–Soviet border war of 1969. China’s opening up with the United States and Western countries placed it outside any bipolarity and (as in the case of India) it could hardly be ignored by either bloc as an independent centre of power, however weak that power was in the real world.

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4. There was no universally accepted/adopted model of clarity about the two choices (propounded as the Western and Eastern bloc models) of social–economic–political–ideological development. Many of the Western liberal democracies also retained planned development under governmental control and direction, following a mixed economic model, as it suited them best at a particular time. Thus the concept of ‘End of History’, signifying a major departure to note the end of ideological differences, was built on flawed ethnic assumptions.3 Similarly, the Huntington thesis of clash of civilizations veered to the other extreme, by erroneously assuming that Cold War ‘bipolarity’ had kept such clashes under control.4

TOWARDS AN ASIA- CENTRED CENTURY China’s modernization and the rapid opening up of its economy since 1980 coincided with many other changes in the world, of which the most significant one from our point of view, perhaps, was that it started the new trend that was leading to the rise of Asia. China’s huge market opening up along with high economic productivity with low labour costs held out a strong attraction to the industrialized countries of the East and the West. Meanwhile, the United States had been quietly shifting strategically forward into the Asian landmass, creating the US Central Command with jurisdiction over 22 countries of Asia and the Horn of Africa, while reducing its forward deployment in the Pacific Ocean region.5 At the same time, leaders of strategic thought like Brezinsky and Kissinger started to interpret the international order not as bipolar, but in pentagonal terms with USA, USSR, EU, Japan, and China, in some sort of an undefined multipolarity. Americans started to be increasingly concerned about the Japanese technological lead and a rising ‘Japanese threat’ in the 1980s, which the economic stagflation of Japan helped to subside in the 1990s. But China, especially Francis Fukuyama, The End of History and the Last Man (New York: Free Press, 1992). 4 Samuel P. Huntington, The Clash of Civilisations and the Remaking of World Order (New Delhi: Viking in Penguin Books, 1996). 5 Jasjit Singh, ‘US Strategic Shift Forward’, The Hindu, 2 August 1987. 3

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after the 1989 Tiananmen incidents, also started to be seen as the next emerging threat, either as a rising, revisionist power, or as an internally imploding state like the USSR. Progressive efforts were made to engage China in the 1990s, alternated with efforts to contain/balance it. It is in this global landscape that the collapse of the Soviet Union put an end to the myth of a ‘bipolar’ world. The enemy—the ‘Evil Empire’—simply faded away leaving behind the reality of a world in transition with new enemies and friends. What was clear was that the global power was shifting to the East, and Asia was emerging as the focus of international economic, political, and military activities. Some of the main factors indicating a shift of global power and Asia’s emerging role can be summed up as follows: 1. Asia is the region where the fastest economic growth and socio-political changes are taking place with obvious consequences and implications for the future. The Southeast Asian Economic Crisis of the late 1990s is behind us, and economies of the two giants of Asia, China, and India have maintained the upward trajectory at impressive levels. Some of the areas of global techno-economic strength (even if not at the frontier edge) like information technology, services, and manufacturing sectors are increasingly centred in Asia. Many high-technology US firms now outsource manufacturing to China, India, and other Asian countries, with the trend of major corporate players like Motorola and General Electric shifting Research and Development (R&D) and design centres to China and India.6 2. At the same time, Asia also represents the region that contains most of the poor of the world and least-developing countries and regions. Although African countries continue to suffer extremely under the burden of poverty and deprivation, the scale of poverty in Asia is overwhelming. India alone has nearly 250 million people living in debilitating poverty. 3. The region still has extensive unresolved disputes extending from issues of sovereignty to ideological contradictions and Nayan Chanda, ‘Offshoring: Don’t Fight It,’ Far East Economic Review (18 March 2004): 29. As of 2004, over 132 multinational companies including 100 in the Fortune 500 list have established high-technology research and development centres in India. 6

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conflict, which are often constructed on religious extremism. There are new tentative stirrings of effort to define the contours of security. 4. The longest wars since 1940 (World War II, Korean War, Vietnam War, Afghanistan War of 1980s—which in a way never ended but spilled over into the 21st century itself—Arab–Israeli Wars, Iran–Iraq War, etc.) have all impacted extensively on and/or occurred in Asia. 5. Eight out of the nine nuclear weapon states are in Asia and the contiguous oceans.7 The only time nuclear weapons were used in war was in Asia and most of the nuclear tests have been conducted on Asian soil. The most extensive nuclear and ballistic missile proliferation ever to have taken place has been experienced in and from Asian countries.8 New information has been emerging that South Korea, Taiwan, and Saudi Arabia have considered and acted to an extent, to move towards acquisition of nuclear weapons. Japan, in the opinion of experts, could acquire nuclear weapons at short notice, especially if it is faced with increasing nuclear–missile challenge from North Korea, even though its own thinking and the existence of US–Japan alliances would sustain its non-nuclear sentiment. 6. This is the region with the largest concentration of military power now. China has been embarked on a massive military modernization with high-technology acquisitions from Russia after 1993, especially in critical areas like air power and space capabilities.9 7. Asia and the contiguous oceans represent the area with the lastknown strategic resource base in the shape of hydrocarbons, China, India, Israel, Pakistan, and Russian Federation are physically located in Asia, while the United States is militarily present in all aspects. France regularly deploys nuclear forces in the Indian Ocean where it has territories. To these must be added the ninth nuclear weapons state, North Korea, which has withdrawn from the Nuclear Non-proliferation Treaty (NPT) and built nuclear weapons. 8 The recent disclosures about Pakistan’s supply of nuclear weapons technology, designs and material to North Korea, Iran, and Libya, and the efforts to supply it to Iraq, while acquiring missile and nuclear technology from China, North Korea, and a worldwide network of clandestine suppliers is now public knowledge. 9 Annual Report on the Military Power of the People’s Republic of China, report to Congress by Secretary of Defence, the United States Government (Washington DC, 2002), p. 11. 7

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with an inevitable potential for energy fault-lines across the continent. World’s energy ‘demand heartland’ composed of Japan, Korea, China, and India is in Asia where rapid economic growth and industrialization have been pushing energy needs and consumption sky high. This is also the heartland of the largest emerging markets. The struggle for control and access to hydrocarbon wealth of Asia and its contiguous oceans has been intensifying for the past two decades in consonance with increasing concerns of impending uncertainties in a key area affecting quality of life across the world.10 By a curious coincidence of geography, the energy ‘resource periphery’ extending from Siberia, Central Asia, Persian Gulf, and northern reaches of the Indian Ocean, South China Sea, and East China Sea, surrounds the ‘demand heartland’. This is the region containing most of the known reserves of oil and natural gas. Future needs and availability of energy resource base are likely to further emphasize the Asia-centred world order while enhancing the role of major centres of power. At the same time, energy fault-lines between the heartland-periphery and/or resource-periphery and the outer world are already shaping a new 21st century ‘Great Game’ of geopolitics for hydrocarbons. 8. Asia is home to sustained terrorism, mostly driven by ethno religious ideologies. In fact, Afghanistan–Pakistan has represented the epicentre of religious terrorism in the name of Islamic jihad impinging across the world for more than two decades. 9. Two of the world’s three largest narcotics-growing and trafficking areas, that is, the ‘Golden Crescent’ of Afghanistan–Pakistan region and Myanmar–Thailand–Laos’ ‘Golden Triangle’ are located in Asia. 10. All three countries that the United States designated as constituting the ‘Axis of Evil’ (Iraq, Iran, and North Korea) are in Asia. Out of the four significant wars that the United States has conducted since the end of Cold War, three have been in Asia (Gulf War: 1991, Afghanistan War: 2001–02, and Iraq: 2003). It has expanded its strategic and military presence in Asia

Nearly 51 per cent of the world’s crude oil transportation passes through the choke point of the Straits of Hormuz at the mouth of the Persian Gulf.

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(in Pakistan, Afghanistan, Central Asia, and Iraq, besides the Gulf Cooperation Council [GCC] countries), in addition to establishing a new naval fleet deployed in the Indian Ocean and new deployments since 2001. The United States, as the sole super power and de facto Asian power, would obviously remain a major player in an Asia-centred world. But there is an increasing congruence of views that given the rise of new centres of power in the past two decades, ‘in the long run it cannot succeed in forcing its will on the rest of the world’.11 Paul Kennedy had hypothesized in the late 1980s that the United States and the Soviet Union would succumb to the phenomenon of imperial overstretches, and instead, China and Japan would replace them in the hierarchy of leading powers.12 Four years later the Soviet Union proved the thesis right and the United States as the sole super power now seems to be overstretched in its unilateralist, imperial mould. John Mearsheimer had cautioned that the ascent of a new rival to the American power would start to alter the global strategic balance in a multipolar–multipower world.13

SECURITY CHALLENGES Seen in this context, what are the major security challenges that the United States and India need to give serious attention to? These (being representative and not exhaustive) may be briefly summed up as follows: 1. Strategic uncertainties regarding China: We are fairly clear about the certainty of China’s continuing rise to global comprehensive power. Its influence has been expanding all the way from South America to Africa and Asia. Its relationship with the former super power, Soviet Union, has reversed from the situation of the 1950s, Brantly Womack, ‘Asymmetry Theory and China’s Concept of Multipolarity,’ Journal of Contemporary China 13, no. 39 (May 2004): 351–66. 12 Paul Kennedy, The Rise And Fall of the Great Powers (New York: Random House Inc., 1987). 13 John J. Mearsheimer, The Tragedy of Great Power Politics (Chicago: University of Chicago, 2001). 11

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as China is now the more powerful strategic partner to a much weaker former Soviet Union. China certainly has been changing in many ways. But at this stage, it is far from clear how China would use its power in future? (More of this later.) 2. Peace and stability in the Persian Gulf region and Central Asia, currently threatened by ethno-sectarian and religious radical violence is not only continuing but also has every potential to expand and deepen with far-reaching consequences for liberal– plural democracies at one level and the economic and social well-being of the international community at the other. Iraq is at the edge of a civil war with little clarity about what would be the best way forward. Afghanistan continues to struggle for the elusive reconstruction and rehabilitation, which would make it possible for the country ravaged by three decades of internecine violence and wars to move away from radical extremism. The Taliban seems to be reasserting even if still in the Kandahar region and the adjoining badlands of Waziristan are hardly under the control of Pakistan, in spite of the latter using its full military power. On the other hand, the rebellions in Baluchistan made more complex by Pakistan’s killing of Nawab Bugti appear to be deepening, feeding as they are on decades of exploitation by Islamabad and the consequent, alienation of the people. 3. The challenge of uninterrupted access to oil and gas at reasonable prices in the context of looming decline of availability of oil in the coming decades, which would leave greater proportion of oil reserves under the control of a few countries like Saudi Arabia, Iran, and Russia, with profound impact on geopolitics and geoeconomics. 4. Arresting the continuing rise and spread of Islamic jihad and terrorism across the world in general but in Asia in particular. 5. Controlling the proliferation of weapons of mass destruction, especially nuclear weapons. Phenomenal proliferation has taken place from Pakistan in recent years with little deterrent steps being taken. Nuclear non-proliferation regime based on the NPT has functioned reasonably well within its inherent contradictions and infirmities. But it reached its apogee long time ago. Measures like the Proliferation Security Initiative (PSI) could only have a peripheral impact. Spread of knowledge about science and technology would make it more difficult to manage proliferation,

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leave alone eliminating it, requiring attention to fresh approaches to the problem without jettisoning the existing regime. 6. Military power in future would be less resistible without similar or superior capabilities. Asymmetric advantage in technology, size of forces, and/or force employment, individually or collectively, has historically been the basis of success or failure in wars and armed conflict. This is obviously acquiring greater salience because of revolution in military affairs (RMA). But the recent experience of Lebanon War also indicates the ability of non-state actors supported no doubt by states and substate entities to adopt not only military-specification weapons (as already witnessed in terrorism since the late 1970s) but also organization and tactics and force employment as a semi-military force with far-reaching consequences for future of peace and security, especially in the context of ongoing jihadi terrorism. 7. Developments in Iraq are to be seen in the context of an earlier situation in Afghanistan in 1980s. Soviet military withdrawal in 1989 was perceived and articulated as such even by knowledgeable people in the Islamic world (especially in Pakistan) as the victory of the Mujahideen (the warriors of Islam) over a super power! This in turn provided a tremendous boost to Islamic jihad which erupted from the Balkans to the Philippines, even impacting the United States as witnessed in the bombing of World Trade Centre in New York in 1993. With a far more dangerous mix of motivations and incentives of the violence in Iraq, would any withdrawal, however well planned and managed but which does not convey an unambiguous message of successful restoration of peace and stability in Iraq, generate beliefs that the sole super power has been ‘defeated’ by Islamic resistance? The question is not that this would be a wrong interpretation but that of (mis) perceptions as indeed happened after the Soviet withdrawal from Afghanistan. 8. Promotion of human development and human dignity based on democratic principles and practice. This is not an exhaustive list and many more issues deserve to be considered. But my central conclusion is that there is a clear convergence of US and Indian interests with respect to all these issues and challenges to security and stability. Where the differences come up are more due to the policy adopted by each country (largely

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conditioned by its own history, culture, and capability). This obviously requires deeper and continuous dialogue between the two countries at different levels and forums. For example, the US Congressmen have been demanding a robust pro-US action by India against Iran on the nuclear issue besides the unhappiness over the years with India’s attempt to establish a cooperative relationship with Iran. But geography itself decides that if India has to play any type of role in stabilization of Afghanistan and/or the transformation of Central Asia leave alone access to the latter’s energy resources, closer relations with Iran become a pre-requisite. Difficulties are already emerging because of US approach to the situation in the region. For example, India’s vote at International Atomic Energy Agency (IAEA) in September 2005 referring Iran to the UN Security Council was seen in India and Iran as under US/Israeli pressure creating hiccups in Indo–Iran relations the future ramifications of which are still unclear beyond Iran seeking to renegotiate the price of natural gas already concluded after years of negotiations. And Indians find it difficult to understand why no action is even contemplated against Pakistan which clearly has been the source of material and technology for Iran’s enrichment programme? And instead it is being rewarded with economic and military aid.

CHINA’S MILITARY POWER AND CHANGING PROFILE ‘The notion that China should in some sense enjoy a pre-eminent place among neighbouring Asian states remains relatively strong among both elites and ordinary Chinese citizens.’14 (Emphasis original)

This brings us to the issue of the rise of China’s power and its implications for the future. There are sufficient reasons to believe that China would remain preoccupied with the process of building its ‘comprehensive national power’ in the coming years, and hence would seek cooperation with other countries while avoiding a direct conflict. But the acquisitions of enhanced military power itself would provide options in its relations to its neighbourhood (including Taiwan), which otherwise were hardly available to it in the 14

Ibid.

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past decades. And an increasing flexing of muscles has been notable during the past 10 years. The issue of China’s future policies is burdened by numerous strategic uncertainties. But it may be useful to first note some of the certainties and realities that would manifest during the next 15–20 years as briefly summed up below: 1. Although it faces many challenges in the years ahead, China’s political system and leadership have demonstrated successfully during the past quarter century that it can manage the transformation of the state and society successfully and with minimum social–political costs, but with a clear willingness to use robust (and even massive) force even against its citizens, as witnessed in 1989. 2. China has been clearly asserting the goals of its grand strategy to become one of the front-ranking powers of the world, and its rapid economic growth and military modernization in all its aspects have been conditioned by this goal. 3. Although it has been reducing the size of its military forces during the past 20 years, China has the largest military in (continental) Asia and outguns any one of its immediate neighbours by a factor of three to 300. Qualitative changes taking place in its military power would provide it with an increasingly potent power projection and a long-range strike capability in the coming years. Access to Soviet/Russian design base since 1992 has really opened up tremendous opportunities for large-scale high-technology modernization of weapons and equipment. 4. Over 96 per cent of China’s nuclear arsenal and conventional military power projection capabilities have relevance only for its neighbours. The INF (Intermediate-Range Nuclear Forces) Treaty left it the unquestioned dominant missile power in Asia, and the modernization of its nuclear–missile arsenal, including the development of space power to support it, has received special attention in the past two decades. It has invested heavily in mobile ballistic missiles for nuclear as well conventional roles. For example, China had reportedly deployed 820 conventional mobile missiles facing Taiwan as part of its coercive strategies.15

15

Space Daily.

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CHINA’S GRAND STRATEGY AND USE OF FORCE The acquisition of a comprehensive national power is central to China’s grand strategy in normative terms which would have to take into account the actual situations and deal with them in accordance with the doctrine of a comprehensive national power. The comprehensive national power is in reality the ‘concept by which China’s strategic planners evaluate and measure national standing in relation to other nations’.16 A recent study of China’s grand strategy had identified three interrelated objectives that it seeks to achieve: (i) the preservation of domestic order and well-being in the face of different forms of strife; (ii) the defence against persistent external threats to national sovereignty and territory; and (iii) the attainment and maintenance of geopolitical influence as a major, and perhaps primary state.17 Reminding themselves and the rest of the world about the ‘humiliation’ imposed on them by the outside imperial powers, the Chinese place a great stress on the need for status, respect, and inf luence of a major power in the global arena, and preservation of the regime and territorial integrity are important components of the grand strategy.18 The issue of national sovereignty and territorial integrity has important implications for India. China is occupying nearly 48,000 sq. km. of Indian territory (in Aksai Chin) in Ladakh, had obtained the Shaksgam Valley further west from Pakistan illegally, and also claims 94,000 sq. km of Indian territory in the north-east constituting the state of Arunachal Pradesh. This state has an elected government and elects members of parliament at the national level that governs the country. China at one time had affirmed that ‘re-unification’ of China is a ‘sacred duty’ of the PLA (Peoples’ Liberation Army), implying that this was much more a task for the military than of political–diplomatic processes. More recently, less than a fortnight before the Chinese presidential visit to New Delhi, Annual Report on the Military Power of the People’s Republic of China, op. cit., p. 6. Michael D. Swaine and Ashley Tellis, Interpreting China’s Grand Strategy (Santa Monica: RAND, 2000), p. x. 18 China’s grand strategy, if anything, imphasizes the importance of ‘preserving its territorial integrity’. See Michael R. Chambers, ‘Rise of China: The Search for Power and Plenty,’ in Ashley Tellis and Michael Wills, eds, Trade, Interdepenene, and Security (Washington DC: The National Bureau of Asian Rsearch, 2006), pp. 65–104. 16 17

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the Chinese ambassador to India publicly laid claim to this state. Territorial integrity in terms of its grand strategy as perceived by Beijing must be interpreted to include these large chunks of Indian territory and a potential flash point, especially for a local border war. Beijing has been dragging its feet on even demarcating the Line of Actual Control (LAC) as it has existed on the Himalayan frontiers in spite of the 1993 and 1996 bilateral agreements to do so in order to maintain ‘peace and tranquillity’ on the borders. China’s philosophy on the use of force for political purposes continues to be rooted in its historical and cultural determinants which indicate that China would be more inclined to use full force as a last resort to achieve its political and strategic goals.19 But that does not necessarily mean that China does not place a great store by the role of force in achieving its objectives. Sun Tzu’s dictum that the acme of skill lies in winning without having to fight a battle rather than win a hundred battles, explains the philosophy. The capability to apply force (and even incremental application of force) would be used as a diplomatic instrument in conjunctions with other stratagem (like deception, etc.) to wear the adversary down and reduce its ability to win if the use of physical force does take place. China may use force for reasons that have little to do with its immediate tangible interests like territorial disputes.20 This is eminently borne out by the Sino–Indian War of 1962. Contrary to conventional wisdom, Chinese Premier, Zhou Enlai, had asserted to the Mongolian leader within days of the conflict that the war was not about the territory. According to him, it was caused by the necessity to teach India a lesson as it was moving too close to the United States!21 This also no doubt took into account the broader changes taking place in great power relations. Besides the Sino–Soviet split, serious confrontation between the US and the Soviet Union was taking place leading to the Cuban missile crisis at that time. China had been facing serious challenges in Tibet especially since 1959. China was not certain how the issue of Kashmir would evolve.

For an exposition of this line of analysis see the seminal work by Alastair Ian Johnston, Cultural Realism: Strategic Culture and Grand Strategy in Chinese History (Princeton, New Jersey: Princeton University Press, 1995). 20 Michael D. Swaine and Ashley Tellis, op. cit., p. 133. 21 Conversation record of Chou En-Lai and Mongolian President’s meeting on 26 December 1962, Cold War History Project, Wilson Centre, Washington DC. 19

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In fact, Zhou Enlai had asserted that India (and Pakistan) was getting ready to ‘give Kashmir’ away to the West!22 This is why its agreement with Pakistan on the latter’s transfer of territory to China being finalized at that time was kept provisional by Beijing, subject to who would finally exercise sovereignty in the state of Jammu and Kashmir (J&K) so that China could reopen the agreement to fresh negotiations if it did not rest with Pakistan. Even in more recent years, China has shown great sensitivity to the improvement of Indo–US relations especially in the areas of defence cooperation.

MILITARY DOCTRINE AND STRATEGY China’s doctrine has been undergoing significant changes during the past quarter century. More rapid changes have taken place after the 1991 Gulf War to plan for a ‘limited war under high-technology conditions’. This was visualized essentially as a local border war with high-technology where the PLA would engage in an ‘active defence’ strategy. Chinese experts have been saying that in order to implement the strategic principle of active defence, China has, in pace with changes in military objectives in the world, begun to shift from a geographic national defence with the backing of the Army to a strategy of national defence in great breadth and depth that integrates the three domains of outer space, deep sea, and territorial land.23

But it is clear that the shift of doctrine to ‘high-technology warfare’ implies that China’s ‘defence strategy is largely an offensive-oriented strategy reflecting the PLA’s shifting emphasis toward the “active” versus the “defensive” side of war preparations’.24 It is, therefore, inevitable that the evolving high-technology hardware is highly biased towards a ‘swift offensive strike because technological innovations have increasingly blurred the boundaries between offensive and defensive weaponry. Indeed, RMA is all about how to

Michael D. Swaine and Ashley Tellis, op. cit. Zeng Liming, ‘Theoretical Breakthrough and Strategic Readjustment—A New Change in China’s Idea of National Defence,’ Zhongguo Xinwen She, Beijing, 28 December 99, cited in FBIS-CHI-2000-0126 dated 27 Jan 2000. 24 You Ji, ‘The Revolution in Military Affairs and the Evolution of China’s Strategic Thinking,’ Contemporary Southeast Asia 21, no. 3 (December 1999): 355. 22 23

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maximise the offensive’.25 There has also been some new thinking as seen in the thesis of ‘Unlimited Warfare’ the contours of which are not fully clear as yet and nor are the implications. But it is also clear that through ‘Informationalization’ and cyber warfare, China is seeking to exploit the vulnerabilities in the area of greatest advantages of the United States in information dominance. Curiously, the only other military that has talked of unlimited war (or total war) has been the Pakistan Army. The Holy Quran was interpreted to mean that war must be total as per the teachings of the Holy Prophet, and terror, in this contrived (mis)interpretation, was to be the weapon of choice for this purpose.26 And military officers have been regularly exhorted to pursue this line of thinking in the name of the Holy Book. There appear to be many elements of commonality between the two concepts. It is also interesting that India, instead, has been articulating a fine-tuned doctrine of limited war and a counter-strike doctrine in view of the nuclearization of the security environment and its influence on conventional war.27

CHINA’S MILITARY MODERNIZATION While continuing to attach importance to the building of the Army, the PLA gives priority to the building of the Navy, Air Force and Second Artillery Force to seek balanced development of the combat structure, in order to strengthen the capabilities for winning both command of the sea and command of the air, and conducting strategic counter-strike.28

China has the third-largest nuclear–missile arsenal in the world and it has been developing more accurate mobile ballistic missiles. In substance, the expressed rationale is that China has been lagging behind other nuclear weapon states, in particular, the United States, Ibid., p. 355. Brigadier S. K. Malik, The Quranic Concept of War (Lahore: Wajidalis, 1979). 27 George Fernandes, the defence minister of the country then, in his Inaugural Address at the national seminar on Limited War organised by the Institute for Defence Studies and Analyses, New Delhi, January 2000. 28 ‘Revolution in Military Affairs with Chinese Characteristics,’ in China’s National Defence in 2004, Chapter III, p. 1, the White Paper published to illustrate China’s national defence policies and the progress made in the previous two years. China Daily, 28 December 2004, available at http://www.chinadaily.com.cn/english/ doc/2004-12/28/content_403913.htm 25

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and its goal is to narrow that gap in the coming years. This has profound implications for China’s neighbours as the overwhelming proportion of China’s strategic capabilities have rationale only for them because of the ranges of delivery systems developed and deployed by China. China has continued to proliferate nuclear weapons technology even after it acceded to the NPT in 1992. A US Senate Committee report in January 1998 stated that: ‘China is the principal supplier of weapons of mass destruction and missile technology to the world, and US government efforts to turn Beijing against international proliferation have met with little success’29 (emphasis added). The essential point we need to note here is that its assistance to Pakistan to acquire nuclear weapons has been motivated significantly by helping to become independent of US influence. China, in view of its lag behind the US capabilities in BMD (ballistic missile defences), would have to rely on counter-BMD strategies. Quantitative and qualitative growth of its nuclear and missile capabilities at a faster rate may be expected to constitute a major element of these strategies. A significant increase in China’s capabilities, spurred by BMD deployments by the United States will also make it more difficult to deter. In turn, this may lead to China becoming more assertive with the risk that it may resort to coercive policies, especially with regard to its neighbours. This will pose a different type of challenge to India (and the United States) than what was experienced in the past. There are serious doubts about the level of China’s investments in its military power and its modernization. But even if we accept the official data as representing the correct and complete position, this indicates that China’s military spending has been increasing at an average rate of almost 14 per cent annually. With an inflation rate that averages less than 2 per cent, this indicates that the defence expenditure has been growing at around 12 per cent per year in real terms over the past 15 years. Although China’s military expenditure as a proportion of its gross domestic product (GDP) is much lower than that of the United States, this rate of sustained annual growth is far more than what any other country has maintained. And China does

29 China: The Proliferation Primer, A Majority Report of the International Security, Proliferation, and Federal Services Subcommittee, United States Senate Committee on Government Affairs, January 1998, Washington DC.

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not have the type of military commitments that the United States has taken on in the past decade! Even in absolute terms, the official military expenditure data makes China the second-largest military spender in Asia after Japan, even though a conservative estimate of its actual expenditure would place it at the top position. China’s latest official policy document titled China’s National Defence 2004 issued on 28 December 2004 sets out its assessment of the strategic environment under which it plans to shape its military posture and some of the key elements of its military policy to support its objectives. Beijing’s White Papers in the earlier years did little to enlighten those interested in understanding the developments in China’s military power and posture. But progressively they have begun to provide more details, no doubt also reflecting the evolution of its military policy as it continues its modernization. At its core, the official policy now argues for greater rather than lesser role for military power in international relations. This is an obvious shift from the earlier official positions perhaps as an outcome of an enhanced confidence about its own increasing military capability. Compared to the latest document, the 1998 White Paper had emphasized development and cooperation, while the 2000 paper highlighted the negative security situation in the world, shifting to a more optimistic, stable security environment in its assessment 2 years ago. This was probably seen as a result of an enhanced international cooperation in combating terrorism after 11 September 2001 attacks. The 2004 White Paper emphasizes challenges of hegemonism and unilateralism, clearly referring to US policies and actions leading to the Iraq War. Concerned about increasing military disequilibrium, China believes that reliance on military power to serve strategic interests and economic advantages would increase, leading to greater instability, and yet it argues for the same logic for itself. The 2004 White Paper’s conclusion that ‘world peace is elusive’ now and the ‘military factor plays a greater role in international configuration and national security’ would probably not come as a surprise to many experts watching the strategic and security environment in Asia. But it is clear that China, if anything, is once again emphasizing the importance of military power in its strategic calculus and appears to have taken a more pessimistic view of the security environment where it believes ‘military imbalance worldwide has further increased’, no doubt reflecting its concerns about expanding US military presence in regions around the country.

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One of the strategic realities of the present period is that the balance of military capabilities between China and India is rapidly shifting to our disadvantage in operational terms. And nowhere is this more noticeable than in the air and space capabilities. This has to be weighed in the context of the fact that future wars are going to be heavily influenced by air power. There is no question that we must continue to improve relations with China and reduce the potential for disagreements and possible conflict. It would not be in our interests to think of China in any adversarial terms. But it would be less than prudent to ignore the changing realities of military power that would provide the capabilities on which altered intentions could be based. Factors beyond our control could propel the two countries into a possible conflict situation.

SHIFTING BALANCE OF MILITARY POWER China and India have extensive territorial (as distinct from border) disputes across the nearly 4,000 km-long borders in the Himalayas. India needs to focus on the human development of its nearly 1 billion people. We have come a long way since the 1940s when the country could not feed itself and had no industry worth a mention. The average growth rate has been sustained at figures above 6 per cent per year now for nearly 15 years, and is touching 8 per cent for the past 4 years. And an environment of peace becomes a pre-condition to pursue human development at an ever-increasing pace in future, and hence, defines India’s strategic priority. India’s interests, therefore, require a cooperative relationship with China. China has also adopted a policy of cooperative peace with India, rapidly leaving behind the hiccups after the Indian nuclear tests in May 1998. The problem is that the past experience also highlights the importance of taking adequate precautionary measures to cater to possible reversal in relations. We also have to take into account the strategic nexus between China and Pakistan which is aimed more at the United States than India. China has provided Pakistan with not only conventional weapons since 1965, but also nuclear weapons technology to increase its autonomy in dealing with the United States and pose a challenge to India providing ‘proven nuclear weapon design and enough enriched uranium for two devices’ in the 1980s, and has since then continued to provide additional assistance to Pakistan’s

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nuclear weapon programme during the 1990s.30 Pakistan has made no secret of the rationale of its nuclearization, which is specifically targeted against India. There have been numerous persistent reports that the Pakistani device was tested at Lop Nor in China during 1983. In fact the Pakistani nuclear scientist, Dr. Samar Mubarakmand, who was in-charge of the nuclear tests in May 1998, claimed that Pakistan had tested a nuclear device in 1983.31 China supplied ballistic missiles to Pakistan in 1991.32 China’s arms sales policies have greater strategy rather than commercial rationale. ‘As with Pakistan, Beijing seeks to use arms sales to Myanmar to complicate India’s security planning.’33 Defence modernization is likely to be the most urgent priority for decisionmakers in New Delhi. Past hiatus in modernization has left serious weaknesses in force levels and capabilities. Indian Air Force combat force level has dropped by 30 per cent because of aircraft deficiencies, and will go down further before this can be arrested. Indian Navy is running short of its force required to meet even peace-time commitments. This makes the new US–India Defence Framework that much more significant. On the other hand, this might exactly be the type of red-rag that the Chinese saw leading to 1962 war.

POWER PROJECTION THROUGH AEROSPACE POWER The principal area where China appears to be making advances in coercive military capabilities involves airpower, to include missiles and information operations.34 Daniel Byman and Roger Cliff, China’s Arms Sales: Motivations and Implications (Santa Monica, CA: RAND Corporation, 1999), p. viii. 31 Cited in The Gulf Today, 19 May 1999. 32 For China’s supplies of ballistic missiles to Pakistan see Pakistan Prime Minister Moeen Qureshi’s statement on 26 August 1993, cited in The Nation, 27 August 1993; and Foreign Minister Abdul Sattar’s statement to the Senate on 26 August 1993, cited in The Nation, 27 August 1993. For an earlier confirmation of Chinese supplies of ballistic missiles to Pakistan, see Chinese ambassador to USA, Zhu Qizhen’s, address to the National Press Club, Washington DC, Reuters Transcript Report, 27 June 1991, cited in John Wilson and Hua Di, ‘China’s Ballistic Missile Programs,’ International Security 17, no. 2 (Fall 1992): 37. 33 RAND Report, op. cit. 34 Annual Report on the Military Power of the People’s Republic of China, Report to Congress by Secretary of Defence, United States Government, (Washington, 2002), p. 11. 30

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There are many areas where Indian defence planning would need to pay close attention to building requisite capabilities for the type of war which may get imposed on us. But the case of combat air power is probably symptomatic of the nature of challenges ahead. The head of the Chinese Air Force has publicly sought a greater role for the PLA Air Force, declaring that the Chinese Air Force will strive for a transformation from the air defence-type to an offensive and defensive type as soon as possible. He announced that ‘At the turn of the century and in the early part of the new century, the (Chinese) Air Force will have a batch of new-types of early warning aircraft, electronic-equipped fighter planes, and ground-to-air missiles’ and that the Air Force ‘must give more prominence to air offensive, gradually integrate offensive and defensive, and build up a crack, first-rate air strike force’35 (emphasis added). By 2010–15 China would be capable of deploying nearly 300–500 modern multirole combat aircrafts of the Su-27/30 class with long-range precision strike and air superiority capabilities. Further down, plans to build 500–1,000 of China’s Jian-10 fighter (developed with Israeli assistance and believed to incorporate Lavi technologies) may fructify.36 Nearly 800 F-7 (MiG-21 design) with modern fire control and interception radar would provide a strong force besides the other combat aircraft being added to the PLA Air Force inventory. Above all, aerial-refuelling capabilities would dramatically enhance the ability of the Chinese Air Force to operate from bases deeper inside China, and still be able to impact on Indian territory and targets. Acquisition of AWACS (Airborne Warning and Control System) would dramatically alter the ability of PLA Air Force to apply combat power in a variety of offensive– defensive missions with greater impact.

INDIA’S INTERESTS AND POLICY CHOICES The reality is that new centres of power (with some old ones regaining their position) have been emerging in the past two ‘Air Force Commander Liu Shunyao on Air Force Transformation,’ FBIS-CHI1999-1107, dated 7 Nov 1999. 36 SWB dated 28 August 1999, p. 19. 35

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decades or so. This defines the true contours of the international order. The nature of this evolution is such that the world order can best be described as polycentric. There are certain characteristics of this polycentric order that also define the nature of the international geopolitical architecture. These may be summed up as follows: 1. Substantive asymmetry of power, capability, and willingness to exercise that capability already exists among the leading centres of power in today’s world. This imposes concurrent pressures for competition and cooperation among states, especially the leading centres of power. 2. Cooperation and competition are increasingly issue-based and driven by national interests. States may cooperate in economic matters and yet differ strongly on strategic goals. 3. Uncertainty and fluidity in international affairs is accentuated by the information revolution, which no longer allows the governments the luxury of long-reaction times or the predictability available in earlier times. 4. As we advance into the 21st century, the United States, Japan, China, Russia, India, and the European Union represent the primary centres of power and capability. 5. The centre of gravity of strategic affairs is increasingly shifting to the Asian landmass (and contiguous island territories). 6. China (and Russia) seeks a multipolar world order. By definition however, a multipolar world would involve polarization and hegemonism, at least around each pole, with a potential competition for greater influence over other states and regions. That is why there has been a talk of building a Russia–China axis, which Primakov even hoped India would join. In many respects, the trend is clear in the evolution of institutions and actions involved with, for example, the Shanghai Cooperation Organization, or the emerging formula for the East Asian Economic Trade Group. This has the makings of future tensions and possible conflict which may be played out more in economic and political terms in the near future, but which would have all the elements of shifting to the use of force. It is here that the use of force (like through terrorism, or as in Hezbollah’s war) by proxy would continue to be a major challenge to international peace and security.

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Given the above prognosis, what strategy would serve India’s interests best? It needs to be emphasized again that India’s primary strategic priority can only be the rapid human development of its people. This would be best served by: 1. Seeking cooperative peace with all countries, especially major players in the international transitional order. A closer look at the imperatives of Indian interests would indicate that the nature of relations between United States, China, and India, among themselves as well as their individual relations with the rest of the countries, would have a profound impact on future events. 2. Working towards a polycentric international order that is non-polarized, non-hegemonic, and even non-aligned, to allow for greater space and choices in autonomy of decision-making, for Indian policymakers to pursue national interests. 3. Prevention of conflicts and wars. This in turn would necessitate robust though minimum but credible deterrence capabilities, both at the nuclear as well as the conventional military levels. Particular attention would have to be paid to ‘local-border’ wars under the nuclear overhang, whether waged as conventional (with high-technology military power), subconventional (through terrorism, jihadi or otherwise), or as semiconventional (as by Hezbollah in the summer of 2006 against Israel) wars. To sum up, India would keep seeking closer across-the-board relations with the United States—particularly in the context of the emerging geopolitical situation in the world. But that itself could produce new challenges if it leads to assertive negative reactions from Beijing, beyond any reasonable and legitimate concerns. However, this is unlikely to inhibit India from the broader and specific needs to build a strong partnership with the United States (which would no doubt have its limitations), but there would be potential costs also. Given the existing territorial disputes and the competition and rivalry—intrinsic to two rising powers—it would be in India’s interest to maintain friendly relations with China even though obviously it cannot be at the cost of our relations with the United States, which by the very nature of the two states and their societies would be far more comprehensive than it could be with China.

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At the minimum, this would necessitate Indian elephant’s possession of credible (economic, technological, industrial, and military) capabilities to protect its interests while embracing the dragon. This would improve the prospects of a more balanced and cooperative relationship between China and India. The basic principle would be to ‘cooperate and ensure’—seeking cooperative peace while ensuring a credible hedging strategy.

7 THE EVOLVING SECURITY ORDER IN ASIA IMPLICATIONS FOR US–INDIA RELATIONS David Shambaugh

INTRODUCTION Security does not operate in a vacuum, but is embedded in broader regional or global dynamics. Thus, consideration of the Asian security environment and US–Indian relations must necessarily take account of the principal elements and factors that collectively constitute the ‘system’ in the region today.1 The regional system in Asia today is quite fluid and complex. New features are appearing while old characteristics (for example, alliances and relationships) are being redefined. As a result of this fluidity, no single characteristic is dominant. Before describing the essential elements that I believe constitute the current Asian regional system today, let me hasten to note several models that do not characterize the emerging regional order. International relations in Asia, it seems to me, are not characterized by: 1. a hegemonic system, dominated by any single power; 2. a major power rivalry or a balance of power system, characterized by two competing major powers; 3. a concert of powers, in which power is roughly equally divided among three–five nations, and stability is provided by their collective actions; 1 The following discussion draws and elaborates on my ‘Asia in Transition: The Evolving Asian Order,’ Current History 105, no. 690 (April 2006).

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4. a condominium of powers, whereby the two strongest powers in the region collaborate to dominate the region; 5. a structural asymmetry and the inevitable clash between the main established power (United States) and the main rising power (China); 6. a hierarchy of powers, with one power atop a pyramid of less powerful and subservient nations; 7. a region-wide collective security network; and 8. a bandwagoning with the region’s strongest powers (United States, China, Japan). Several of these models characterized the regional system in the past and may do so again in the future, but I do not see an evidence for any of these at present. It is useful to bear these alternatives in mind as one wrestles with the complexities of the evolving regional order. What, then, are the principal defining features of international relations in Asia at present? Recognizing that these lie in the eyes of the beholder, and that no meta-theory can explain all, I offer six elements that collectively capture the complexities and essence of international relations in Asia today.

THE US -LED SECURITY SYSTEM First, the US-led security system remains the predominant regional security architecture across Asia. This includes a number of elements: the five bilateral alliances in East Asia; non-allied security partnerships in Southeast Asia, South Asia, and Oceania; the unilateral build-up of forces in the Southwest Pacific; the new US–India and US–Pakistan military relationships; and the US military presence and defence arrangements in Southwest and Central Asia. Taken together, they comprise the dominant security architecture across all of Asia. No country can match the United States in these regards. The alliance system is commonly referred to as the ‘hub and spokes’ model, with the United States serving as the hub of a wheel with each of the five bilateral alliances (Australia, Japan, South Korea, the Philippines, and Thailand) serving as the spokes. The system has benefitted the United States and its Asian allies for more than five decades, and has been the predominant regional security

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architecture since the end of the Vietnam War. It has been central to the maintenance of strategic stability and economic development throughout the East Asian region. Even China has benefitted from the regional security and stability engendered by the system, which has provided an environment conducive to China’s explosive economic development. During the second Clinton Administration, but particularly during the George W. Bush Administration, the United States sought to strengthen each of these bilateral alliances. Although the military components in each of these alliances have been upgraded, the political dimensions of some have experienced significant strain in recent years. In some cases, they have experienced political strain because of the military components. In both South Korea and Japan, the behaviour of US forces has caused fervent frictions with local communities. The broad global policies of the Bush Administration deepened these tensions in some cases. Relations with China have been a further irritant in some alliances—as Australia, South Korea, and Thailand have all drawn closer to Beijing than some in the US would like, and these governments have indicated to Washington that they do not intend to compromise their ties with China just to please Washington. In other words, some of these allies are now seeking to balance their ties with the United States and China, rather than continuing their singular strategic tilt towards the United States. In addition to strengthening the military components of these alliances, the United States has moved to solidify non-allied security partnerships (sometimes dubbed as ‘Cooperative Security Locations’ by the Pentagon) with India, Mongolia, Pakistan, and Singapore. In each case, these security partnerships involve joint exercises, training, intelligence sharing, arms sales, military educational exchanges, and a wide range of military assistance programmes. Indonesia has also recently re-qualified for US military assistance programmes (after a decade hiatus). Malaysia has quietly begun to buy some US weaponry, and military–military exchanges have commenced between the United States and Vietnam. In Central Asia, the United States maintained air bases in Uzbekistan and Kyrgyzstan, in connection with the ongoing wars in Iraq and Afghanistan. Each of these security partnerships are significant in their own right, but, taken together, strongly supplement the five bilateral alliances in East Asia and constitute a dense web of security and

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military partnerships among the United States and the majority of Asian nations, stretching from Northeast to Southwest Asia. Only North Korea, Laos, China, Cambodia, Myanmar, and Nepal lie outside the purview of US defence arrangements. Notable too is the fact that these alliances and security partnerships geographically ring China. This is no accident, and represents US ‘strategic hedging’ against the potential for strategic rivalry with China—a strategy being led by the Pentagon. The Pentagon’s Quadrennial Defense Review (QDR) makes clear that China is seen by the US military establishment as the only prospective, strategic ‘peer competitor’ on the horizon and the QDR consequently stipulates a substantial redeployment of US forces to the Pacific theatre. It also explicitly states that the United States is ‘hedging’ against China. In addition to strategic partnering with various Asian nations, the United States has also undertaken its own unilateral military build-up in the Western Pacific. In particular, Guam is being built into a forward base of major significance. The forces deployed there are directly relevant to China, potential contingencies in the Taiwan Strait or Korean Peninsula, and can also be used as deployments into the Indian Ocean, Persian Gulf, and Broader Middle East. Andersen Air Force Base on Guam is home to the 13th Air Force Command, and includes growing numbers of B-1, B-2, and B-52 strategic bombers; C-17 Globemaster long-range transports; Global Hawk and E-2 Hawkeye reconnaissance aircraft; F/A-18 Hornet fighters; and in-flight refuelling tankers and other aircrafts. Guam is also now home to a growing number of Los Angeles-class nuclear-powered attack submarines and a growing number of surface combatants. Consideration is also being given to homeporting of an aircraft carrier battle group there. The Third Marine Expeditionary Force is also being relocated from Okinawa to Guam. Thus, any consideration of the regional system and security architecture in the Asia–Pacific region must begin with and take full account of US security ties with these nations. Yet, despite the pervasiveness of this US-led security system, it cannot be claimed that the US ‘hubs-and-spokes’ system is truly and fully regional. A number of countries—most notably China—remain unaffiliated and have no compelling reasons to join. Nonetheless, it is this US-led system that provides for regional stability and security— public goods from which all Asian nations derive benefit.

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A PROACTIVE CHINA One of the most significant developments of the past decade has been China’s proactive engagement of its periphery.2 China’s new proactive regional posture is reflected virtually in all policy spheres— economic, cultural, diplomatic, and strategic—and this parallels its increased activism on the global stage. In each of these realms, the efforts and progress of China in reaching out to its neighbours have been truly impressive (with the notable exception of Japan). As China has reached out, all nations around the country have reciprocated and have redefined their relations with Beijing. As China’s influence continues to grow, some of these countries are looking to Beijing for regional leadership or, at a minimum, are taking China’s views and sensitivities more into account. Others are less certain of Beijing’s short-term motives and long-term strategy, and are hence hedging their bets by tightening their relationships with the United States and simultaneously seeking to bind China into a dense web of institutional arrangements that will constrain its potential for disrupting regional security. Nonetheless, China’s proactive engagement of its periphery is of major importance in defining the emerging regional order. Overcoming its earlier hesitance to engage in regional multilateral forums since 1998, China has taken an active role in many. It has also worked hard to address and alleviate one of the region’s most contentious issues: the North Korean nuclear crisis. The Chinese government’s general embrace of regional multilateralism is very significant, as no regional institution can be considered effective unless China is not only a member, but an active one. Beijing’s active regional diplomacy places it increasingly at the centre of all regional issues—bilateral and multilateral. Finally, China’s growing centrality to the economic and technological networks of production and supply chains that interweave the region also serve as a stabilizing factor.

2 For further elaboration, see David Shambaugh, ed., Power Shift: China & Asia’s New Dynamics (Berkeley and London: University of California Press, 2005); David Shambaugh, ‘China Engages Asia: Reshaping the Regional Order,’ International Security 29, no. 3 (Winter 2004/05): 64–99; Robert Sutter, China’s Rise in Asia (Lanham, MD: Roman and Littlefield, 2005).

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Bilaterally and multilaterally, Beijing’s diplomacy has been remarkably adept and nuanced, earning praise around the region. As a result, most nations (the notable exception being Japan) in the region now see China as a good neighbour, constructive partner, and status quo regional power. This Asian perspective is striking, given that, just a few years ago, many of China’s neighbours voiced growing concerns about the possibility of China becoming a domineering, regional hegemon and powerful military threat. Today these views are more muted. Even former adversaries—such as Vietnam, India, Indonesia, South Korea, and Russia—now enjoy sound and steadily improving relations with Beijing. Even relations with Japan have turned around, after being in the ‘deep freeze’ during the Koizumi era. China’s cooperative diplomacy has become a defining—and positive—feature of the emerging regional order.

‘HEDGED ENGAGEMENT’ BETWEEN THE UNITED STATES AND CHINA The relationship between the United States and China remains the most important bilateral relationship, with truly regional (if not global) consequences. On balance, this complex relationship is currently characterized by substantial cooperation on bilateral, regional, and global issues. Yet, despite this tangible and positive cooperation, there remain evident suspicions and distrust of the other’s motives and actions. As a result, the state of Sino–American relations today may be characterized by David M. Lampton’s term ‘hedged engagement’.3 Both sides are engaging to a significant extent, yet are hedging against the possibility of a deterioration of ties.4 Looking to the future, the Sino–American relationship is likely to continue to exhibit these paradoxical features. Even though some commentators and observers in the United States are eternally pessimistic about the US–China relationship, I believe that, overall, there are real reasons for optimism about the present state and future of the relationship. As far as some issues are concerned, they are always of concern; but if one looks David M. Lampton, ‘Paradigm Lost,’ The National Interest 81, (Fall 2005): 67–74. See Evan Medeiros, ‘Strategic Hedging and the Future of Asia–Pacific Stability,’ The Washington Quarterly 29, no. 1 (Winter 2005–06): 145–67. 3 4

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comprehensively and takes a macro view of the relationship, one has to be impressed with the degree of interaction, cooperation, and maturity of relations today. This has not come about by accident— but is the result of (i) hard work by both governments; (ii) a longterm vision for the relationship held by leaders and officials in both governments; (iii) overlapping interests; and (iv) the deep interdependence that now exists at so many levels of each society. The two societies of China and the Untied States are intertwined as never before. China now holds more than half of the US national debt in treasury bonds and other financial instruments. Chinese corporations are increasingly buying real estate in the United States. More than 60,000 Chinese students populate American college campuses. American stores are flooded with goods made in China. The bilateral trade volume now exceeds USD 250 billion per year. American businessmen now operate across China and have a substantial presence and market share. The US investment banks, equity funds, and venture capital are also increasingly penetrating the Chinese market. American brands and popular culture continue to be apparent across China. Dozens of full flights cross the Pacific every day, ferrying Chinese and Americans back and forth. Emails and other forms of communications link individuals in the two societies together. In short, the two societies are now intricately interwoven together as never before. Despite this density of interaction, there remains a strong ambivalence, or opposition, in each society’s perceptions of the other. For many Americans today, the ‘rise of China’ is uncertain at best and frightening at worst, and the predominant image of China is that of a Communist one-party state that represses dissent and human rights + an increasingly strong economic giant that steals American jobs + a rapidly modernizing military that threatens Taiwan and potentially US allies in Asia = Trouble. It is that simple for many Americans. A 2007 survey conducted by the Chicago Council on Global Affairs gave China a tepid 40 degree (on a Fahrenheit scale) temperature on a ‘thermometer of feelings’ about foreign countries (just above the freezing point). Only Saudi Arabia (34 degrees), Iraq (27 degrees), North Korea (23 degrees), and Iran (21 degrees) ranked lower among American’s perceptions.5 Such a lukewarm temperaChicago Council on Global Affairs, The United States and the Rise of China and India: Results of a 2006 Multination Survey of Public Opinion (Chicago, IL: Chicago Council on Global Affairs, 2006), p. 19.

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ture reflects the angst and uncertainty that one senses in the American public about China. Americans generally have a difficult time grasping the complexities and nuances of China (or other societies). Despite these perceptual problems, the United States and China have been cooperating very effectively on a range of important international issues over the past few years. These include: 1. North Korea’s nuclear programme. The two sides have worked together through the Six Party Talks, drafting of the UN Security Council Resolution 1718, and bilaterally to try and roll back Pyongyang’s programme. 2. Iran’s nuclear programme, and UN Security Council Resolution 1696 requiring Tehran to suspend its uranium-enrichment and reprocessing activities by 31 August 2006 (which it failed to do). But it must also be said that, from Washington’s perspective, China and Russia have not been as committed as they could be in halting Iran’s nuclear programme. Going forward, this will be a key ‘test’ (in Washington’s eyes) of whether China is a ‘responsible international stakeholder’. 3. UN peacekeeping operations. China has increased its peace-keeping operation (PKO) efforts worldwide, including its recent commitment of 1000 PKO forces to Lebanon, and this is greatly appreciated and valued by the United States and the international community. 4. Afghanistan. The United States appreciates China’s initial contribution of USD 310 million in reconstruction aid, as well as its dispatch of some armed police forces to Kabul to assist in training Afghan police. Beijing has also bilaterally engaged the Karzai government on a range of normal diplomatic issues and exchanges. 5. Counter-terrorism. Since 9/11, both governments have worked very effectively, if quietly, together to combat terrorism and the various logistical manifestations of it. 6. Global issues. As noted above, a bilateral Global Issues Forum has been initiated. 7. Asian issues. The two governments interact via Asia–Pacific Economic Cooperation (APEC), the ASEAN (Association of Southeast Asian Nations) Regional Forum (ARF), and in other multilateral forums to advance peace, prosperity, and security in the Asia–Pacific region. 8. Taiwan. Finally, the two governments have, since 2003, pursued mutual approaches towards the Chen Shui-bian government on

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the island, and have thus worked together to stabilize the Taiwan Strait. Although the two nations cooperate on a number of regional and global issues, the relationship is certainly not a condominium of two-power domination. Even though they occasionally display traditional balance of power and strategic hedging practices, it should be recognized that Sino–American cooperation is real and significant. Bilateral interdependence has never been thicker. Further, the absence of Sino–American antagonism is an important feature of the regional order and stability. While some Asian countries may hedge against either United States or Chinese regional domination, and adroitly acquire whatever resources and benefits they can from both China and the United States, every one of these countries seeks a stable and cooperative Sino–American relationship. Should Beijing and Washington one day confront each other, all regional states would experience their worst nightmare and be put in the awkward position of having to choose sides—and this they seek to avoid at all costs. To be sure, there are tensions in the relationship at present. For Washington, the ballooning trade deficit is probably primary, while China’s human rights abuses and media censorship have risen on the US agenda, of late. Taiwan is always a potentially volatile issue, but both sides worked well together to manage it and contain the Chen Shui-bian government’s independence inclinations. Intellectual property rights (IPR) are another notable concern. China’s military modernization is viewed warily by Washington, and the Pentagon in particular (as described below). China’s relations with ‘states of concern’ (Myanmar, Iran, Sudan, Venezuela, and Zimbabwe) has also drawn critical attention in Washington. Meanwhile, the US security partnerships and military build-up in the Pacific (as described above) are of concern to Beijing. These are all real concerns, but none are grounds for a significant cleavage in the relationship.

THE RISE OF INDIA IN ASIAN INTERNATIONAL RELATIONS The fourth element of the evolving Asian system pertains to India. India’s economic growth is certainly an important factor in its own

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right—but of key importance in this context is India’s new proactive diplomacy in East Asia. In the mid-1990s, India adopted its ‘Look East’ policy, intended to signal New Delhi’s new engagement of nations that are east of the Malacca Strait and north of the Himalayas. While the rapprochement with China was underway at that time, and a few feelers were put out to Singapore and Vietnam, India’s new declared policy did not really materialize until the post2004 period. The deepening of China–India ties was at the centre of the new strategy; but more recently, New Delhi has moved to bolster ties with Japan, Australia, and ASEAN. The China–India relationship has developed significantly in recent years. Indian Prime Minister Atal Bihari Vajpayee’s state visit to China in June 2003 triggered the new cast in the relationship. As the capstone of a decade-long rapprochement, which was briefly interrupted by the political fallout in the aftermath of India’s nuclear tests in 1998, the visit symbolized one of the most critical developments in Asian affairs in recent years. At their meeting, Prime Minister Vajpayee and Chinese Premier Wen Jiabao signed the Declaration on Cooperation and nine protocols on bilateral cooperation, thus fully normalizing Sino–Indian relations. Both leaders pledged that their countries would work together for regional stability and peace. Progress was also made on their long-standing boundary dispute; the two countries codified the Agreement on the Actual Line of Control and have pledged to exchange high-level emissaries to negotiate a final settlement of their 34-year quarrel over the disputed territorial boundary. As part of the agreement, India reiterated its recognition of Tibet as part of China and promised not to support separatist activities undertaken by Tibetan exiles in India. In return, China formally recognized the incorporation of Sikkim into India. Since Vajpayee’s 2003 visit, Chinese Premier Wen Jiabao and President Hu Jintao have paid state visits in 2005 and 2006, and Prime Minister Manmohan Singh paid a very successful visit to China in 2007. Each visit produced a large number of agreements and initiatives.6 Bilateral trade topped USD 20 billion in 2006, and the two sides agreed to treble this figure by 2010. Mutual exchanges

See ‘Joint Declaration,’ issued by India’s Ministry of External Affairs and China’s Ministry of Foreign Affairs on 21 November 2006; ‘Neighbors Make Joint Declaration,’ China Daily, 22 November 2006.

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in the military field are advancing. Although there has been little apparent progress, negotiations over the boundary have intensified. A series of bilateral protocols have been signed to increase cooperation in trade, industry, agriculture, finance, water resources, energy, environment, information technology, tourism, education, and other fields. Both sides have pledged consultation and cooperation on regional and global issues. Despite lingering suspicions in each country, the development of Sino–Indian relations has been rapid, far-reaching, and significant. It is a very conducive factor to improving stability and security in Asia. New Delhi has also moved to bolster ties with Japan. Prime Minister Manmohan Singh paid an important official visit to Tokyo at the end of 2006. This was the single most significant meeting ever held between the two sides. A 57-point ‘Statement towards the India–Japan Strategic and Global Partnership’ was agreed upon. This visit was another important step in India’s new role and presence in East Asia. Taken together with India’s budding relations with Australia, it also represents New Delhi’s attempts to ‘hedge’ against potentially negative consequences of China’s regional rise. Taken together, India is becoming a player outside of South Asia—and this constitutes a new factor in the regional equation. New Delhi is likely to pursue its new East Asian diplomacy in ways that do not closely align with any particular regional power or bloc—what one observer has described as the ‘France of Asia’.7

CHINA’S MILITARY MODERNIZATION AND THE REGIONAL SECURITY BALANCE The fifth distinguishing feature pertains to hard power—specifically the modernization of China’s military and its implications for the regional security balance.8 China’s military has now been embarked 7 See Alyssa Ayres, ‘Is India Emerging as the France of Asia?’ YaleGlobal Online, 21 November 2006. 8 This section draws upon my ‘China’s Military Modernization: Making Steady & Surprising Progress,’ in Ashley Tellis and Michael Wills, ed., Strategic Asia 2005– 2006 (Seattle: University of Washington Press for the National Bureau of Asian Research, 2005).

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on a sustained modernization of its military infrastructure and armed forces for the past 15 years. With sustained double-digit growth in its defence budget, continual downsizing and streamlining, doctrinal evolution, improved logistics, intensified training, and a variety of new weapons systems, China’s People’s Liberation Army (PLA) today is demonstrating new competencies and capabilities. Nevertheless, despite this accelerated progress, the PLA still exhibits numerous deficiencies (both in relative and absolute terms), and it would be a mistake to overstate Chinese military capabilities. The PLA can certainly and capably defend China’s continental territory from invasion, and now possesses a substantially enhanced (compared with 5–10 years ago) range of coercive capabilities against Taiwan—including electronic and information warfare capacities, naval blockade competence, air interdiction and dominance capabilities, improved sea- and air-denial assets, and increased ballistic- and cruise-missile deployments. Yet, when viewed in a broader regional or global context, the PLA still has very limited or no capabilities. Specifically, the PLA evinces little evidence of attempting to acquire a power projection capability—it has built no aircraft carriers; has no intercontinental bombers; possesses only a very small fleet of in-flight refuelling tankers (and have not mastered that skill), and airborne command and control aircraft; has a small number of truly blue-water capable surface combatants; possesses no military bases abroad; and has no global network of command and control or other elements that one would expect to see from a nation trying to seriously develop a power projection capability or become a global military power. Even a close reading of Chinese military doctrinal manuals gives little, if any, evidence that power projection beyond China’s immediate periphery is a priority. Even if it is recognized that there is no attempt to develop any sort of global military capability, it is equally evident that the PLA’s regional reach in Asia remains restricted. To be sure, significant progress has been made in recent years (particularly since 2001–02), as new weapons systems have come on stream and continued reforms of the force structure have been phased in. As a result, there is no doubt that today’s PLA has significantly improved over the last decade; advancements in some sectors have been more than incremental improvements. Qualitative advances have been made, new systems have been deployed, important new ones are under development, the fighting capacity of all services has

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been increased, and, perhaps, above all, the command, control, and ‘jointness’ of PLA forces have been improved. PLA forces are now undertaking certain types of exercises and displaying certain capabilities that many foreign analysts and intelligence agencies did not think was likely to happen, just a few years ago. At the same time that one recognizes these enhancements, it is important to keep the PLA’s broader capabilities in perspective. Even though the military modernization programme has been steadily developing, it would be inaccurate to depict it as a ‘crash programme’ or ‘build-up’. Perhaps with the exception of ballistic missile production, one does not see China embarked on any such accelerated or crash programme of weapons production. Even its weapons purchases from Russia, averaging approximately USD 2.2 billion per year over the past 5 years, remain very modest in both financial terms and total number of platforms imported. Moreover, when one examines the PLA’s inventory of ground, naval, and air assets, it must be said that the vast majority still remain a decade or more behind the international state-of-the-art—and in many areas, the gap is actually widening (due to advances in US and North Atlantic Treaty Organization [NATO] systems). China’s naval surface fleet remains a ‘green water’ rather than ‘blue water’ one, that is, it is only capable of patrolling China’s coastline rather than the open ocean. The PLA Air Force (PLAAF) is similarly dated—only 15 per cent of its total fighter force is fourth-generation interceptors. While the newest in the PLA’s conventional forces are approaching world standards (for example, the T-98A and T-99 main battle tank), the bulk of the ground forces’ firepower still lags behind NATO, Russian, or even Japanese systems. When one compares the quality of China’s weapons systems regionally, however, the gap is not as great (although there is still one). The best of the PLA Navy’s (PLAN) surface combatants compare well with those in any regional navy, as the newer destroyers are comparable to those of even Japan, and the best of the PLAAF fighters are about equal in quality to those of Australia, Japan, Singapore, South Korea, Taiwan, and Thailand (specific comparisons with India are offered below). Of course, what the PLA has that these other militaries do not is numbers. The Chinese air, ground, and naval weapons platforms dwarf those of any regional military. This is not an unimportant factor in any potential regional conflict scenario involving China.

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Thus, any net assessment of PLA capabilities and progress in China’s military modernization programme in 2005 must conclude that the proverbial glass of water is simultaneously half-full and half-empty—but the volume is rising. Only 3 or 5 years ago, such an assessment would have likely concluded that the glass was only onequarter or one-third full. The PLA has made a mini-leap forward over the last three-or-so years. This is particularly the case with respect to information and electronic warfare (IW and EW), landattack cruise missiles, joint training, more fourth generation fighters, a few new surface combatants (particularly the Sovremenny), and the Kilo submarines. When the 093 and 094 submarines are fully deployed, China’s submarine fleet will achieve similar advances. All East Asian nations (and India) are keeping a close eye on China’s military modernization, but as yet there is no real evidence that they are gearing their own acquisitions and force modernizations to the ‘China factor’. One does not see evidence of procurements by regional militaries, specifically intended to counterpotential Chinese platforms. Instead, what some regional states are doing, as noted above, is to strengthen their defence ties with the United States as a means to ‘hedge’ against a stronger China.

AN EMERGING NORMATIVE SECURITY COMMUNITY The sixth defining feature of the evolving regional order pertains to soft power: the gradual emergence of a regional security community and growing multilateral architecture, based on a series of increasingly shared norms (about interstate relations and security). The ARF is the cornerstone of this emerging regional community, but the Shanghai Cooperation Organization (SCO) and the South Asia Association for Regional Cooperation (SAARC) are also important component parts. These organizations are forms of cooperative, rather than collective, security. China’s growing embrace of the ARF and a potential ‘regional security community’ is a positive sign, and may move the region gradually in the direction of further institutionalization. Consideration is being given among security specialists in Northeast Asia for evolving the Six Party Talks into some kind of Northeast Asian cooperative security mechanism. This should be further explored, whether or not the Six Party Talks

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produce a denuclearized peninsula. Asian nations are also increasingly engaging in combined military exercises—some are US-led while some are bilateral. In the area of non-traditional security, effective intra-regional cooperation is already occurring in a wide variety of areas: economic security, non-proliferation, resource management, public health, counter-terrorism, countering narcotics, countering smuggling, countering piracy, countering organized crime, countering human trafficking, container security, disaster relief, etc. Energy security is an issue ripe for multilateral cooperation. Although the growth of multilateralism in Asia has had a late start compared with Europe or the Americas—and it has a long way to go to reach comparable levels of institutional integration—there has nonetheless been significant progress in recent years. One reason for the increase in the number of dialogues, groupings, and multilateral mechanisms in Asia has been the growing acceptance of common norms within the region. Such ideational agreement must precede the formation of institutional architectures; but once norms are institutionalized, they have a kind of binding effect on member states. To be sure, the diversity of Asian societies, cultures, and economic and political systems will be a challenge for Asian states to overcome, but there are increasing signs of normative convergence around the region. The first East Asian Summit was held in Kuala Lumpur, Malaysia in December 2005, and was an important step forward in this process. Growing regional multilateral cooperation mirrors the intensifying interdependence that is occurring through the Asian region. This feature of the evolving Asian system is oriented neither around security affairs nor major power relations, but around the increasingly dense web of economic, scientific, technological, cultural, societal, educational, and other ties being forged among Asian nations in the era of accelerating globalization. The core actor in this model is not the nation-state, but a plethora of non-state actors, and processes that operate at the societal level: trade, investment, transport, communications, education, research, tourism, and other forms of daily interaction. These multiple threads bind societies together in complex and interdependent ways. Indeed, they point up another significant way in which the Asian region is changing: its traditional geographic subcomponents—Northeast Asia, Southeast Asia, South Asia, Southwest Asia, and Central Asia—are no longer useful intellectual constructs for dividing or distinguishing the

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macro processes occurring throughout the region. In the 21st century, these five sub-regions are all increasingly interconnected and interdependent at numerous levels. Regional interdependence is a rapidly accelerating trend, which serves as a powerful deterrent to conflict and is conducive to peace and stability (including across the Taiwan Strait). Yet as profound as this dynamic is, interdependence by itself is insufficient to establish a dominant regional system in Asia. It does not operate at the nationstate level, nor does it necessarily require the creation of security arrangements—features that any truly regional system must exhibit.

IMPLICATIONS FOR US–INDIA RELATIONS What are the strategic and policy implications of these seven characteristics of international politics in Asia, and the absence of the nine systemic factors noted at the outset, for US–India relations? Ashley Tellis’ chapter discusses this subject at considerable length, many of which I agree with, but let me offer some additional—and, in some cases, contrasting perspectives. First, the absence of seven of eight factors noted at the outset of this chapter importantly means that the US–India strategic relationship can develop on its own merits. If any, or a combination of these factors were present, they would have a defining influence on the character of US–Indian relations. In a (US) hegemonic system, India would have to accommodate American dominance through strategic subservience, as opting out of such a system is not an option. A hierarchy of regional powers, with the United States as the preeminent (but not dominant) power at the top of the regional pyramid, would similarly force New Delhi into a lesser state of strategic subservience to Washington. In a balance of power system, between the United States and China, India would be forced to choose sides. In a condominium of powers, with the United States and China dominant, India would similarly have to accommodate itself to Washington’s and Beijing’s wishes (hardly something India would be inclined to do). In a system of structural asymmetry, where the United States and China have hostile relations (as distinct from a balance of power system), and live under conditions like the

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Cold War where conflict could erupt at any time, India similarly has to choose which side it should align with. Nor do we see compelling, region-wide evidence of ‘bandwagoning’ with either Beijing or Washington, although there is some, along with a degree of ‘hedged alignment’ in the region, but New Delhi does not seem to be doing either. Finally, absent a regional collective security network, neither India nor the United States are forced into such institutional arrangements, together. As a result of the absence of seven of the eight aforementioned factors, all of which would force India to align itself with one of these structural systems, New Delhi and Washington have the flexibility to pursue their bilateral relationship unencumbered by strategic, structural dictates. The only one of the eight models that has some degree of resonance today is the concert of powers model. It can be argued that international relations in Asia today are characterized by a concert among the five principal actors in the region, of which India is one: the United States, China, Japan, ASEAN, and India. India’s newly proactive diplomacy in East Asia, described above, gives it a new regional role. But even if one accepts that there is a dispersion of power in the region among these five principal actors, they are not acting as a concert would normally act. The best example of this type of system was, of course, the Concert of Europe—which functioned for almost half a century, in the wake of the Congress of Vienna of 1815. It was a system that kept the peace and maintained a balance among the major powers of the era (Britain, Russia, Austria, Prussia, France, Italy, and Turkey). It functioned well because no nation possessed disproportionate power and influence, and because all actively cooperated in maintaining the system via a series of regular conferences and diplomatic coordination. It was, in effect, the world’s first de facto regional security regime. Even though one can argue that the five aforementioned actors are the predominant powers in Asia today, there is no evidence of multilateral coordination among them. The ARF certainly does not qualify such a mechanism, although it brings together all parties. Moreover, for a concert of powers system to work, there needs to be a roughly equal dispersion of power among the principal powers—a situation that does not exist today. It would also require all principal powers to enjoy generally harmonious and non-conflictual relations among themselves—again, not a situation that exists today.

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Thus, if these eight conceptually potential regional systems to not obtain at present, thus freeing the United States and India from structural constraints to develop their bilateral relationship on its own merits, what about the other seven characteristics of the Asian regional order that do exist? First, although the US-led regional security system is not truly regional in character (as many nations do not participate), it nonetheless has presented the United States and India with opportunities, to forge substantial defence cooperation over the past 8 years. This cooperation began in earnest during the Clinton Administration, but has been more deeply and broadly developed under the Bush Administration (on the US side).9 India has become one of the main ‘Cooperative Security Locations’ (CSLs, as dubbed by the Pentagon) that supplement the five bilateral US regional alliances. Second, China’s regional proactive diplomacy has definitely benefitted India, as Beijing has reached out to New Delhi (and vice versa) as part of its diplomatic offensive, to pacify its borders, build trade and investment, and ameliorate pre-existing tensions with neighbours. The Sino–Indian relationship has developed remarkably and positively over the past decade, and appears to be on steady footing despite the continuing irresolution of the disputed border. The Chinese President Hu Jintao’s November 2006 visit to Delhi and Indian Prime Minister Manmohan Singh’s December 2007 visit to Beijing are the most recent indications of rapidly developing Sino–Indian ties. The third issue is how India fits into the ‘hedged engagement’ relationship between Washington and Beijing? To be sure, there are elements in both the US and Indian governments and the respective strategic studies communities that view the US–India relationship—particularly the growing defence component of that relationship—as a key component in mutual hedging against Beijing. Of course, both governments deny that this is a factor in their forging a ‘strategic partnership’, and it is prudent for both Washington and New Delhi to do so, but it is also evident that some quarters in each capital would like to use the relationship to counter Beijing’s growing 9 See Sumit Ganguly, Andrew Scobell and Brian Shoup, eds, U.S.–India Security Cooperation into the Twenty-first Century: More than Words (London: Routledge, 2006); and Sumit Ganguly and Andrew Scobell, ‘India and the United States: Forging a Security Partnership,’ World Policy Journal 22, no. 2 (Summer 2005): 37–44.

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military muscle and strategic influence in Asia. Such a strategy is, in my view, profoundly misguided. These manipulative temptations should be resisted.10 The US–China–India trilateral relationship is not a mini-strategic triangle and should not be treated as one. It should be a positive-sum set of interactions in which all three parties should maximize their mutual security, economic interests, and regional prestige. The governments in New Delhi and Beijing seem to recognize this—but does Washington? Fourth, the delicate state of Sino–Japanese relations do not directly affect the Sino–Indian relationship. Only if Washington attempts to use the US–Japan alliance and the budding defence relationship with India as two strategic pincers at China’s flanks, as part of an attempt to contain or ‘hedge’ against China, will Sino–Japanese relations become linked to US–India relations. As noted above, there are some policymakers and strategic analysts in Washington who would like to pursue such a strategy—but this is a profoundly misguided Machiavellian instinct. As former US Secretary of Defence William J. Perry and Assistant Secretary of Defence Ashton B. Carter have astutely observed, ‘Hedging is contagious…and hedging can beget more hedging in a dangerous spiral’.11 To be sure, India’s own—and newly developed—relationship with Tokyo will introduce a certain degree of hedging into regional dynamics, but this bilateral relationship should also be measured on its own merits. The fifth dimension is how China’s military modernization programme affects the US–India relationship? There is little doubt that China’s steady increase in its military capabilities is of concern to the United States government. This is evident in the annual Department of Defence Report to Congress on the Military Power of the People’s Republic of China,12 as well as periodic statements by administration officials who question the degree to which China’s military is ‘outsized’ compared with Beijing’s regional roles (this view is often voiced by Secretary of State Condoleezza Rice). The US See Karl Inderfurth and David Shambaugh, ‘U.S.–India–China: Managing a Ménage à Trois,’ International Herald Tribune, 19 July 2005. 11 Ashton B. Carter and William J. Perry, ‘China’s Rise in American Military Strategy,’ paper presented to the Aspen Strategy Group, August 2006. 12 The 2006 report can be found at http://www.defenselink.mil/news/Jun2000/ china06222000.htm 10

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government’s response to China’s military modernization programme is twofold: (i) monitor it carefully and (ii) hedge against it by building up US capabilities and defence relationships in the region. India plays a central part in this Pentagon-led strategy.13 The question is whether India wishes to be used in this way, and the extent to which India itself seeks to offset or hedge against China’s growing military power? My sense is that India would sternly resist such strategic manipulation by Washington. The Sino–Indian relationship has developed remarkably well diplomatically and commercially in recent years, but the extent to which India still views China as a potential long-term strategic competitor is not clear. Militarily, China has the edge in most conventional capabilities, while its nuclear arsenal and ballistic missile inventory are also considerably larger. China’s Air Force fields 2600+ combat capable aircraft, compared with India’s 852.14 China’s Air Force also has a 4:1 advantage in fourth generation Russian fighters. China’s Navy puts to sea 71 surface combatants, compared with India’s 54, and China has a 3:1 advantage in destroyers and frigates. India has an active service aircraft carrier, while China has none. China also has a strong advantage in submarines: 58–16. All Indian subs are tactical SSKs, while China deploys one SSBN and four SSNs. The PLA also holds the edge in ground force equipment, fielding twice as many main battle tanks (8,580 versus 3,978), more towed artillery (17,700 versus 12,675), and more attack helicopters (305 versus 12). Of course, total number of equipments is not the only measure—more important is the generation and technical capabilities of the equipment. Here too, we see the PLA having more advanced equipment across the board than India. The overall size of forces on active duty also favours China (2.25 million versus 1.32 million), and it seems that China’s training regimen (op tempo) is also more advanced. Thus the principal strategic question is whether the United States and India seek to combine together (with others in Asia) to encircle, contain, offset, hedge against—choose your terminology—China and its growing military muscle? Here I must agree with Joseph

See the discussion in Ashton B. Carter and William J. Perry, op. cit., particularly pp. 5–6. 14 All figures in this paragraph are derived from International Institute of Strategic Studies, The Military Balance 2006 (London: Routledge, 2006), pp. 230–35, 264–69. 13

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Nye’s much quoted insight, ‘If you try make China an enemy, it will become one.’ I similarly concur with former Secretary of Defence William Perry and Assistant Secretary Ashton Carter who warn against ‘attempting to create an encircling anti-China alliance’.15 Finally, how does the nascent development of a regional, normative security community affect US–India relations? As discussed above, there is a growing regional, multilateral architecture in Asia—with institutions in Central, South, and East Asia reinforcing each other. Some of these have specific security components, but they are embedded within broader, multilateral diplomatic frameworks. They have already done much to advance regional cooperation on non-traditional security issues, and have put in place a series of political–military confidence-building measures (CBMs). Underlying this growing institutional architecture is a growing consensus with the region—including among ASEAN, India, and China—over the norms that should govern inter-state relations and regional security. These norms are at substantial variance with the American alliance-centric perspective. The United States (at least under the Bush administration) seems thoroughly disinterested in, even ignorant of, the normative change sweeping across Asia and the multilateral networks (Track I and Track II), which advance these ideas. India, on the other hand, appears far more attuned to, and interested in forging such an alternative Asian-led regional security and diplomatic architecture. In sum, not surprisingly, one sees areas of convergence and divergence in American and Indian interests, and views concerning China and the macro trends in the Asian region. As in many international relationships, the task is to forge cooperation wherever possible while discussing, and trying to better understand, the differences.

15

Ashton B. Carter and William J. Perry, op. cit., p. 10.

8 ENERGY SECURITY AND THE FUTURE OF ENERGY COOPERATION CHINA1 Kenneth Lieberthal

INTRODUCTION China is rapidly emerging as a major force in both world energy markets and global energy geopolitics. This emergence reflects the scale of China’s rising oil demand and Beijing’s increasingly active, strategic diplomacy designed to secure future energy supplies. Now as the second-largest oil consumer and the third-largest oil importer in the world, China has experienced oil demand growth that has accounted for nearly one-third of the world’s total oil demand growth during the past decade, and is adding the equivalent of a medium-size country to world oil demand each year. In the course of less than a decade, China’s three national oil companies (NOCs) have become significant new players on the global oil industry scene, with increasing investment stakes in the Persian Gulf, Central Asia, Africa, and the Western hemisphere. China is now an important factor that impacts world oil demand and prices, production prospects in key energy-exporting countries, and the competitive rules of the game for the world’s international oil companies. Moreover, energy investments abroad are expanding China’s diplomatic role in key energy-producing regions, most importantly the Persian Gulf, 1 This chapter was completed in 2006 and reflects developments as of that year. I want to thank Yang Bonny Lin for the excellent research assistance she provided both on the NBR publication cited in Note #4 and for the additional work she did on India and on Sino–Indian relations for this chapter.

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Central Asia, Africa, and Russia. Additionally, China’s efforts to secure energy supplies and transport routes in Asia are increasingly affecting the shape and tenor of China’s diplomatic ties, as well as rivalries, in Northeast and Southeast Asia. China’s energy needs, perspectives, and plans are therefore of increasing consequence. Not only is the People’s Republic of China (PRC), the world’s second-largest oil importer (behind the United States), but is also the world’s largest coal consumer (the vast majority of which it sources domestically). It is launching the world’s most ambitious programme of new nuclear plant construction, and is rapidly ramping up its investments in non-carbon alternative energy sources. Looking forward, the Chinese government is providing a wide range of financial subsidies and tax incentives to encourage non-carbon fuel development to: 1. Obtain 10 per cent of electric power from renewable energy by 2010. 2. Obtain 10–15 percent of its energy from renewable sources by 2020. 3. Obtain 30,000 MW of wind turbines by 2030, with 5,000 MW installed by 2010.2 4. Install 40,000 MW of nuclear power by 2020.3 Of these various dimensions of the Chinese energy picture, the PRC’s increasing need to source oil externally, and the security implications of China’s resulting efforts are having the greatest impact on the United States and India, and they, therefore, provide the focus for this chapter. To understand the key factors shaping the future in this sector, this chapter analyzes: 1. China’s oil needs, perspectives on oil security, and relevant policymaking dynamics. 2. American concerns about China’s international oil activities. ‘China, India Share Renewable Energy Goals,’ Reuters, available at http://www. uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=50898&nav02=43874&nav 01=43092 (accessed 25 September 2006). 3 Mitali Das Gupta, Eshita Gupta, and Pragya Jaswal, ‘Asia Energy Security Issues: Focus on China and India,’ Asian Energy Institute Newsletter, Singapore, April 2006, p. 19, available at http://www.ips.org.sg/events/pos/papers/Policy%20BriefAEI.pdf 2

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3. India’s oil-related needs and perspectives. 4. The potential patterns and limits of cooperation in the oil sector between China and India, and between China and the United States.

CHINA AND OIL4 THE ROOTS OF CHINA’S ENERGY INSECURITY China’s growing dependence on imported energy—in particular, oil, and recent moves abroad by Chinese NOCs to secure physical access to future supplies have been documented in a number of recent studies.5 In order to appreciate why access to energy supplies abroad has become such a critical economic and political concern for Beijing’s leadership, however, several key points warrant particular attention. First, at a visceral level, China’s leaders fear that domestic energy shortages and rising energy costs could undermine the country’s economic growth, and thus, seriously jeopardize job creation. For a regime that increasingly stakes its

The first two sections and part of the fourth section of this chapter draw very heavily from Kenneth Lieberthal and Mikkal Herberg, ‘China’s Search for Energy Security and Implications for US Policy,’ NBR Analysis 17 (Washington: NBR, April 2006), with thanks to NBR for permitting such extensive direct use of material from that publication. 5 See Philip Andrews-Speed, Xuanli Liao, and Ronald Dannreuther, ‘The Strategic Implications of China’s Energy Needs,’ Institute for International Strategic Studies, Adelphi Papers nos 346, 2002; Erica Strecker Downs, China’s Quest for Energy Security (Santa Monica: RAND, 2000); Erica Strecker Downs, ‘China’s Energy Security’ (unpublished dissertation, Princeton University, 2004); Joe Barnes, ‘Slaying the Dragon: The New China Threat School’ (paper presented at the conference China and Long-Range Asia Energy Security: An Analysis of the Political, Economic and Technological Factors Shaping Asian Energy Markets, Baker Institute for Public Policy, Houston, April 1999); International Energy Agency (IEA), China’s Worldwide Quest for Energy Security (Paris, 2000); US–China Economic and Security Review Commission, ‘China’s Energy Needs and Strategies,’ Washington, DC, 30 October 2003, available at http://www.uscc.gov//hearings/2003hearings/ transcripts/131030tran.pdf; and Ross H. Munro, ‘Chinese Energy Strategy,’ in Energy Strategies and Military Strategies in Asia, report for the Office of Net Assessment (Department of Defense, 1999). 4

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political right to rule on economic performance and rising standards of living, the threat of economic stagnation raises real risks of social instability, which could in turn threaten the continued political monopoly of the Chinese Communist Party (CCP). Therefore, energy security is a strategic, domestic political concern for the leadership. Against this backdrop, Beijing has been further alarmed by a huge rise in global energy prices since 2003, and by the increasing spectre of a long-term global energy ‘scarcity’. China’s strong economic growth is spurring a concomitant growth in energy demand, which together is outstripping domestic energy supply and infrastructure capabilities. This supply– demand gap will become more acute over time, particularly in light of the fact that ever since 2000, China has become far less efficient in energy use—per incremental dollar of gross domestic product (GDP). Oil is particularly a sensitive problem. Over the next 15 years, demand is expected to roughly double. By 2020, China will likely import 70 per cent of its total oil needs when compared to 40 per cent today (see Table 8.1).6 In the long term, oil demand growth will also be driven by an enormous increase in the number of vehicles in China, from today’s level of approximately TABLE 8.1 China oil demand and imports (MMBD)

Actual (BP 2005) IEA (WEO 2004) DOE (IEO 2005) East-West Center (3/05) IEE Japan (3/04) Merrill Lynch (11/04)

2000

2004

5.0

6.7

2010

2020

2020* Imports

7.9 9.2 8.6 7.3

11.6 12.3 12.3 12.0

7.1 8.8 8.8 8.5

Import share (%) 67 72 72 71

10.0

Note: Assuming a 3.5 MMBD domestic production.

See IEA, ‘World Energy Outlook 2004,’ October 2004, available at http:// www.iea.org/Textbase/publications/free_new_Desc.asp?PUBS_ID=1266; and U.S. De partment of Energy, Energy Information Administration (EIA), ‘2005 International Energy Outlook,’ July 2005, available at http://www.eia.doe.gov/ oiaf/ieo/pdf/0484(2005).pdf

6

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22 million to estimates ranging from 120 to 150 million vehicles by 2020.7 Consequently, China will become heavily dependent upon the Persian Gulf to supply a large share of its future oil needs, and an increasing share of China’s oil imports will have to transit vulnerable, maritime chokepoints. The IEA predicts that, as of 2015, 70 per cent of China’s oil imports will come from the Middle East, while other significant shares will come by tanker from Africa, by pipeline and rail from Russia, and by pipeline from Central Asia.8 More than 50 per cent of China’s oil will have to transit the Malacca Straits. The same long-term trends are likely to hold for China’s natural gas needs, although import dependence will probably accelerate only after 2010. The US Department of Energy forecasts that imports from Southeast Asia, the Persian Gulf, Africa, and Russia, will account for 40 per cent of China’s gas needs by 2025.9 In the face of mushrooming energy demand, other segments of China’s domestic energy system are also experiencing intensifying supply bottlenecks, including severe (if temporary) shortages of electricity and bottlenecks in coal production and transportation. These shortages are adding to the atmosphere of crisis in the energy sector and aggravating the leadership’s sense of vulnerability to supply disruptions. China’s energy policies and institutions accentuate demand growth and aggravate energy supply and infrastructure shortages. Subsidized energy prices promote excessive demand growth, which in turn increase pressure on supplies and infrastructure to move energy around the country. At the same time, investment in

The IEA forecasts that total vehicle ownership will reach 90 vehicles per 1,000 people by 2030 when total vehicle stock in China is expected to reach 130 million. See IEA, ‘World Energy Outlook 2004’. The EIA estimates that if the present patterns persist, China’s car ownership will exceed that of the United States by 2030. See EIA, ‘2005 International Energy Outlook’. ExxonMobil estimates that China’s total light vehicle fleet could reach over 100 million by 2020, and over 200 million by 2030. See ‘2005 Energy Outlook: China in Perspective’ (paper presented at ‘China’s Search for Energy Security and Implications for the US,’ NBR conference, Washington, D.C., 27 September 2005.). 8 IEA, ‘World Energy Outlook 2004’. 9 EIA, ‘2005 International Energy Outlook’. 7

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improving energy efficiency is badly underfunded.10 Although Beijing has begun to recognize the need for demand-side energy reforms, the government has moved cautiously out of fear of the impact of higher energy prices on employment, inflation, and social stability. There appears to be a growing recognition of these problems among China’s top leadership. Such concerns are evident in recent efforts to reorganize energy policymaking—most notably the 2005 establishment of a new State Energy Office, which reports to a new Energy Leading Group headed by Premier Wen Jiabao.11 Nevertheless, the pace of reform remains slow. In short, as China’s gap between domestic energy supplies and demand becomes more acute over time, energy imports will play an increasing role in the country’s economy. Put simply, energy security has become an issue of the ‘high politics’ of national security, not just the ‘low politics’ of domestic economic policy.

THE ROOTS OF CHINA’S GO-OUT STRATEGY Beijing is acting according to the principle that energy security is too important to be left to the markets. China has thus decided to adopt the go-out strategy. Briefly, the main elements of the go-out strategy include a more active, energy-centric form of commercial diplomacy by Beijing’s leaders within the key energy-exporting regions, combined with a widening campaign by China’s three major NOCs—China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC)—to secure equity investments in oil and gas fields abroad (that is, physical control over oil China’s national energy plan assumes it will quadruple its GDP by 2020, while only doubling energy consumption—a repeat of what occurred during the two decades, from 1980 to 2000. In recent years, the level of government investment in improving energy efficiency has actually fallen, however, and is probably only one-third of the annual amount needed to achieve the 2020 target. See Jonathan E Sinton, Rachel E. Stern, Nathaniel T. Aden, and Mark D. Levine, with Tyler J. Dillavou, David G. Fridley, Joe Huang, Joanna I. Lewis, Jiang Lin, Aimee T. McKane, Lynn K. Price, Ryan H. Wiser, Nan Zhou, and Jean Ku, Evaluation of China’s Energy Strategy Options, China Energy Group (Berkeley: Lawrence Berkeley National Laboratory, May 2005). 11 ‘China Creates Office to Safeguard Energy,’ China Daily, 28 April 2005, available at http://www.chinadaily.com.cn/english/doc/2005-04/28/content_438342.htm 10

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supplies), and a diversified slate of long-term crude and liquefied natural gas (LNG) supply contracts, from a broad range of exporters to meet future needs. These measures are further augmented by state diplomacy and company efforts, to promote development of new oil and natural gas pipelines that will diversify future transport routes for energy imports. China’s NOCs have acquired growing equity oil stakes and long-term crude oil contracts in the Persian Gulf, anchored by deep involvement in Iran, and more recently, by growing energy and diplomatic ties with energy giant Saudi Arabia. China’s heavy focus on Central Asia has centred on the acquisition of sizeable equity oil stakes in Kazakhstan, which will be shipped via a long-distance pipeline currently being built to western China. Russia has become an important crude oil supplier through its rail shipments to Northeastern China, and has intermittently planned to build a large crude oil pipeline from East Siberia to China. Japan, however, continues to try and persuade the Russians to build the pipeline to the Pacific Coast, instead. Despite many attempts, China has not yet been successful at establishing an equity oil or gas position in Russia. China’s NOCs have also built a large portfolio of oil stakes and supply contracts in Africa, centred on the NOCs’ largest equity production position in Sudan’s oil industry, along with growing investments and supply contracts with major West African oil exporters—Nigeria and Angola. In the Western hemisphere, China owns growing equity oil stakes in Canada’s western heavy-oil belt and is building ties with Venezuela. China has recently acquired equity investments through a major acquisition in Ecuador, and a strategic energy alliance with Brazil’s Petrobras. In Southeast Asia, China’s energy acquisitions and supply contracts are growing rapidly in Indonesian oil and LNG, Australian LNG, and natural gas supplies and potential oil pipeline deals with Myanmar. All told, China’s NOCs now have equity oil production overseas of 400–500 thousand barrels per day (MBD), equal to approximately 15 per cent of China’s oil imports. Beijing has signed ‘strategic’ energy alliances of one sort or another with at least 10 countries, including Iran, India, Sudan, Russia, Kazakhstan, Saudi Arabia, Brazil, and Venezuela. Thus, while seeking to expand its equity oil and state-to-state (or NOC-to-NOC) position,

11

4

74

Latin America

North America

Company Total

100

5

15

20

1

26

10

22

% of deals

32

1

3

3

0

11

11

3

No. of deals

100

3

9

9

0

34

34

9

% of deals

Sinopec

17

1

0

11

1

4

0

0

No. of deals

100

6

0

69

6

25

0

0

% of deals

CNOOC

16

0

2

2

1

3

6

2

Other* No. of deals

139

6

16

31

3

37

25

21

No. of deals

100

4

11

22

2

27

18

15

% of deals

Total

Canada

Venezuela, Brazil, Ecuador, Peru

Indonesia, Australia, Myanmar, Papua New Guinea

Mongolia

Sudan, Angola, Algeria, Nigeria

Saudi Arabia, Oman, Iran

Russia, Kazakhstan, Uzbekistan

Key countries

* Major subsidiaries of CNPC, Sinopec, and CNOOC include: Sinochem, Zhuhai Zhenrong, China Aviation Oil Company, China National Oil and Gas Exploration and Development Corporation, China National Electronic Equipment Corporation, and China Oilfield Services Limited.

Note: Information on China’s global energy investments are taken from The National Bureau of Asian Research’s Asian Global Energy Investments Database. The table above is adapted from Yang Bonny Lin’s unpublished paper, ‘Weak Vertically and Competing Horizontally: An Analysis of Relations between and within the Chinese Central Government and National Oil Companies’ (University of Michigan, 2005). Numbers above do not include memorandums of understanding or proposed investments.

1

Africa

15

8

19

Middle East

Southeast Asia

16

Eurasia

Northeast Asia

No. of deals

Regions

CNPC

TABLE 8.2 Chinese petroleum companies

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China still must rely on the market for the vast majority of oil imports (see Table 8.2). The mercantilist cast of the go-out strategy reflects China’s sense of weakness and vulnerability regarding reliable access to energy supplies. This sense of weakness provides the rationale for direct state intervention and support. Three aspects of this viewpoint stand out. They are: First, this mercantilist attitude is strongly influenced by a general mistrust of global energy markets. China’s leaders believe that they are facing an unstable and unforgiving global energy market that is dominated by sophisticated global oil companies, Western industrial countries, and unreliable and unstable oil-exporting countries. The market alone cannot be counted on to supply oil on demand, and at an acceptable price. As supplies are subject to disruption from numerous geopolitical risks, the only way to ensure reliable supplies is through the physical control of oil supplies directly from major producers, state-to-state cooperative agreements, and transport systems in which China has a stake. Second, distrust of energy markets is aggravated by the perception that these markets are dominated by the United States, a perception that overlaps with concerns that the United States is out to exploit China’s energy weakness. Based on strategic dominance in the Persian Gulf, the US Navy’s control over critical energy transport sea lanes, and enormous power in the global oil industry and institutions, many believe that the United States exerts a powerful influence on global oil prices and flows.12 The projection of US power into the Persian Gulf and Central Asia in the wake of 11 September 2001 has further aggravated these fears. Strident rhetoric in the United States during the 2005 CNOOC–Unocal episode has strongly reinforced these perceptions.13 Third, in terms of energy sector capabilities, Beijing feels that China is working from a position of weakness and must play 12 For an interesting insight regarding Beijing’s orientation on these issues, see Xiaojun Ma, ‘East Asia Energy Strategy: Conflict or Cooperation’ (speech, International Strategy Research Institute, AEI/CCPS Conference, Washington, D.C., 9 May 2005). 13 See, for example, Hon. C. Richard D’Amato, ‘National Security Dimensions of the Possible Acquisition of UNOCAL by CNOOC and the Role of CFIUS’ (statement presented before the House Committee on Armed Services, 13 July 2005).

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‘catch-up’. Excluded from the major institutions governing global oil cooperation (such as the IEA), and forced to rely upon NOCs that are relatively new and weak competitors in the dynamic, global oil industry, China feels dominated by the large, powerful, and technologically sophisticated oil companies that it feels help to defend the interests of Western industrial countries.

A MERCANTILIST PRC ENERGY POLICY? Rather than a coherent strategy, Beijing’s energy security policies are more a collection of ad hoc initiatives—some coordinated, some not, and some state-driven, others market- and commerciallydriven. Although China has adopted what Phillip Andrews-Speed terms a ‘strategic’ approach to energy,14 there is no central policy institution that effectively oversees this strategy. Rather, Chinese leadership and supporting institutions seem to adhere to a more broad ‘mentality’ in which the government, NOCs, and China’s diplomatic corps all work to some extent in the same direction.15 China’s NOCs are not always driven solely by state exhortation and diplomatic and financial support. As these NOCs gain experience in the global energy industry competitive environment, they are increasingly operating within a sort of commercial ‘nether land’, torn both between their traditional fealty to state interests and their expanding commercial instincts. They are moving abroad in response to the same commercial competitive pressures and resource constraints that drive the major international oil companies (IOCs) and other private and state-owned international energy companies to expand globally. As is true for all the major oil companies, equity oil reserves are a key component of commercial profitability, competitiveness, and the attainment of an operating scale sufficient for China’s NOCs to compete successfully in the global energy industry. Similar to the situation faced by other large oil companies based in other countries, oil exploration and development costs in China are high, available resources are limited, and large, low-cost reserve Philip Andrews-Speed et al., op.cit. Erica S. Downs, who has written extensively on this process, uses a traditional Chinese saying to describe it as, ‘Each soldier fighting his own war.’ See Erica S. Downs, ‘The Chinese Energy Security Debate,’ China Quarterly, no. 177 (2004): 21–41. 14

15

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opportunities are concentrated abroad. Moreover, each company now holds a minority public share ownership and, therefore, cannot entirely ignore traditional shareholder interests in corporate growth and profitability. Also, among the Chinese NOCs there is a wide range of commercial drive and sophistication that belies a simplistic view of global expansion as a simple extension of state policy. Obviously, CNOOC is the most commercially-oriented, efficient, and ‘Western’ in its operations, and in many ways, behaves much the same as a typical IOC. CNPC, the largest state company and the one closest to the Central Government, by contrast, operates more like a ministry than an oil company. Sinopec is somewhere in between. There are other key differences that reinforce the need for a more-nuanced US policy towards the expansion of China’s NOCs. The government has purposely put the most controversial investments—in Sudan, Iran, and other rogue states—in the hands of CNPC, the most centrally directed of the NOCs, and these investments are held by the government parent company, rather than the market-listed global arm of CNPC (called PetroChina). This calculated move is designed to increase flexibility and reduce potential shareholder pressure. In fact, a powerful indicator of the damage done by the CNOOC–Unocal episode is that the management of the marketlisted arm of CNOOC soon afterwards sought to obtain shareholder approval for its 100 per cent government-owned parent CNOOC to make investments abroad. The purpose of this request was to confer upon CNOOC more independence from capital markets and foreign political pressure, so that the NOC could invest in more controversial, opaque countries and deals. Notably, CNOOC’s private shareholders successfully prevented that change in the company’s charter. China’s NOCs, despite their visibly commercial motives, do not want to put themselves clearly at odds with Beijing. Their fundamental attitudes and behaviours are, however, often far more market-driven and corporate-centred than what a superficial understanding of the go-out strategy might suggest. The government may seek more disciplined control of the NOCs, but it does not always have a free hand. China’s energy ‘strategy’ thus reflects both mercantilist instincts and an evolving natural industry drive to invest abroad. Even though China’s global energy push outwards does raise significant new issues for US–China and India–China relations,

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US and Indian policymakers err if and when they assume that the overseas investments of China’s NOCs abroad are always a reflection of a coherent state strategy and direction. Given this context, what then are the most significant energy issues in US–China and India–China relations?

AMERICA’S REACTIONS TO CHINA’S OIL EFFORTS ENERGY AND US–CHINA RELATIONS China’s global energy expansion has provoked a wide range of concerns among US policymakers—concerns that were brought into sharp relief during the CNOOC–Unocal episode. These issues can be divided into two groups of potential problems: markets and geopolitics.

MARKETS China’s impact on oil markets and prices The first major set of US policy concerns revolves around China’s growing impact on global oil markets and prices. Much recent rhetoric in the United States suggests that China’s oil demand is the prime culprit behind rapidly rising world oil prices. China has indeed accounted for a significant share of world oil demand growth recently (approximately 30–40 per cent annually over the past several years), making China an important factor among many in today’s tight oil markets. High oil prices are, in fact, a product of a long list of supply and demand developments, including very strong global oil demand, slow growth in production capacity, and low investment in new capacity in recent years, particularly, in the Organization of Petroleum Exporting Countries (OPEC).16 Global OPEC’s oil production capacity, for instance, is essentially the same today (roughly 31 million barrels per day, MMBD) as it was 20 years ago, a period during which world oil demand rose by 22 MMBD. See BP PLC, BP Statistical Review of World Energy 2005 (London: BP, June 2005), available at http://www.bp.com/liveassets/ bp_internet/globalbp/globalbp_uk_english/publications/energy_reviews_2005/ STAGING/local_assets/downloads/pdf/statistical_review_of_world_energy_ full_report_2005.pdf

16

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refining is also running at virtually full capacity and is especially tight in the United States. Due to this tight capacity, global price formula linkages strongly influence US benchmark crude prices; and, therefore, world prices.17 The notion that China has a special role in rising oil prices is particularly misplaced. The United States has actually been the major factor in producing destabilizing oil demand growth. From 1995 to 2004, US oil imports grew by 3.9 MMBD while China’s grew by 2.8 MMBD. The incremental US draw on global oil market supplies absorbed the equivalent of more than three-quarters of the entire increase in OPEC oil exports, during that 10-year period,18 making the United States much more of a rogue element than China in the world oil market over the past decade.

Taking oil ‘off the market’? A second US concern over oil markets and prices has been China’s preoccupation with acquiring equity oil supplies that are controlled by the Chinese NOCs. Because these Chinese companies can ship this oil directly to China, many in the United States believe that China is effectively taking oil ‘off the market’. This effort has fuelled US concerns that China’s ‘hoarding’ behaviour will undermine open and flexible global oil markets, lead to higher oil prices, and worsen supply shortages elsewhere.19 Congressional and media reactions to China’s oil investments in Canada and Venezuela have been particularly hostile, voicing strong concerns that China is challenging traditional US access to ‘secure’ oil supplies. These concerns reflect apparent confusion among some US policymakers about how today’s global oil markets function. China’s leadership does seem to believe that equity control provides greater Total world oil consumption in 2004 was 80.8 MMBD, world oil refining capacity was 83.9 million barrels per day, and production was roughly 96 per cent of capacity. See BP Statistical Review of World Energy 2005, op. cit.; see also Klaus Rehaag, Intenational Energy Agency, ‘A Market on Steroids’ (paper presented at the conference Middle East Petroleum and Gas Week 2004, Bahrain, 12 May 2004). 18 See BP Statistical Review of World Energy 2005, op. cit. 19 Christopher R. Hill, Assistant Secretary of State for Asia and the Pacific, testimony before the Senate Foreign Relations Committee, Subcommittee on East Asian and Pacific Affairs, Washington, D.C., 7 June 2005. 17

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oil supply security. But equity barrels are, in reality, no more effective at ensuring China’s national energy security than long-term crude supply contract barrels. The major geopolitical risks to stable oil flows—such as political instability in key exporting countries, wars, ethnic conflict, a potential US blockade of China’s oil in a Taiwan crisis, or transit bottlenecks—would disrupt equity and contract oil flows equally. There is no correlation between equity oil and energy security. The view that owning barrels provides energy security is based upon a pre-1970 understanding of global oil markets—an era before the creation of today’s dynamic, flexible, global, commercial oil markets. Over the past 5 years, no major economy has suffered a physical shortage of oil despite severe oil price increases and a rapid succession of geopolitical and weather-related supply disruptions.20 Unfortunately, the same outdated view underlies the thinking of many in Washington, DC, who see China’s equity oil obsession as a threat to US oil security. The oft-stated charge that China would take Unocal’s Gulf of Mexico oil production to China and ‘deprive’ the United States of its own oil supplies ignores a basic fact: modest redistribution of Atlantic Basin oil supplies could replace the barrels going to China, with no real effect on price or supply security.21 The consequence of an outmoded view is that policymakers from both Washington and Beijing are continuing to react in ways that reinforce each side’s suspicions of being denied future oil supplies. A similar dynamic is contributing to China’s increasingly acrimonious battle with Japan over oil pipelines and natural gas fields. Similarly, China and India, despite tentative steps towards limited cooperation, are basically investing with the

In fact, due to administrative and pricing distortions caused by government oil price controls—and not the lack of availability of imported oil supplies—one of the very few actual oil supply shortages in recent years occurred in 2005 in southern China. 21 In this example, the shift in movement of 50 thousand barrels per day (MBD) of Unocal’s Gulf of Mexico crude oil production to China instead of the United States would also effectively result in the Chinese purchasing 50 MBD less in the North Sea, Angola, or Nigeria. As events actually transpired, CNOOC was prepared to sell the Gulf of Mexico crude into the US market. 20

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understanding that they are ‘competing’ head-to-head for oil supplies in Africa and the Middle East.22 These delusions are motivating real actions. China and other Asian countries, therefore, need to be discouraged from this ‘hoarding’ mentality. Although vital to the competitive commercial success of China’s NOCs, equity oil becomes a form of national ‘hoarding’ when cast in political and national security terms. As will be suggested later, US policymakers need to avoid reacting to an outmoded view of oil markets in a way that unnecessarily reinforces China’s paranoia over oil security.

The global governance of oil The third oil market issue deals with the important area of global emergency oil stock management. Due to China’s growing scale of oil imports and its market impact, China’s exclusion from the emergency oil-sharing arrangements of the IEA risks added price volatility in times of global supply disruptions. For example, prior to the 2003 Iraq War, China undertook a huge oil-buying spree in anticipation of supply disruptions, thereby aggravating the oil price spike that occurred prior to the US invasion. The effectiveness of the IEA’s emergency oil-sharing programmes is already weakening, as a growing share of the global demand base is outside the IEA sharing system. China is also developing its own strategic petroleum reserves (SPRs), which so far do not have regional or global sharing mechanisms, available in the case of a crisis. As all importers benefit from reduced prices in a crisis, there is likely to be a growing resentment that China—which refuses to share its own reserves with the broader international community—would be ‘free-riding’ on emergency oil releases supplied by IEA countries during a crisis. Moreover, the lack of direct availability of emergency oil supplies potentially opens up China, India, and other competing, non-member states to political pressure from supplier states that try to use energy as a diplomatic lever. The example of serious foreign policy splits in the Western alliance during the 1973–74 oil crisis is instructive. ‘India Yet To Match China’s Cash, Political Clout,’ Petroleum Intelligence Weekly, 24 October 2005.

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GEOPOLITICAL ISSUES AND IMPLICATIONS Beyond energy markets, China’s search for secure oil supplies also raises a number of new geopolitical issues that are complicating US–China relations.

Energy ties to ‘problem’ states A major concern for the United States is the growing involvement of China’s energy sector in a number of problem states, including Iran, Sudan, Myanmar, Uzbekistan, Venezuela, Cuba, and, lately, Syria. Iran and Sudan are clearly of the most significant concern, and they raise a host of problems—because of the challenges Iran poses to the international arena in terms of potential nuclear weapons development and Sudan’s severe human rights problems. In a number of cases, these relationships with problem states are accompanied by broader military ties and weapons sales elements that increase the problems posed for US policymakers. As long as the Chinese government believes that equity oil supplies are vital to energy security, China’s NOCs will have strong incentives to expand their investments in these ‘problem’ states. From a commercial standpoint, these ‘problem’ states also represent important and unique opportunities to purchase equity reserves. China’s NOCs are latecomers to the world oil exploration and production (E&P) scene, and are competing with the major global oil companies from the United States and Europe that over decades have developed the long-term relationships, E&P expertise, and strong investment positions in all the most accessible and promising countries that are offering petroleum investment opportunities. CNPC, Sinopec, and CNOOC are indeed playing catch-up. Even the most competitive companies are finding fewer new opportunities to access sizable reserves. Seventy-five per cent of the world’s known oil reserves are in countries where outside investment in oil development is excluded or sharply limited. 23 As a result, competitive pressures force the Chinese NOCs to reach further into high-risk, uncertain countries for new E&P opportunities, just as the other major IOCs are doing. A unilateral US embargo on these energy-rich 23

IEA, ‘2004 World Energy Outlook,’ 1999.

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countries merely reduces the competition for the Chinese NOCs, and makes the temptation to seek access to these reserves nearly irresistible. Hence, finding ways to manage the tensions over all these issues is imperative in any US policy response to China’s expanding energy diplomacy.

Energy and Northeast Asian geopolitics China’s efforts to secure energy supplies and oil and gas transport routes have aggravated geopolitical tensions in Northeast Asia. These tensions are also being fuelled by the equally competitive policies of other major regional importers (particularly Japan), as well as by Russia’s erratic policies on the promise of future energy supplies to Northeast Asia. The Kremlin is seeking to use energy as a strategic instrument to reassert its influence in the region, and thereby, is contributing to the competitive environment in the region, particularly between China and Japan. ‘Energy nationalism’ has become a potential threat to regional stability as energy disputes increasingly spill over into broader geopolitical rivalries. These geopolitical rivalries, in turn, undermine cooperative solutions to the region’s energy needs. This ‘vicious circle’ is a major and growing regional concern for both the United States and China.

Energy security and China’s military development Another important issue for some departments of the US government, particularly the Department of Defense, is the potential for perceived energy security threats to drive China’s military modernization. China’s increasing dependence on oil flows through the Malacca Straits and the other sea lanes of Southeast Asia is potentially accelerating the development of the country’s naval capabilities necessary to protect those lanes. China has greatly increased cooperation, port access agreements, and maritime ties with Pakistan, Bangladesh, and Myanmar in an apparent effort to be better positioned to protect its maritime energy transport routes, during a future crisis. This cooperation, in turn, risks exacerbating the broader tensions between the United States and China over the increasing pace and scale of the latter’s military and naval modernization.

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China as a new player in global energy geopolitics Finally, growing energy ties in key exporting regions inevitably will make Beijing an important diplomatic player in these areas and will bring China into direct contact with vital US interests in these regions. Beijing will become an important competitor for influence in the Persian Gulf, as China builds ties with Iran and Saudi Arabia, and possibly, with Kuwait and Iraq. At the same time, US allies in the region (such as Saudi Arabia) are looking to diversify their diplomatic relationships away from heavy dependence on the United States. Energy is also a major factor in China’s growing involvement in Central Asia via the Shanghai Cooperation Organization (SCO). Beijing is building an extensive energy relationship with Kazakhstan, expanding energy investments in Uzbekistan, and increasing its involvement in the Caspian Sea region. Energy will also influence China’s engagement and influence in Southeast Asia, particularly with two key US allies, Indonesia and Australia. China has become active in the Western hemisphere through significant investments in heavy-oil development in Canada and Venezuela. The United States has traditionally been the dominant outside force in the energy geopolitics of these countries. The reality of growing Chinese influence should encourage both China and the United States to begin to develop mechanisms for managing potential disagreements.

INDIA’S OIL RELATED NEEDS AND PERSPECTIVES Like China, India’s rapidly expanding economy requires strong growth in access to oil, with oil consumption growing at over 6 per cent annually over the past decade. India lacks sufficient domestic reserves to meet its needs. Indeed, bringing in 68 per cent of total consumption, India is even more reliant on imports than is China. That reliance is slated to grow, very likely reaching at least 85 per cent of total Indian oil consumption by 2025, most of which will need to be imported from the Middle East.24 But 24 Some Indian analysts, in fact, predict the total exhaustion of exploitable domestic Indian oil reserves by 2020: Stein Tonnesson and Ashild Kolas, Energy Security in Asia: China, India, Oil and Peace (Oslo: International Peace Research Institute, April 2006), 40. This report overall provides excellent information on India’s oil profile and strategy.

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India’s NOCs, five of which are on the Fortune 500 list, are not as well-funded as are their Chinese counterparts, and India must also sometimes deal with tense relations with those neighbours from whom it wants to secure oil and gas resources, or through whom it wishes to route pipelines.25 India has adopted a strategy to address its oil needs that is broadly similar to China’s. It stresses import source diversification and acquisition of equity oil, construction of SPRs, and increased domestic production and fuel diversification.26 The Indian government has drawn up an ambitious plan to garner 60 million tons per annum equity oil from overseas by 2025 by empowering public-sector oil companies to enter the E&P business abroad. India is seeking oil assets in countries such as Kazakhstan, Iran, Sudan, Vietnam, and Ecuador, through ONGC Videsh Limited (OVL). OVL currently has stakes in 24 oil and gas projects spread across 14 countries, including Russia, Sudan, Vietnam, and Myanmar. The fact that both China and India are seeking equity oil investments—and that both for similar reasons tend to do best when dealing with states that the Western majors tend to shun—means that they have often competed head-to-head for projects. This has occurred in locations as diverse as Russia and Central Asia, Africa, and Latin America. Indeed, China is India’s main competitor in some of the oil-rich regions that few Western companies have ventured into, such as Iran, Sudan, and Ecuador. But the record to date suggests that India is often unable to compete sufficiently with China, even though India, like China, often seeks to link energy policy to broader diplomatic efforts. For example, in 2004 Indian companies lost out to Sinopec in securing Block 18 in Angola, and in August 2005, CNPC outbid India to acquire PetroKazakhstan.27 25 Brahma Chellaney. ‘India’s Future Security Challenge: Energy Security,’ in Prasenjit K. Basu, Brahma Chellaney, Parag Khanna, and Sunil Khilnani Basu, eds, India as a New Global Leader (London: Foreign Policy Centre, 2005), 63–82, available at http://fpc.org.uk/fsblob/377.pdf 26 Stein Tonnesson and Ashild Kolas, op. cit., p. 43. Like China, India is also hoping to build a series of terminals for the import of LNG along its coast, and has been in talks with suppliers from Australia, Oman, Algeria, Nigeria, and Malaysia. Both India and China are also looking at natural gas from Iran, Turkmenistan, and Myanmar. ‘India, China Work Out New Energy Synergies,’ Asia Times, 26 September 2006, available at http://www.atimes.com/atimes/South_Asia/HI26Df01.html 27 Stein Tonnesson and Ashild Kolas, op. cit., pp. 50–51.

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China’s energy efforts have been posing an array of problems from an Indian perspective. Beijing’s energy ventures into and close relations with countries that are surrounding India in some instances have the potential to decrease the availability of such energy resources to India. These neighbouring energy resources might otherwise significantly increase India’s energy security by avoiding risks associated with transporting the supplies for long distances. China’s relations with Sri Lanka also work to India’s disadvantage. In 2006, Sri Lanka allocated an exploration block in the Mannar Basin to China for exploring oil resources. This implies the emergence of a Chinese presence a few kilometres away from India’s southern tip, close enough to contribute to strategic discomfort in India. In economic terms, this could end the monopoly held by Indian oil companies in this area, placing them in competition with the wealthy Chinese oil companies. China is building bunkering facilities and an oil tank farm at Hambantota, on the southern coast of Sri Lanka, which will provide service to hundreds of ships traversing the sea lanes of Sri Lanka for commerce. This adds another vital dimension to its strategic presence in the Indian Ocean, supplementing its projects in Pakistan, Myanmar, and Bangladesh.28 Indian wariness is felt over China’s ‘String of Pearls’ strategy to preserve and protect its own energy interests. India, for example, is concerned with China’s oil-related involvement in Pakistan. The Chinese finished constructing a port at Gwadar in April 2006 and reportedly are committed to undertaking the construction of the second phase—creating a naval base in Gwadar by 2010. President Musharraf also wants to expand the scope of Sino–Pakistani cooperation in Gwadar and may have suggested the construction of a mega petrochemical complex in Gwadar and a railway line and an oil/gas pipeline connecting Gwadar with Xinjiang.29 Like the United States, then, India has serious concerns about China’s energy strategy and its consequences. The question for both 28 Amit Kumar, ‘China‘s Growing Influence in Sri Lanka: Implications for India,’ India Institute of Peace and Conflict Studies, Article 2079, 27 July 2006, available at http://www.ipcs.org/China_east_asia_articles2.jsp?action=showView&kValue =2093&issue=1009&status=article&keyArticle=1009&mod=b 29 B. Raman, ‘Gwadar: Will Hu or will Hu not?’ South Asia Analysis Group Papers, 1 November 2006, available at http://www.saag.org/papers21/paper2010.html

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New Delhi and Washington is how best to nurture cooperation with China, while at the same time protecting serious economic and security interests. All three countries rely heavily on oil imports and have major concerns about supply security and price stability. The external oil-related activities of each also clearly impact on the broad security interests of the others.

POTENTIAL PATTERNS AND LIMITS OF COOPERATION INDIAN–CHINESE COOPERATION A variety of arguments have been put forward to spur Sino–Indian cooperation in the oil sector, especially as regards bidding for equity oil. Both Indian and Chinese experts have argued that China has not been a real ‘winner’ in the previous deals where China outbid India. Competitive bidding has caused China to have to pay extremely high prices to win oil assets. Moreover, competitive bidding between the two countries enables the countries that are selling assets to play China and India against each other by pushing up prices. Only through cooperation can win-win situations be attained for both China and India. Some Chinese experts argue that cooperation with India brings two additional advantages. India’s strategic location controlling sea lines of communication (SLOCs) close to the Malacca Strait gives New Delhi an advantage, and can aid China’s transportation supply security. Second, India’s membership in the Commonwealth could allow it to participate in energy-related cooperative partnerships with other Commonwealth members, and if China worked with India, it might also be able to participate in these operations.30 Others point to the political advantages of joint bidding. Cooperation will decrease the political risks of entering into sensitive markets, as opponents would have to consider their interests with both China and India before blocking acquisitions. Additionally, bidding jointly helps to spread any negative media

‘Zhong-Yin nengyuan hezuo bulu kengqiang’ (Sino–Indian Energy Cooperation is Making Sonorous Steps), 24 August 2006, available at http://www.chinaenergy. gov.cn/news.php?id=8804

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attention onto both countries, instead of having one country bear the full brunt.31 Both China and India have, therefore, since 2004 worked towards a modicum of cooperation in the energy sector. India in October 2004 suggested the two countries could work together and establish an Asian energy security network. When Premier Wen Jiabao visited India in April 2005, he suggested that energy cooperation should become an inseparable part of bilateral cooperation. In the India–China agreement pronounced during Wen’s trip, Article 9 mentioned that China and India will engage in cooperative energy exploration and development in third countries. An Indian petroleum ministry official then visited Beijing in August 2005 to encourage dialogue, and in January 2006, Indian Petroleum Minister Mani Shankar Aiyer visited China and signed an energy memorandum of understanding (MOU) with National Development and Reform Commission (NDRC) official Ma Kai.32 According to Talmiz Ahmad, the head of the Indian oil ministry’s international division, India–China cooperation entails setting up a joint bilateral working group to monitor progress and promote additional India–China cooperation. The partners will focus their attention on four main regions—the Caspian Sea region, Central Asia, Africa, and Latin America. In the first phases of cooperation, companies from both countries will engage in an informationsharing dialogue on specific proposals with a view to coming up with possible joint offers.33 This joint commitment to bilateral cooperation on bids for equity oil has led to at least two cooperative bids: 1. August 2006: OVL and Sinopec jointly invested USD 850 million to buy a 50 per cent stake (shared 25 per cent: 25 per cent) in Omimex de Colombia Ltd., which has oil-and-gas-producing assets in the South American country, and is owned by US-based Omimex Resources Inc. The two Asian firms have formed a 31 ‘Zhong-Yin nengyuan hezuo “jiancheng ‘xiguan’ shiyou” qiye jianli xinren’ (Sino–Indian Energy Cooperation Gradually Becomes a ‘Habit’ as Oil Companies Establish Trust), 22 August 2006, available at http://www.chinaenergy.gov.cn/news. php?id=8659 32 Stein Tonnesson and Ashild Kolas, op. cit. 33 India Daily, ‘India, China Plans for Oil Sector Cooperation at Early Stage,’ 26 August 2005, available at http://www.indiadaily.com/editorial/4370.asp

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joint-venture company, Mansorovar Energy Colombia Ltd. This is the first acquisition made jointly by ONGC and Sinopec.34 2. December 2005: CNPC and India’s ONGC jointly won a USD 573 million bid to acquire 37 per cent of Petro-Canada’s stake in Syrian oilfields (with 50:50 equity).35 There are also several projects in which both Indian and Chinese oil firms have equity stakes: 1. Iran: Sinopec 51 per cent stake and ONCG 29 per cent stake in the large Yadavaran oil field. 2. Sudan: CNPC (40 per cent), Petronas (Malaysia), Sudapet (Sudan), and ONGC (26 per cent stake bought in 2003)36 are part of the Greater Nile Petroleum Operating Company with assets in Sudan. 3. Cote d’Ivoire: Operator Vanco Energy, Sinopec Overseas Oil & Gas Ltd. (27 per cent), ONGC Videsh Ltd., Petroci Holding, and Oil India are exploring oil block C1-112.37 India and China also have somewhat complementary comparative strengths in several energy-related technologies, and these

34 Asia Times, ‘India, China Work Out New Energy Synergies,’ 26 September 2006, available at http://www.atimes.com/atimes/South_Asia/HI26Df01.html 35 Business Standard, ‘ONGC, CNPC Win Joint Bid for Syrian Oil,’ 21 December 2005, available at http://www.business-standard.com/common/storypage.php?sto ryflag=y&leftnm=lmnu1&leftindx=1&lselect=1&chklogin=N&autono=209178 36 Cindy Hurst, ‘China’s Oil Rush in Africa’ (International Institute for the Analysis of Global Security, 2006), 7, available at http://leav-www.army.mil/fmso/ documents/chinainafrica.pdf 37 Vanco News, ‘Vanco Announces Drilling Plans for Block CI-112,’ 16 December 2004, available at http://www.rigzone.com/news/article.asp?a_id=18785. Various stages of cooperative efforts between Indian and Chinese firms are also in evidence in other parts of the energy sector such as gas, technology development, and so forth. Reports on the key projects can be found in: http://www.uofaweb.ualberta.ca/ chinainstitute/nav03.cfm?nav03=44178&nav02=43874&nav01=43092; Asia Times, ‘India, China Work Out New Energy Synergies,’ 26 September 2006, available at http://www.atimes.com/atimes/South_Asia/HI26Df01.html; The Hindu, ‘Indian Firm Taps China’s Appetite for Green Energy,’ 16 March 2006, available at http:// www.hinduonnet.com/2006/03/16/stories/2006031604881600.htm; Zhang Lijun, ‘Hezuo cai neng gong ying,’ Beijing zhoubao, 23 October 2006, available at http:// www.beijingreview.com.cn/06-CN/06-10-23/w-1.htm

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provide potential avenues for additional cooperation. Indian expert Siddharth Varadarajan notes that the Chinese have pioneered oil recovery technology, which helps to maintain production at ageing oilfields such as Dagang and Daqing at levels far higher than Indian fields of comparable vintage. The Chinese side also excels in basin evaluation and drilling rigs. Indian companies have an advantage in IT-enabled E&P services. There is, therefore, scope to work together if the Indian security establishment reduces its concerns about the involvement of Chinese expertise in India’s domestic, particularly its offshore, energy locations. The two countries also need to cooperate if they are to develop pipelines within the region, the use of backhaul cargoes in very large crude carriers and swaps to jointly source crude from distant sources such as West Africa and Venezuela.38

An Asian gas grid and oil market There are numerous straws in the wind concerning steps to develop an Asian regional energy market that both improves Asia’s access to energy and reduces Western influence over Middle East oil and gas. The Indian government has itself begun to talk of an Asian gas grid and oil market, and its proposals are finding traction not only with major oil importers like China and South Korea but also with producers.39 An ambitious USD 22.4 billion project, introduced in New Delhi in November at an Asian energy ministers’ round table, would entail the construction of several pipelines. The grid has four principal elements. The first would extend the existing Baku– Tbilisi–Ceyhan pipeline system—originally conceived by the United States as a means of shipping Central Asian hydrocarbons westwards—down to the Red Sea via Syria, Jordan, and Saudi Arabia, allowing Caspian crude to be exported easily to the Indian Ocean littoral. Second is the famous Iran–Pakistan–India pipeline, with the possibility of two additional sourcing spurs, one from the

The Hindu, ‘India, China and the Asian Axis of Oil,’ 24 January 2006, available at http://www.hindu.com/2006/01/24/stories/2006012403181000.htm 39 International Herald Tribune, ‘India Casts a Wide Net for Energy,’ 25 January 2006, available at http://www.iht.com/articles/2006/01/24/business/DRESOURCE. php 38

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Caspian–Turkmenistan region to Iran, and the other from Turkmenistan via Afghanistan. The third element would be a pipeline system connecting eastern India to Myanmar and southwestern China, with one connection running from Sittwe on the Burmese Bay of Bengal Coast to Mizoram, Manipur, and Assam into China, eventually connecting up to the West–East China gas pipeline near Shanxi, and the other connecting from Yangon to Kunming. The fourth element would involve laying pipelines that would connect the Sakhalin deposits in Russia to Japan, China, and South Korea.40 Extensions of pipelines to China (such as extending the Iran– Pakistan–India and Turkmenistan–Afghanistan–Pakistan–India pipelines from India to China) would benefit both India and China. According to the then Petroleum and Natural Gas Minister Mani Shankar Aiyar, a trans–South Asian pipeline would let China tap into Iranian and Central Asian gas. In turn, India could recoup the transit fees it pays to Pakistan from China. Moreover, the fact that the same pipeline which supplies India would also go on to feed China would provide a virtually iron-clad guarantee for India against Pakistan’s turning off the tap.41 China is actively considering various approaches to the development of Asian regional energy capabilities. In a background paper, the Development Research Centre of China’s State Council suggested creating an Asian counterpart to the International Energy Agency through cooperation among China, India, Japan, South Korea, and other nations. India said it would support China’s proposal.42 Furthermore, Indian experts argue that there is a need and urgency to establish an Asian oil market. They have noted that currently the international oil market is not a truly free market— with both OPEC suppliers and OECD importers. Western benchmark crude prices monopolize oil prices such that ‘oil exported to Asia from the Persian Gulf costs as much as USD 2 a barrel more’.

Ibid., and see The Hindu, ‘Energy Key in the New Asian Architecture,’ 25 January 2006, available at http://www.thehindu.com/2006/01/25/stories/200601250660 1300.htm 41 See Hindustan Times, ‘India, China Vie for Energy Influence,’ 17 January 2005, available at http://www.hindu.com/2005/01/17/stories/2005011706001100.htm 42 PTI, ‘India, China Plan Asia Energy Agency,’ 13 January 2006, available at http://www.rediff.com/money/2006/jan/13oil.htm 40

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Moreover, speculators who trade in oil futures on the New York Mercantile Exchange and International Petroleum Exchange, have propelled oil prices to absurdly high levels. The huge and growing US military presence in Asia also underpins the petro–dollar unipolar system, which is considered a major source of instability and violence. Other circumstances also make establishing an Asian market potentially attractive for the participants. Central Asia has emerged as a major energy producer, and India and China are two of the fastest growing economies in the world. Traditional suppliers, too, may gain from an Asian market, especially if this means greater stability and predictability in prices. Saudi Arabia likes high prices but not the ones that are ‘unreasonably high’. This makes more understandable the fact that the first overseas tour of King Abdullah was to China, India, Pakistan, and Malaysia, and that his agenda, at least in Beijing and New Delhi, involved energy-related initiatives like China’s proposed SPR.43 Iran wishes to shift its oil and gas trade to the Asian region to reduce its market dependence on the increasingly hostile West. Speaking at a conference in Delhi, Iranian Oil Minister Bijan Namdar Zanghaneh proposed the creation of an Asian Bank for Energy Development to finance energy projects in Asia (like the proposed Iran–Pakistan–India gas pipeline). With particular reference to growing markets like China and India, the Iranian minister called for a lower price for energy supplies, from Asian producers to Asian consumers.44

PROBLEMS WITH AND LIMITS TO INDIA–CHINA JOINT COOPERATION EFFORTS Despite the above initiatives and discussions, cooperation between India and China may remain very limited. India is concerned that China and Chinese NOCs will not respect their MOUs. China has historically out-manoeuvred India politically and financially, and the Chinese NOCs may have few incentives to share their trade The Hindu, ‘India, China and the Asian Axis of Oil,’ 24 January 2006, available at http://www.hindu.com/2006/01/24/stories/2006012403181000.htm 44 Asia Times, ‘India finds a $40bn Friend in Iran,’ 11 January 2005, available at http://www.atimes.com/atimes/South_Asia/GA11Df07.html 43

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information and strategies with the Indian oil companies. Myanmar is a case in point: when China was hosting India’s then petroleum minister Mani Shankar Aiyer in Beijing, it was also secretly dealing with Yangon to access gas that India has coveted.45 Moreover, the MOUs signed between China and India on energy cooperation may actually leave India as a junior partner in any joint deals. India and China may, in short, still compete with each other for the primary, most lucrative oil fields.46 Indeed, S.C. Tripathi, the Indian Petroleum Secretary, notes the change has been from ‘competing wherever possible’ to ‘working together whenever feasible’.47 India–China cooperation clearly does not exclude competition.48 The post-MOU signing Sino–Indian competition in Russia also suggests the limits of cooperation. Earlier this year, TNK–BP, the Anglo–Russian oil venture, was selling its subsidiary Udmurtneft, a medium-sized company in Russia with 550 m barrels of reserves. On 24 February 2006, Sinopec submitted a bid. Two months later, India’s largest oil company ONGC submitted a joint bid with a Russian company ITERA. Sinopec then sought out the Russian company Rosneft to join in its bid. In the end, Sinopec paid approximately USD 3.5 billion for a company widely thought to be worth only USD 3.0 billion.49 In sum, India and China have many parallel needs and concerns in their oil sectors, and they are broadly following basically similar strategies for addressing their energy security needs. China in general has the stronger hand to play, given the greater capacities of its NOCs and the larger economic role that it plays in Asia and globally. Some

45 Stein Tonnesson and Ashild Kolas, op. cit., Appendix provides a detailed case study of Burma, placed between India and China. See also: Asia Times, ‘India, China Work Out New Energy Synergies,’ 26 September 2006, available at http:// www.atimes.com/atimes/South_Asia/HI26Df01.html 46 Emerging Markets Daily News, ‘Indian/Chinese Co-operation Unlikely to Last,’ 22 September 2006, available at http://www.uofaweb.ualberta.ca/chinainstitute/ nav03.cfm?nav03=50889&nav02=43874&nav01=43092 47 Asia Times, ‘India, China Pin Down $573m Syria Deal,’ 22 December 2005, available at http://www.atimes.com/atimes/China_Business/GL22Cb06.html 48 India Daily, ‘India, China Plans for Oil Sector Cooperation at Early Stage,’ 26 August 2005, available at http://www.indiadaily.com/editorial/4370.asp 49 Yi Qiang, ‘India’s Grab for Petroleum Disturbs Sino–Indian Cooperation, Future Oil Needs Comparable to China’s,’ Caijing News, 3 June 2006, available at http:// biz.cn.yahoo.com/060603/16/hlop.html

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Chinese efforts to acquire equity oil (and gas) have discomfited India, raising both economic and security concerns. But the two countries have also discussed and to a limited extent implemented bilateral cooperative efforts. The really major potential cooperative initiatives— especially those to create more of an Asian integrated energy market with supporting infrastructure—are still in the future and will require strategic political and economic decisions to bear fruit.

US OIL STRATEGY VIS-À-VIS CHINA50 The United States is the largest oil importer and most consequential player among all consumers in the international oil markets. The United States also has major security interests and broader foreign policy goals that will be deeply affected by the nature of its relationship with China and the interaction of that relationship with China’s energy policies. A sophisticated US strategy should utilize the full array of tools available in a reasonably coordinated fashion to influence China’s energy outcomes. The goals of such a strategy should be: 1. to build the mutual trust necessary for effective cooperation; 2. to increase Beijing’s willingness to work with US counterparts to develop and deploy capabilities to address China’s key energy problems; 3. to enhance incentives and opportunities for China to follow the desired energy strategy; and 4. to help China develop specific technical and policy capabilities that will better enable it to achieve desirable energy outcomes. The United States has vital national interests entailed in China’s energy future. China’s choices in the energy sector will affect the availability and price of energy in the international market, the level of diplomatic and security tension over energy access, and the quality of the global environment. To begin serious efforts to improve China’s energy outcomes, policymakers in Washington must first fully accept the reality that

This analysis in far greater detail is available in Kenneth Lieberthal and Mikkal Herberg, op. cit., pp. 24–42. 50

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such improvement is in US interests. If, however, US policymakers believe that it is in the interests of the United States to increase the hurdles to sustainable development that China faces, then effective measures to work with China in this vital issue area will prove unattainable. The full case for cooperation has yet to be made persuasively across the US government. For those who believe that such cooperation conforms to vital US interests, the following seven initiatives highlight the preferred future for China’s energy strategy: 1. Commitment to market-based approaches to acquiring energy resources in the international market. This commitment includes reduced efforts to lock up foreign energy resources through purchases of equity assets in foreign fields. 2. Willingness to cooperate with other consumers to increase price stability. This measure recognizes that, as one of the world’s two largest oil consumers, China can facilitate the adoption of measures to leverage producers to enhance energy availability and price stability. Coordination with the United States in future releases from respective SPRs, for example, could play an important role at a time of artificial supply disruptions. 3. Openness to applying new technology and sustaining the conditions to encourage its development and use. This initiative includes embracing relatively supportive rules to attract or develop new technology, and enhancing protections for intellectual property rights for those new technologies. 4. Improved systems optimization. The United States has an interest in greater efficiency of China’s overall energy system. China, however, remains relatively weak in systems analysis, targeted at optimizing allocation of resources across an array of complexly integrated efforts. This is a core strength of both the US government and the US energy companies. 5. Effective conservation measures. China’s political economy is sharply skewed to favour production over conservation. Increasing the effectiveness of conservation efforts will require that China studies experiences elsewhere, incorporates new technologies and sophisticated regulatory frameworks, and makes difficult changes in the incentive system for local government officials.

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6. Improvements in overall energy efficiency per unit of GDP. Even though high on China’s current agenda, efficiency improvements will require major technology imports, better systems optimization, changed local government incentives, and substantial budgetary funding.51 7. Improvements in environmental outcomes in the energy sector. Coal accounts for 68 per cent of China’s current energy use and this figure will drop by less than 10 per cent by 2020. Given China’s expected GDP growth rates over this same period, absolute quantities of coal consumed will increase substantially. The country’s environmental situation is so severe as to require determined efforts both to adopt environment friendly technologies (such as carbon capture and sequestration) and to increase the shift towards other energy sources.

The issue of trust The issue of trust is both fundamental and nettlesome. Most of the above suggestions for the formulation of US energy policy towards China require that Beijing trust the United States enough to allow effective cooperation on more than a project-by-project basis. The issue of trust becomes especially important in reducing Beijing’s acute security concerns regarding sourcing and transporting of its imported energy. An important aspect of Beijing’s sourcing strategy is rooted in distrust of US strategic intentions towards China’s energy security needs. State equity oil policy as well as the tough global competitive environment for China’s NOCs are driving Beijing into deals with problem states, but those very deals, in turn, themselves produce outcomes that further erode the trust between the United States and China. The US relationship with China is so wide ranging and complex that energy sector policy alone will not determine the degree of trust

51 Current plans call for China’s GDP to quadruple between 2003 and 2020. During the same time, however, China’s energy consumption is expected only to double. Since the adoption of that goal, energy consumption has actually risen at a rate considerably faster than GDP. In terms of energy use per unit of GDP, China currently lags far behind not only the industrialized countries but also certain developing countries such as India. Superior technologies that can substantially improve the PRC’s energy efficiency are already available elsewhere.

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that both sides bring to the table. The US rhetoric towards Chinarelated energy issues is, however, watched carefully in Beijing. Because energy sector policy priorities and related investments tend to be expensive, long term, and of vital importance, this type of perception can become a crippling obstacle to effective cooperation. Energy sector cooperation is, therefore, inevitably a hostage to the broad sweep of US–China relations, including many seemingly unrelated, diplomatic, security, economic, and other issues. Within this overall relationship the specific level of cooperation in energy sphere can play a significant role in either enhancing or reducing overall mutual trust. Both sides should take greater cognizance of this important reality.

Multilateral initiatives for energy cooperation China and the United States have already undertaken a substantial number of bilateral cooperative efforts in the energy sphere. Many of these have taken place under the aegis of the Fossil Energy Protocol (extended in April 2005 and in effect until 2010) between the United States and China and involve exchanges and other activities across the board in energy exploration and use.52 Such ongoing activities are helpful both in providing forums for technical exchanges and for improving mutual understanding of the problems involved. By linking up appropriate experts on each side, these cooperative efforts, therefore, lay the necessary groundwork for effective identification of key problems, and provide the basis for future cooperation on a significant scale. The problem to date is that such exchanges have tended to occur below a policy level in each government—neither side appears to have meaningfully raised the issue of US–China cooperation in the energy sector to a policymaking level, nor has either secured a champion for such cooperation at that level. A high level of engagement in the issue is, however, critical. No sector is more intimately tied to the overall fate of the economy— and to both social outcomes and national security—than is energy. At lower bureaucratic levels, specialists in energy have little For more information, see the US Department of Energy’s summary of the activities under this protocol: http://fossil.energy.gov/international/International_ Partners/China.html

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difficulty identifying win-win situations for technology sharing, joint exploration, efficiency and conservation approaches, and so forth. The resulting initiatives remain politically weak however, until they are integrated into larger policy issues such as those concerned with equity among localities, economic growth strategies, environmental trade-offs, and international security. Policy-level engagement is what is required to cast energy sector initiatives in terms that support, rather than diverge from the strategies and priorities in these broader issue areas.53 There are at least three multilateral initiatives that the United States can take to increase mutual trust and understanding with China in the energy sphere—these initiatives involve the Group of Eight (G-8), IEA, and a Northeast Asia Security Community. Put simply, US initiatives to make China a full member of the G-8, to bring it fully into the cooperative programme of the IEA for coping with threatened or actual oil supply disruptions, and to take the initial steps towards creating a Northeast Asian Security Community, could accomplish three important goals: 1. Each effort would signal a US readiness to have China play a major role in multilateral energy-related regimes for the long term. 2. Each would give China a role in a regime that can address in a serious way energy issues in which China is in any case an important factor. 3. Each would require that China takes serious decisions that would in turn signal its own willingness to look to long-term cooperative relations with the United States and others on energy and other vitally important international issues. None of these initiatives would be easy or straightforward. All would require creative thinking and a great deal of concerted diplomatic initiative. Such efforts must therefore occur as part of a

Ongoing cooperation at the specialist level may at some point capture the attention of key policymakers, especially if there is a general shift in policy priorities at the top. Waiting for such an eventuality is not, however, a good basis for current policy. It is better to develop an approach that brings the related issues to high-level policy attention now.

53

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high-level strategy and force leading officials to confront basic issues that integrate US–China energy cooperation prospects into larger political and national objectives. In that context, the knowledge gained from mid-level exchanges can be put to effective use in the service of national policy goals. Otherwise, such knowledge is more likely to stay largely bottled up in the specialist community, with disappointingly few spillover effects. Given the many problems in US–China bilateral relations, multilateral initiatives also offer a potentially very important basis for building mutual trust in this sphere.

UNITED STATES AND INDIA–CHINA COOPERATION The United States, India, and China share many crucial interests in the future energy world. Because they all are major oil importers and will remain so for decades to come, they share interests in promoting the leverage that is available to importers over exporters. They also require basic political stability in the Middle East. They have national interests tied in with energy conservation and improved efficiency. To the extent that cooperation among any two of the three countries promotes these goals, the United States should welcome that cooperation and encourage it. The United States nevertheless has several concerns about India–China cooperation in the energy sector, especially in the oil sector, which are as follows: 1. As noted earlier, Washington has criticized Beijing for being willing to ignore the behaviour of governments that are bad actors in order to access their energy resources. Sudan, Iran, and Myanmar are three examples that Americans frequently cite in this regard. The major concern is that China provides these countries with resources that inevitably reduce the impact of any international sanctions and that China might use its international political leverage (especially as a Perm Five member of the UN) to prevent tough international actions against inappropriate behaviour. But India is also prepared to engage in energy cooperation with these same states. Even though India is not able to veto UN Security Council resolutions, it nevertheless provides these states with additional

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resources and security through its investments and purchases. Where, as in the recent case of Syria, China and India jointly do an energy project with a government that the United States feels warrants isolation and opprobrium, America is even more concerned.54 2. Some in the US government have serious concerns about China’s long-term intentions and the resultant impact on the international arena. Those individuals seek, where possible, to assure that the key countries around China have strong governments and economies. America’s strategic outreach to India, especially during the George W. Bush administration, appears to be motivated in part by such considerations, and the US–India agreement on civilian nuclear power gained favour within the administration in part on this basis. Individuals who have this relatively pessimistic view of long-term Chinese development, and of US–China relations over the coming decades, inevitably do not welcome Indian–Chinese cooperation in equity oil and gas development or in nuclear power. 3. On a very fundamental level, the United States sees an optimum energy future in terms of enhancing the role of market forces in the allocation of oil (and gas) internationally. Efforts that aim to reduce Western access to resources, and leverage over prices by constructing an integrated Asian energy market and related infrastructure are viewed as market-disrupting and unwelcome. This is all the more true when the key players in China and India are NOCs that are supported by diplomatic initiatives (including aid that is effectively tied to energy deals), thereby reducing the importance of underlying market forces in allocating resources. In sum, America retains concerns about China’s future and sees a strong, vibrant India that has a wide-ranging, dynamic relationship with the United States as in America’s interests. But the international energy situation is very complex and no single principle will suffice to guide all actions. On the one hand, US interests in how China’s energy future evolves will produce substantial efforts both bilaterally and multilaterally to cooperate with China to improve energy efficiency 54 The Hindu, ‘U.S. Tells India to Back Off Syria Oil Deal,’ 28 January 2006, available at http://www.hindu.com/2006/01/28/stories/2006012813250100.htm

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and to stabilize prices and supply lines. In this vein, forms of Sino– Indian energy cooperation that enhance the goals of efficiency, conservation, and multilateral cooperation to cope with potential supply disruptions are generally welcome in America. But on the other hand, Sino–Indian cooperation that enhances China’s ability to act outside of the market—and especially to provide resources and other support to governments the United States considers to be bad actors—will irritate Washington and potentially lead to efforts to reduce or even reverse these outcomes.

9 CHINA’S QUEST FOR ENERGY SECURITY IMPLICATIONS FOR THE WORLD Sudha Mahalingam

INTRODUCTION: THE CONTEXT For some years now, global energy equations have been undergoing significant realignments. At the core of this shifting paradigm is a complex web of factors: geopolitical, geostrategic, and technological. Salient among them is China’s relentless march towards what it perceives as its manifest destiny—a global super power status.1 China’s low per capita energy consumption base, subsidized domestic energy prices, and an energy-intensive growth paradigm foretell quantum leaps in energy demand, so much so, that its future stature in the international community is critically dependent upon its unfettered access to adequate energy supplies. Not surprising, therefore, that energy security has become an important imperative for China in recent years, informing its domestic and foreign policies alike. The Chinese preoccupation with energy security is rewriting not only the geopolitics of the entire Asian region, but also the rules of the game in global energy markets. The direction and dimension of China’s quest for energy security is determined by certain critical contexts. Foremost among them is the country’s chosen model of development, one that is conventional, conformist, and energy-intensive. Instead of leapfrogging to a clean and sustainable growth path that is better-suited to its domestic Deng Xiaoping first articulated this vision and began the process of liberalization of the Chinese economy to help China realize this vision.

1

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resource endowments, China has chosen to tread the familiar path of Western model of development. The Chinese economy’s growth is focussed on manufacturing and heavy industries, on ultramodern infrastructure and more numerous and bigger cars, on high-rises and rapid urbanization—all energy-guzzling activities. A related context is the visceral fear of the Chinese leadership of not being able to access adequate quantities of energy to sustain this growth, which is critical to the legitimacy of the Communist Party.2 Second, having awakened to a market economy after decades of socialist slumber, China seems to be a nation in a hurry. Not only has the country’s pace of development in the last two decades been impressive, but there are also signs that it would accelerate in the coming years. Perhaps the Chinese leadership believes that the first two decades of this century are critical to its transition to ‘global power’ status. China is targeting an accelerated growth rate of over 9 per cent for the next 20 years. This, therefore, adds a sense of urgency to the country’s quest for energy security. Third, China’s integration with the global economy does not seem to extend to the energy sector. Securing the country’s energy needs is still the domain and responsibility of its National Oil Companies (NOCs). Even as it has introduced tentative domestic market reforms in the energy sector, China is wary of placing its trust on global energy markets, a pointer to the importance the Chinese leadership assigns to energy security. No wonder then, the Chinese political leadership extends its supporting arm to its NOCs. All the devices at the command of the State—military, strategic, diplomatic, and policy instruments—are deployed to pursue the objective of energy security. And finally, China’s focus on ‘peaceful development’—a subtler variation of the earlier slogan of ‘peaceful rise’ originally coined by Deng Xiaoping—somewhat limits the country’s options. China seems to be following a conscious policy of avoiding conflict and resolving outstanding differences wherever possible, so as to provide a conducive environment for growth. Perhaps this explains why China has resolved its border issues with almost all its neighbours and in regions where resolution is difficult, explicit or tacit acquiescence

K. Lieberthal and M. Herberg, ‘China’s Search for Energy Security: Implications for US Policy,’ NBR Analysis 17, no. 1, April 2006, p. 11.

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of ‘status quo’—as in the South China Sea, East China Sea and India—has helped it focus on economic growth. In its pursuit of energy security, China seems to have adopted, to the extent possible, a non-confrontationist approach. In the backdrop of the context outlined above, this article outlines in Part II the strategies adopted by China, both in the domestic market as well as in the international sphere. Part III examines the implications of China’s energy quest for the other major energy importers in the world, including India. Part IV identifies areas of potential conflict as well as cooperation, specifically between India and China. Part V lists the main conclusions.

CHINA’S ENERGY SCENARIO GROWING SHARE OF HYDROCARBONS Even though China has overtaken Japan to become the second-largest oil consumer in 2005, coal still claims primacy in China’s energy mix, accounting for as much as 67 per cent of the country’s total energy mix. Only 6 per cent of China’s primary energy consumption is supplied by imports. This has prompted some scholars to argue that China’s energy vulnerability is exaggerated since it is selfsufficient in coal.3 However, this argument needs to be placed in context. Although coal does supply a substantial chunk of domestic energy demand, the fast-growing sectors of the Chinese economy— such as transportation—are essentially hydrocarbon-led. The share of hydrocarbons in the total energy mix grew from virtually zero in 1992, to 33 per cent in 2005. Transportation sector is the single most significant contributor to this growth. From 229,000 vehicles in 1999, China’s automobile sales increased to 2.04 million in 2005. By 2010, China is expected to have 57 million private automobiles; and the number will double by 2020.4 Besides, transportation

Zhong Xiang Zhang, China’s Hunt for Oil in Africa in Perspective (Honolulu: East– West Center, September 2006). 4 Jiang Wenran, ‘Fuelling the Dragon—China’s Quest for Energy Security and Canada’s Options,’ China Institute, University of Canada, January 2006, available at http://www.uofaweb.ualberta.ca/chinainstitute//pdfs/fuelingthedragon.pdf 3

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bottlenecks prevent increases in the share of coal in China’s energy basket. China’s manifest reluctance to expand its rail networks implies greater role for hydrocarbons. Table 9.1 gives estimates of China’s oil consumption made by different agencies. Although there is variation in the estimates, it is abundantly clear that the share of hydrocarbons is set to grow steeply and along with that, the share of imports too will increase. TABLE 9.1 China’s oil demand (MBD)

Actual (BP 2005) IEA (WEO 2004) DOE (IEO 2005) East-West Center (3/05) IEE Japan (3/04) Merrill Lynch (11/04)

2000

2004

5.0

6.7

2010

2020

2020 Imports

Import share

7.9 9.2 8.6 7.3

11.6 12.3 12.3 12.0

7.1 8.8 8.8 8.5

67% 72% 72% 71%

10.0

Source: NBR Analysis, April 2006.

China’s current oil consumption exceeds the combined consumption of Japan, South Korea, India, and Indonesia. In 2005, China consumed 7 million barrels per day (MBD) of oil, which indicates that probably the estimates given above are on the conservative side. Even so, it is far behind the United States, which consumes 22 MBD, more than three times as much as China. However, oil consumption is growing rapidly. In 2003 and 2004, China clocked oil demand growth of 11 and 13 per cent, respectively, although it slowed down slightly in 2005. Energy Information Administration (EIA) estimates that China will account for 38 per cent of global incremental demand in 2006.5

GROWING SHARE OF IMPORTS China’s soaring oil demand created a panic in global oil markets, especially at a time when oil prices were already spiralling. Energy analysts have been quick to blame China for the soaring oil prices

5

http://www.eia.doe.gov/emeu/cabs/China/pdf.pdf

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although a combination of factors including China’s growing demand such as speculation, Iraq war, terror premium, inadequate refinery capacity, and so on has contributed to the price spiral. If domestic production stagnates at current levels, imports will supply at least two out of three barrels by 2020. Table 9.1 depicts the widening gap between domestic oil production and consumption. The increasing share of hydrocarbons is occurring at a time when domestic oil production is stagnating and is set to even decline. Daqing, China’s largest oil field discovered four decades ago, is already on the decline. It now produces around 930,000 barrels a day, followed by Shengli (520,000 barrels a day). China’s restrictive policy regime wherein NOCs are authorized to hold majority stakes is not considered conducive enough for international oil companies (IOCs) to invest in exploration in that country. Therefore, virtually all of China’s incremental oil demand has to be met by imports which have grown to 40 per cent of total consumption. Not only do they pre-empt a growing share of its foreign exchange earnings, but high energy costs also make Chinese exports expensive, impeding their ability to compete in global markets. High oil prices also fuel inflation and impede economic growth, another area of concern for China. The share of gas in China’s energy basket is miniscule at 2 per cent even though the country seems to be endowed with gas reserves—Sichuan, Daqing, Changqing, Liahoe, Tuha, and the Tarim Basin in Xinjiang, which is estimated to contain 48 tcf of gas reserves. The most promising basins are situated in Western and north-central China, necessitating substantial investments in pipelines. Petrochina, an NOC, is building a 1,400-km gas pipeline project linking the Shan-Gan-Ning gas basin to Shandong Province in Eastern China via Beijing. The other pipeline projects are SeNingLan from Sebei in Qinghai to Lanzhou in Gansu (already operational), and Zhong Wu pipeline from Zhongjian in Sichuan Province to Wuhu in Hubei Province (under construction). Increasing the share of gas in China’s economy requires massive investments in pipeline infrastructure. An international consortium of Royal Dutch/Shell, Gazprom, and China Light and Power has built a gas pipeline from Xinjiang to Shanghai, covering a distance of 4,200 km—the second-largest infrastructure project in China, after the Three Gorges Dam—at an estimated cost of USD 18 billion. Although the cost of carrying gas over such long

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distances would be high enough to make imported liquefied natural gas (LNG) a more economical option, China’s determination to go ahead with the project indicates that when it comes to energy security, the country prefers high-cost self-reliance to reliance on global markets. Besides, China is also pursuing a ‘Develop the West’ policy to bring the energy-rich but development-poor regions on par with the metropolitan provinces in the east and south. However, despite these efforts it is estimated that by 2020 China will be importing as much as 49 per cent of its gas consumption.6 In 2004, China sealed a USD 25 billion deal with Australia’s North West Shelf to import 3.7 million tonnes of LNG every year at its Guangdong terminal. However, its earlier plan to build a series of LNG terminals for importing gas have been shelved after global gas prices soared in the wake of spiralling oil prices. Affordability is an important criterion for China’s energy security.7

NUCLEAR POWER China is also seriously examining non-fossil fuel options like nuclear power and renewables. Even though hydropower now accounts for about 18 per cent of China’s electricity mix, two large dams—the 18.2 GWe Three Gorges Dam and the 15.2 GWe Yellow River project—will add substantially to the mix in the next few years. Nuclear power, currently an insignificant share of China’s electricity generation, is also likely to grow rapidly in the next few years. China has just placed an order for four Westinghouse AP 1000 reactors to be supplied by the US-based Westinghouse Corporation, a deal that is said to be the largest business deal in the history of nuclear power.8 The reactors, to be built at Zheijiang and Guangdong provinces are expected to commence commercial production from 2013. China has set itself a target of 30,000 MW of nuclear capacity by 2020. Beijing is also likely to join the Generation IV International Forum (GIF), a US-led programme to minimize waste and improve 6 John Daly, The Dragon’s Drive for Caspian Oil (Jamestown Foundation, 13 May 2004), available at http://www.jamestown.org/news_details.php?news_id=48 7 Miyamoto Akira and Ishiguro Chikako, Pricing and Demand for LNG in China (Oxford, UK: Oxford Institute of Energy Studies, January 2006). 8 http://www.iht.com/articles/2006/12/17/business/nuke.php

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the efficiency of atomic reactors. The GIF has identified six high-priority reactor types whose technology will be further developed through international effort.9

RENEWABLES Until recently, renewable energy received little attention from Chinese authorities. However, the new Renewable Energy Promotion Law that came into effect from 2006 seems to hold out a glimmer of hope for the future of renewable energy in China. The law clearly vests the responsibility for implementing and managing renewable energy development to energy authorities of the State Council. The government budget establishes a renewable energy development fund to support Research and Development (R&D) and resource assessment. The government encourages and supports various types of grid-connected renewable energy power generation. Grid enterprises shall purchase the power produced with renewable energy within the coverage of their power grid and provide grid-connection service. The Chinese government has set a target of 10 per cent share by 2020 for renewable energy in the country’s gross energy consumption.10 It is noteworthy that China regards hydropower as renewable energy and, therefore, the target of 10 per cent may not be as ambitious as it may seem (see Table 9.2). TABLE 9.2 Expected growth of renewables in China under the new law Sector

Current capacity (end of 2004)

Expected capacity in 2020

Wind power

560 MW

20,000 MW

Solar energy

50 MW

1,000 MW

2,000 MW

20,000 MW

7,000–8,000 MW

31,000 MW

Biomass Hydro power

Source: China People’s Daily, 1 March 2005.

9

Ibid. http://www.guardian.co.uk/environment/2005/nov/08/energy.renewableenergy

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DOMESTIC INITIATIVES IN PURSUIT OF ENERGY SECURITY REORGANIZATION

OF

DOMESTIC HYDROCARBON INDUSTRY

China has reorganized its petroleum industry to create major NOCs which can take on global IOCs. Most state-owned oil and gas assets have been cross-assigned to form two vertically integrated firms: China National Petroleum Corporation (CNPC) and China Petroleum and Chemical Corporation (Sinopec), with each of them operating a range of local subsidiaries. The other major state sector firm is the China National Offshore Oil Corporation (CNOOC), which handles offshore exploration and production and accounts for roughly 15 per cent of China’s domestic crude oil production. CNPC, Sinopec, and CNOOC—all carried out initial public offerings (IPOs) of stock between 2000 and 2002. However, the government maintains a majority stake in each, through stateowned holding companies bearing the same name. The reorganization of China’s NOCs has demarcated clear spheres of operation. Although CNPC and its affiliates tend to dominate in the north and west, Sinopec focuses on the south and CNOOC on offshore regions. Historically, CNPC has focussed mainly on oil and gas exploration and production, while Sinopec had been engaged in downstream activities such as refining and distribution. CNPC and Sinopec operate virtually all of China’s oil refineries and the domestic pipeline network. Like India, China too does not have an energy ministry. Coordination among China’s NOCs which together control trillions of dollars worth of assets is at best, patchy. However, it is setting up a special task force which will be based in an existing energy bureau at the National Development and Reform Commission and will be headed by Ma Kai, the minister in charge of the commission.11 Besides, in 2005, China also established a State Energy Office which reports to a new Energy Leading Group headed by

‘China to Set Up Energy Task Force as Planner Warns of Dire Power Shortage,’ Energy Bulletin, 7 March 2005, available at www.energybulletin.net

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no less than Premier Wen Jiabao himself.12 Therefore, it is expected that in future there will be a greater degree of coordination among the various actors in China’s energy sector. As part of its ‘Develop the West’ strategy, China has focussed on oil exploration efforts in the western provinces of Xinjiang, Sichuan, Gansu, and Inner Mongolia, as well as offshore fields in the Bohai Bay, Pearl River Delta, and South China Sea. In July 2006, PetroChina announced that it would open nine blocks in the Tarim Basin in northwestern China’s Xinjiang Uygur Autonomous Region for foreign companies to explore. The nine blocks cover more than 42,000 square miles, and according to CNPC hold an estimated 43.9 billion barrels of potential oil reserves.13 But owing to the remote location of these fields as well as the tax, royalty, and lease regime offered by China, the response so far has been rather lukewarm. The only exception has been the Bohai Bay region where exploration is being undertaken by CNOOC in association with ConocoPhillips. Other companies involved in oil exploration and production activities in the Bohai Bay region are Kerr-McGee, Apache, Chevron, and Royal Dutch Shell. Some independent analysts estimate that the Bohai Bay area holds more than 1.5 billion barrels of recoverable oil reserves.14 Import dependence exposes China not only to global oil price volatility and spikes, but also to potential supply disruptions, especially because, like India, China sources a substantial chunk (60 per cent) of its consumption from the Middle East—notably, Oman, Yemen, Iran, and Saudi Arabia. International Energy Agency (IEA) estimates that by 2015, 70 per cent of China’s imports will come from the Persian Gulf region. A substantial chunk of gas imports will also come from the same region, although this trend will be evident only after 2010. Apart from the vulnerability caused by excessive dependence on a single region—one that is perceived to be unstable—virtually all the tanker traffic bound for China passes through the Straits of Hormuz, Straits of Malacca, and the South China Sea, which are considered as chokepoints. In fact, more than half of China’s imports will have ‘China Creates Office to Safeguard Energy,’ China Daily, 28 April 2005. See http://www.eia.doe.gov/emeu/cabs/China/pdf.pdf 14 Ibid. 12 13

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to traverse the Malacca Straits. Therefore, security of sea lanes is as much a concern as access to adequate quantities of energy itself.

ENERGY SECURITY AND FOREIGN POLICY The Chinese leadership appears to be acutely conscious of the country’s energy vulnerability. In the last two decades, energy security concerns have informed and dominated China’s diplomatic, strategic, commercial, and scientific initiatives. China’s foreign policy initiatives now have a distinct and deliberate energy component. China’s energy diplomacy has a twin objective—of moving away, to the extent possible, from middle-eastern suppliers, and at the same time, avoiding confrontation with the United States. Avoiding situations and transit routes where China’s energy supplies would be vulnerable to disruptions by the United States seems to be implicit in China’s energy-related foreign policy. China’s energy-related foreign policy has spanned the entire spectrum—from strengthening bilateral political and diplomatic relations with both oil exporters and oil-rich countries opening up their upstream sectors for overseas investments. China’s overseas oil asset acquisition has taken it far and wide in all directions, including Central Asia, the Middle East, Africa, and Latin America. CNPC has acquired exploration and production interests in 21 countries spanning four continents and plans to further invest USD 18 billion in foreign oil and gas assets between 2005 and 2020.

CHINA

AND THE

CASPIAN/CENTRAL ASIA

The Caspian region is estimated to have at least 2.7 per cent of world’s oil and 7 per cent of gas deposits. Both history and geography have conspired to make the region the playground for what is referred to as the ‘great energy game’ in which the United States, Russia, and China jostle for their share of spoils. While most transport routes for Caspian oil and gas are controlled by Russia—thanks to the legacy of history—IOCs have managed to defy geography to build a pipeline that ferries Caspian oil all the way to the Turkish Mediterranean port of Ceyhan, from where it is shipped to European and North American markets. In Central Asia and the Caspian, China has adopted a two-pronged approach, multilateral and bilateral. The Shanghai Cooperation

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Organization (SCO) is at the core of the former. Originally formed as a joint front against terrorism, energy cooperation is increasingly becoming the focus of SCO. Initially called the Shanghai Five, the SCO was formed in 1996 largely to demilitarize the border between China and the former Soviet Union. In 2001, the organization added Uzbekistan and renamed itself the SCO. Mongolia won observer status in 2004; Iran, Pakistan, and India became observers the following year. The SCO has since then risen in regional prominence, tackling issues of trade, counterterrorism, and drug trafficking. But increasingly, the SCO is viewed as joint Sino–Russian effort at countering the growing US influence in the energy-rich Central Asian and Caspian regions. In 2005, the prime ministers of member states and ministerial level representatives of observer states met in Moscow when the inter-bank SCO Council was created to fund future joint projects. Although the specific projects themselves were not identified then, SCO Executive Secretary Zhang Deguan indicated that these would be energy projects. On the bilateral front also, China has made significant inroads into the Caspian region. In 2005, China’s CNPC acquired Petrokazakhstan from a Canadian company, after it outbid India’s ONGC Videsh Ltd. (OVL). The assets include 11 discovered oil fields and seven exploration licences in Kazakhstan, by far the most oil-rich country in the Caspian. In December last year, China completed the construction of its first-ever trans-national pipeline, running 620 miles from Central Kazakhstan to deliver 200,000 barrels of oil a day at Alashankou in Xinjiang. The pipeline was developed by the Sino–Kazakh Pipeline Company, a 50:50 joint venture between CNPC and Kazakhstan’s KazTransOil. Interestingly, half of the imported oil comes from Kazakhstan and the other half is supplied by Russia. In Azerbaijan, Chinese companies are engaged in onshore fields. CNPC has invested USD 800 million in developing a section of the Kursengi–Garabagly field, and has signed additional contracts to develop other sites worth an additional USD 120 million. China’s Shengli Oil Company signed a production-sharing contract with the State Oil Company of Azerbaijan to explore and develop the Pirsaat oil field. Shengli will also help Azeri companies in extending the production life of old deposits in the Karamay oil fields. Turkmenistan is the other Central Asian country in which China has an energy interest. China hopes to build a pipeline from

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Turkmenistan to its western provinces to ferry gas to feed into the West-East gas pipeline to Shanghai.

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RUSSIA

With Russia, China has an ambivalent energy relationship. After much flip-flop, Russia has finally decided to build the oil pipeline from Angarsk to Skovordino on the Russian Pacific Coast, very close to the Chinese border. Japan, which had set its sights on Russian oil through the pipeline, has been left virtually fuming. Nevertheless, Russian oil flowing through the pipeline could even be shipped to the West Coast of the United States though China might consider itself the intended beneficiary. For the moment, China gets Russian oil in railway wagons, but was hoping for substantial increase in supplies through a pipeline. Recently, China began to fill up its Strategic Petroleum Reserve (SPR) with Russian oil.15 China is also in talks with Russia for a gas pipeline from Siberia. China is the logical destination for gas from Sakhalin 1, but the wrangle over export rights is likely to delay the project. In 2004, Putin had nominated Gazprom as the sole gas exporter to Northeast Asia, but Exxon, the operator of Sakhalin 1 believes that as its Production Sharing Agreement (PSA) was ‘grandfathered’, the ruling does not apply to its project. Even so, Chinese access to gas from Sakhalin 1 is likely to be jeopardized by its insistence on linking gas price to coal rather than crude, a major deviation from international practice. China plans to construct several nuclear reactors for power generation. Russia and China are collaborating on the construction of the Tianwan nuclear plant in Lianyungang in East China’s Jiangsu Province.

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LATIN AMERICA

China’s good relations with Latin America predate the advent of social democratic governments in that region.16 But in recent years,

15 Dow Jones, ‘China Uses Russian Crude in Strategic Oil Reserve,’ 10 October 2006, available at http://www.gasandoil.com/goc/frame_nts_news.htm 16 Jorge I. Dominiguez, ‘China’s Relations with Latin America: Shared Gains and Asymmetric Hopes’ (Working Paper, Weather Center for International Affairs, Harvard University, June 2006).

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these political ties have been strengthened and expanded to subserve China’s energy needs. In fact, the first oilfield acquired by China, as early as 1993, the year in which it became a net oil importer, was in Peru through a subsidiary of China National Petroleum Corporation. The beginning of this millennium witnessed a concerted effort towards further strengthening of ties with the region. President Jiang Zemin’s whirlwind tour of Venezuela, Cuba, Chile, Argentina, Uruguay, and Brazil in 2001 put Latin America on the radar screen of the Chinese leadership. Hu Jintao followed it up with a 13-day Latin American tour and participation in the 12th APEC Leaders’ Meeting in Chile, in 2004. Last year, Hu Jintao visited Mexico. A similar stream of visits by Latin American leaders to China has reinforced mutual ties. These visits have gone hand in hand with quantum jumps in trade between China and Latin America. According to W. Jiang, Beijing has established four strategic partnerships with Latin American countries: Brazil, Venezuela, Mexico, and Argentina.17 In addition to membership in the APEC forum and observer status in the Organization of American States (OAS), Beijing has also become involved in regional organizations such as the China–Latin America Forum, China–South American Common Market Dialogue, and China–Andean Community consultations, among others.18 In fact, China has identified Latin America as one of the key regions alongside Russia, Central Asia, Middle East, and Africa, that may become China’s energy suppliers. The earliest debut of a Chinese energy company in an overseas acquisition was the USD 250-million purchase of development rights to an oil field in Peru by a subsidiary of China’s largest energy company CNPC in 1993, the year in which China became a net oil importer. Venezuelan President Hugo Chavez signed more than a dozen accords with China valued at USD 11 billion, including the ones on energy and transportation. China will invest USD 2 billion in the country’s oil industry, and another USD 9 billion to help Venezuela build a railroad. The South American country will also double the oil sales to China by next year to 300,000 bpd. Jiang Wenrang, ‘China’s Energy Engagement with Latin America,’ China Brief 6, no. 16 (2 August 2006), available at http://jamestown.org/publications_details. php?volume_id=415&issue_id=3821&article_id=2371339 18 Ibid. 17

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CHINA

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AFRICA

Energy-rich coastal Africa appears to have caught Chinese imagination on a grand scale. In November, China hosted the leaders of 40 African states in Beijing, with a view to strengthening its already firm toehold on this region, which is in dire need of investments as well as technology. In this summit, Hu Jintao announced that Beijing would offer USD 3 billion in loans and USD 2 billion in credit to Africa by 2009. Already China’s trade with Africa has grown 10-fold in the last few years to reach USD 40 billion and this figure is likely to double by 2010. According to Chinese government statistics, the country has invested around USD 6.2 billion in aid and investment in Africa, till the end of 2005. In recent years, Angola has replaced Saudi Arabia as the largest oil supplier to China. Similarly, China absorbs some 70 per cent of Sudan’s exports. CNPC is currently the largest investor in the Sudanese oil industry. China has also used its clout at the United Nations (UN) in defence of African countries, which were widely condemned by the West. Thus Beijing has resisted any moves towards military intervention in Darfur, and checked all attempts of discussion at the United Nations General Assembly of Zimbabwe President Robert Mugabe’s Operation Murambatsvina. Recently, China and Libya have signed four memorandums of understanding (MOUs) on cooperation in mining and oil exploration.

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China and India are often portrayed as two competitive regional powers reaching out for the same and limited sources of oil and gas supplies. Competitive energy pursuits by both nations have lent some credence to this view. In recent times, the NOCs of both countries have competed for oil assets in Kazakhstan, Sudan, Ecuador, and Angola. It is noteworthy that in each of these cases, Chinese companies outbid Indian companies to win the assets. However, these victories came at a cost. In order to clinch the deal, Chinese companies have had to raise their bids substantially, in excess of the value of the assets in the international market. For instance, in Kazakhstan, CNPC had to bid USD 4.6 billion, which was USD 700 million more than what India’s OVL was prepared to pay. Eventually, CNPC went on to acquire the Canadian company’s

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assets in Petrokazakhstan. Even though trade between the two countries has witnessed an impressive growth of over 500 per cent in the last 5 years, not everyone sees Indo–China relationship in a positive light. Maintaining that there is no strategic congruence between the two countries, China watchers point out that in the past year, India has found itself ranged against China at the UN, the International Atomic Energy Agency over Iran’s nuclear programme, the East Asia Summit, and the Nuclear Suppliers Group (NSG) over the issue of India’s membership.19 The Indo–US nuclear deal wherein India has been implicitly accepted into the group of weapons states, has perhaps done more to the perceived distancing of the two countries. The other major areas of friction could be China’s naval presence along maritime chokepoints in the South China Sea, the Malacca Straits, the Indian Ocean, and the Strait of Hormuz in the Persian Gulf, through acquisition of naval bases in Cambodia, Myanmar, Bangladesh, and Pakistan, to protect its long-term economic security interests. However, China and India are moving towards a cooperative approach to energy security, thanks to the initiative taken by India’s former Petroleum Minister Mani Shankar Aiyar. In January 2006, an MOU was signed between the leaders of the two countries, envisaging a comprehensive cooperation on wide-ranging areas such as upstream exploration and production, refining and marketing of petroleum products and petrochemicals, R&D, energy conservation, promotion of environment-friendly fuels, and trading in oil and joint bidding in third countries. Five commercial agreements were also signed between Indian and Chinese firms. Earlier this year, OVL and CNPC teamed up to purchase a 37 per cent stake in the al-Furat oil and gas fields from Petro-Canada for USD 573 million. India defied US opposition to clinch the deal which was then seen as the first step in cooperative acquisitions.20 In August, the second joint acquisition, this time by Sinopec and OVL, of 25 per cent stake each in Omimex de Columbia from a US firm strengthened this impression.

Power and Interest News Report, September 2006, available at http://pinr.com The Hindu, ‘United States Tells India to Back Off Syrian Oil Deal,’ 28 January 2006. 19

20

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IMPLICATIONS OF CHINA’S THIRST FOR ENERGY EMERGING REALIGNMENT IN GLOBAL ENERGY MARKETS China’s apparently insatiable thirst for energy is viewed with alarm in energy markets, especially by major energy importers like the United States, Europe, and Japan. However, it is noteworthy that China’s oil demand growth coincides with significant shifts and realignments in global energy markets. For some years now, the centre of gravity of global energy markets is shifting inexorably to the Asian continent—not only in terms of demand, but also in terms of new supply sources. The Russian Jevushka has finally edged out the ageing Saudi Begum as the world’s largest oil producer. Russian oil production which had plunged to rock-bottom levels in the wake of the collapse of the Soviet Union has been steadily rising in recent years, only to surpass Saudi production in 2006. Russia now accounts for 15 per cent of global oil production and has even introduced a new REBCO blend, a third crude after W&T Offshore Inc (WTI), and Dated Brent to be traded on NYMEX. At an annual production of 640 bcm, Russia is way ahead of all other gas producers in the world. With the two Sakhalin projects, Kovykta and Shtokman fields on the verge of production, Russian energy exports are expected to increase significantly in the near future. More importantly, Russian exports are rising in tandem with the increasing production. Considering that energy exports account for a quarter of the country’s gross domestic product (GDP), a third of its government revenues and half of export earnings, Russian energy exports will increase significantly in the coming years. President Putin’s attempts to consolidate control over Russia’s energy sector is indicative of the importance of the energy dimension in Russia’s economy as well as polity. Northeast Asia, especially China, Japan, and South Korea will be the biggest beneficiaries of Russia’s incremental energy exports. Even though the oil pipeline could supply any of these markets, gas pipelines—from Siberia, Sakhalin, and Russian Fareast—will essentially serve Chinese markets while the Japanese market geared to LNG will benefit primarily from shell-operated Sakhalin 2. In

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fact, Putin and his team have time and again stressed the importance of Asian markets. Recently, Vladimir Frolov, a senior Russian trade official was quoted as saying, ‘Russia has turned its second eagle head to Asia’, in an obvious reference to the two-headed eagle on the Russian seal. That China is a Kyoto signatory also spells a greater role for gas in the Chinese economy. China’s manifest reluctance to improve its railway infrastructure to carry coal to its markets in the east and south, and its apparent keenness to move to a cleaner energy paradigm means that incremental energy demand in these regions will have to be serviced by imported gas. Although China does have the option of importing LNG from Australia, Indonesia, or even from Iran, the price factor would ensure that piped Russian gas is the most economical option for China. Similarly, the other significant emerging source of supply also lies in China’s backyard, in the Caspian region. With an estimated reserve of 30 billion barrels of oil and 3 tcm of gas, the Caspian Sea is by far the largest new source of supply that has come on stream in recent years. Besides, Kashagan, Kazakhstan’s new elephant field will soon commence production, and eventually, the Caspian region could supply as much as 5 per cent of global oil demand. Although the BTC pipeline has established an outlet to the Mediterranean, China is unlikely to settle for a runner-up status in the great energy game being played out in the Caspian. The Atasu–Alashankou pipeline could be extended to the Caspian shores to take advantage of new production. India, unfortunately, is unlikely to be as big a beneficiary of emerging new supplies in Russia and the Caspian. Despite talks of shipping Sakhalin oil and LNG to Indian shores, the wisdom of adding to the congestion in the Malacca Straits, albeit in the reverse direction, is questionable. Even though token quantities of oil would still find its way from Sakhalin 1 to Indian shores, it is unlikely that Russia would play a major role in physically servicing the Indian market. As for Caspian oil, the only feasible option would be a pipeline from Iran’s Neka terminal to Chabahar in the Persian Gulf. However, in the current geopolitical scenario, this pipeline is unlikely to materialize anytime soon.

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US ENERGY SECURITY PERSPECTIVES AFTER 9/11 The events of 9/11 seem to have induced a paradigm shift in the manner in which the United States views its energy security options. Even before 9/11, the United States had begun to move away from its excessive dependence on Gulf Cooperation Council (GCC) oil. President Bush’s energy policy of May 2001 emphasized the need to diversify sources of supply. The Energy Policy Act of 2005, despite its failure to address profligate consumption, emphasizes the role of renewables and non-carbon alternatives, which will reduce its dependence on imported hydrocarbons. In fact, US dependence on GCC oil has now dwindled to just a quarter of its imports even as Canada, Mexico, Venezuela, and Western Africa supply the rest. Trinidad and Tobago has emerged as a major LNG exporter in the Atlantic. The United States has embarked upon aggressive supply diversification measures which include, inter alia, drilling in Alaska, building energy bridges with Kazakhstan, and regrouping its military forces in the Caspian. In pursuit of this objective, the US government has extended generous financial assistance to the Caspian region even as its companies have invested several billion dollars in the energy industry in this part of the world. The Energy Charter Treaty, signed and ratified by Central Asian countries, seeks to put in place a conducive investment environment for multinational oil companies to do business in this region. With North Sea oil rapidly depleting, Europe too is compelled to look for other sources of energy supply. Russia seems poised to play this role. Both existing infrastructure and the pipelines and ports being built are geared to ferry Russian and Caspian energy to Europe. The Bluestream gas pipeline running under the Black Sea is already operational, and it carries Russian gas to Turkey. As for oil, the Baltic Pipeline System, operational since 1991, and the CPC link Russia and the Caspian to Europe, while the recentlycommissioned Baku–Tbilisi–Ceyhan pipeline enables Caspian oil to be transported to the Mediterranean shores of Turkey. The Baltic and Black Sea ports are also operating at full capacity and Russia is now planning more ports, one in Primorsk and another in Murmansk in the Barents Sea, to get its oil across to Europe and the United States, respectively. The point to note here is that virtually

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all the Russian oil and gas headed to the United States and Europe currently go from western Russia, whereas Siberian and Russian far-eastern supplies are best accessed by Asian consumers.

OVERSEAS OIL EQUITY AS AN ENERGY SECURITY STRATEGY China’s mercantilist strategy is premised on a deep mistrust of global energy markets and its anxiety to gain physical control over natural resources. This policy has not only come under severe criticism, but has also been a cause of alarm among oil importers. The criticism centres around China’s assets in countries like Sudan and Angola, where the ruling regime has been blamed for its scant respect for human rights. The panic ensues from perceived fear of China cornering global incremental oil production from regions where Western oil companies are reluctant to engage. China’s aggressive equity oil strategy ignores certain fundamental principles of oil market behaviour. The global oil market is a highly evolved structure where supply and demand are precisely balanced by a hawk-eyed Organization of the Petroleum Exporting Countries’ (OPEC) cartel. As new non-OPEC supplies come on stream, OPEC adjusts its production levels, so as to maintain prices at desired levels. Thus, supply is a function of price. In its long history, OPEC has always ensured that global oil markets are well-supplied at a given price. Regardless of whether a consuming nation has access to its own sources of supply, it can still access its requirement from the global markets, provided it is willing to pay the market price. The advantage of equity oil will become manifest only when OPEC cannot raise its production at will or if there is physical disruption of supplies owing to a catastrophic political event like war, or large-scale terrorist attacks by non-state actors. Even so, the resilience of the world oil economy will ensure resumption of oil production at the earliest. For the present, the only gain from equity oil is the price advantage, not unlike what could be obtained from long-term supply contracts. China can elect to take its share of equity oil in kind and, thus, reap the price advantage especially in a situation of rising prices. However, as Chinese companies often outbid other competitors for equity oil in their desperation to get hold of the assets, they may actually be paying a much higher price than what the commercial value of the asset warrants. If that happens

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to be the case, then the price advantage of equity oil gets eroded to that extent. Third, overseas equity oil always runs the risk of outright nationalization by the host governments, or at the least, creeping acquisition through alterations to the tax and royalty regimes. After all, the resurgence of resource nationalism is only all too evident in many parts of the world. In Russia, President Vladimir Putin has now turned his attention to Shell, the operator of Sakhalin 2, in an attempt to use the environmental weapon to gain control of the IOC’s assets. He had earlier used a tax weapon to discipline Russian oil oligarchs. In Venezuela, Hugo Chavez forced IOCs to renegotiate contracts. Bolivia and Ecuador are other examples. In the light of these arguments, it appears somewhat premature for other oil importers to feel threatened by China’s mercantilist policies, especially in terms of ability to access adequate quantities of oil to meet their own domestic demand. China’s quest for equity oil as well as long-term energy relationships has often pitted it against the interests of the United States. Thus, China’s support for Iran on the uranium-enrichment issue in the UN Security Council is informed by its perceived energy interest in that country. The United States claims that its efforts to arrest the genocide in Sudan with the help of UN Security Council are frustrated by China’s involvement in Sudan. China, for its part, can claim that assets in most other parts of the world have already been acquired by IOCs, and being a late-comer to the oil equity game, it will have to settle for available assets which, unfortunately, happen to be located in the troubled regions of the globe. Besides, these are regions in which the IOCs are not interested and, therefore, are available to China and India. China’s evolving relations with Saudi Arabia, once again fuelled by its energy vulnerability, is another irksome development for the United States which, after 9/11, has moved away from the kingdom. As for Iran, it is the only oil-rich country in the entire Gulf region having substantial, untapped potential—thanks to the sanctions regime. Iran is too irresistible an area for China to relinquish its claim over the promised development blocks. Beijing has recently signed an agreement with Iran to develop the Khuzestan Province, the home to 90 per cent of Iran’s onshore reserves. Sinopec will also cooperate with Iranian companies in the expansion of the latter’s refinery capacity.

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China, for its part, has reasons to feel threatened or aggrieved by US policies. The colour revolutions engineered by the United States in Central Asia have caused unease over potential US control over the energy resources and transit routes from the region. China could legitimately complain about the US attitude towards CNOOC’s failed bid in 2005 to acquire Unocal. Lacking a blue-water navy, China has reason to be concerned over unfettered access to the two sea lanes, Straits of Hormuz and Straits of Malacca, both patrolled by the US navy. US reaction to China’s energy pursuits has nearly bordered on paranoia. Analysts, policymakers, politicians, and think tanks have blamed China for everything from soaring oil prices to unchecked human rights violations. China has been severely criticized for its foray into Canada and Venezuela, as though it impinges on America’s own access to oil from these countries, which is far from the truth. Neocon visions of China emerging as an alternate superpower challenging the supremacy of the United States have virtually shut all doors for China from multilateral energy institutions like the IEA—although both Japan and South Korea are members. US rhetoric blaming China for the burgeoning oil demand has done little to endear it to the Asian power with a per capita energy consumption that is a pathetic fraction of the global superpower. China’s lack of faith in the market place got reinforced when the US blocked its acquisition of Unocal. Therefore, in a sense, China’s strategies for mitigating its energy vulnerability—be they pipelines from Central Asia, the SCO, or its stand on Iran—could have been inspired and shaped at least partially by its sense of being deliberately left out of the global energy architecture through US policies and actions.

CHINA AND INDIA—CONFLICT, COMPETITION OR COOPERATION? AREAS OF SYNERGY AND POTENTIAL FOR COOPERATION There are many areas of synergy between India and China. Both are populous developing countries with low per capita energy consumption. Unfortunately, both countries have chosen an energyintensive growth paradigm and will have to depend on imports

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to fuel their economies. Both countries are and will continue to depend on the GCC region for a substantial portion of their energy imports. There could be many areas where a synergetic approach is likely to bring more gains than losses. An emergency stockpile is integral to energy security in oil-importing nations. Ever since the 1973 oil crisis, importing nations around the world have scrambled to build an emergency stockpile of crude and petroleum products—an inventory that could be used during periods of physical supply disruption. The United States has an SPR of 700 million barrels—the largest in the world—while the European Union (EU) also has a common stockpile under the auspices of the IEA. Japan and South Korea are also members of the EU stockpile. Even though located in individual member territories, the management of the stockpile is a joint EU responsibility. The ASEAN (Association of Southeast Asian Nations) countries have been discussing the possibility of setting up a common stockpile for the region. In today’s world where terrorist threats to supply disruption are no longer in the realm of fantasy, no import-dependent country can afford not to have an SPR. Therefore, both China and India have decided to set up their respective stockpiles—of 45 days in the case of China and 15 days, initially, in the case of India. According to reports, China has already completed construction of oil-tanking facilities in Zhenhai, in the port city of Ningbo on the eastern coast. Recent reports say that China has already begun to fill up this reserve with Russian oil.21 China has also earmarked three other sites for strategic stocks along the eastern seaboard, aiming to build a total of 16.2 million cubic metres (101.9 million barrels) of reserves in the next 5 years. India and China can cooperate in the construction and joint management of crude stockpiles. Joint bidding for construction could bring down the costs. Setting up SPRs cannot be postponed much longer, in view of the serious energy vulnerability of the two Asian neighbours. Yet, if India and China place additional demand on the global oil market for filling up their respective SPRs, they could send prices soaring even further in the current volatile market situation. Therefore, both countries will have to look for other alternatives that do not

21

Dow Jones, op. cit.

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upset the global oil market. Further, both may find it worthwhile to discuss with IEA the possibility of participating in the IEA SPR, or whether they should build a common Asian reserve. It is inevitable that both India and China will see substantial increases in gas consumption in the coming years. Even though pipelines will supply some quantity of gas to both the countries, LNG is also likely to play an increasingly important role as liquefaction costs are driven down by constant technological upgradation. Globally, LNG price is linked to crude price—an individual marker or a basket of crudes. In the current scenario of spiralling crude prices, such linkage may render LNG beyond the purchasing capacity of Asian markets, especially China and India. Therefore, if gas suppliers can be persuaded to delink the LNG price from crude price, they would find ready markets in Asia. Such a gesture would be beneficial to both gas suppliers and consumers, securing stable and long-term buyers for the former, and conversely, affordable and stable supplies for the latter. The support of countries concerned over climate change can be harnessed to effect this transition. Gas prices can be linked alternatively to coal or fuel oils which they replace. If successful, they could set a new benchmark and enable gas to realize its potential as the fuel of this century. All Asian importers of Persian Gulf oil pay a premium of one to one-and-a-half US dollar over and above Brent benchmark price of crude for each barrel of crude they buy from Persian Gulf—thanks to a historical accident of pricing. Thus all Asian consumers pay, over and above the high crude prices, a premium which costs them collectively over USD 10 billion annually. Although there has been some discussion among Asian buyers of the need to collectively bargain for elimination of the ‘Asian premium’, no concrete measures have emerged so far. Proposals for an Asian marker crude—to reflect the heavier crudes consumed by Asia—have not taken off. China and India could push for an overhaul of the international oil pricing mechanism to a less discriminatory and more equitable one. Mutual support for each other’s position for the development of an Asian marker crude—reflecting the heavier and high-sulphur crudes consumed by Asia—is another area of multilateral cooperation in which China and India can take the lead. The Kyoto Protocol has come into force from January 2005. Developed countries that have been subject to emission reduction targets have been reconsidering the nuclear power option to cut down on their greenhouse gas (GHG)

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emissions. In the second Kyoto commitment phase which will begin in 2012, China, India, and Brazil may be required to agree to emission cuts, preventing the former two from generously dipping into their substantial coal reserves. In that scenario, it is perhaps inevitable that both these countries will turn to cleaner energy sources to meet their growing electricity demand. Nuclear power and renewable energy will play an increasingly important role in future fuel choices of both countries. In this context, the recent visit of Hu Jintao to India may lead to an environment where China could play a positive role in enabling India access uranium and reactors from the international market. As both India and China are endowed with abundant coal reserves, it is imperative that both these countries collaborate on using coal in a clean manner. There is an array of new technologies that seek to do this, such as coal gassification, coal to liquids, coal-bed methane, and so on, as well as technologies for carbon sequestration. Both China and India have respective strengths in this sphere, and by pooling their strengths, they could multiply the advantages. Specific areas of collaboration in R&D can be identified. Trans-national electricity trade is another area of potential trilateral cooperation. Tajikistan and Kyrgyzstan, the two Central Asian Republics, have substantial hydel potential. Tajikistan has a potential of 263.5 billion kilowatt hours, of which only 6 per cent has been exploited. Kyrgyzstan has 163 billion kilowatt hours of potential of which only 10 per cent has been exploited. The potential in these two countries remains unexploited for want of capital as well as markets. If new hydel projects can be built in these countries, electricity can be transported to India through Xinjiang district of China. High voltage direct current (HVDC) lines have now made it possible to transmit electricity over long distances with minimal line losses. The Xinjiang route will make it possible for India to bypass Pakistan and reach Himachal or Ladakh in India. No doubt, the lines will have to traverse difficult mountain terrain, but Powergrid Corporation of India—the country’s state-owned transmission company—has demonstrated expertise in building high-voltage transmission networks in difficult terrain. During the Soviet era, all the Central Asian Republics were interconnected through a high-voltage grid, and there was power flow between Russia and the Republics. In recent times however, the grid has been disconnected and is in

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disuse though both Kyrgyzstan and Tajikistan supply some electricity to Uzbekistan through cross-border connectivity. It might be worthwhile to explore whether the Soviet period grid connectivity can be restored at a minimal cost. In fact, in the future, it is also possible to extend the connectivity to Uzbekistan where electricity generated by gas turbines can also be fed into the same grid to be transported southwards to India. China and India can also collaborate in the construction of hydel projects as well as transmission networks, pooling capital as well as technology. For India, the project will have the added advantage of bypassing the troubled Afghan and Pakistani territory. Additionally, China can earn transit revenues as well as help in the development of Xinjiang. India’s new electricity law allows open access to the country’s transmission and distribution networks, so much so that bulk consumers can directly buy power from any producer. Large scale cross-border power trading is not a novel concept. In fact, it has been successfully practised in many parts of the world such as Canada–US, US–Mexico, Scandinavia–Germany, France– UK, and so on. Islanding technologies now make it possible to isolate problem stretches of the grid. Although the relative economics of a gas pipeline vis-à-vis HVDC cable needs to be determined, industry experts are of the view that the latter may be cheaper than the former. If that is the case, then it might even be possible to eventually transmit electricity all the way from Xinjiang—fired by its gas reserves—to India, tapping along the way Kyrgyzstan’s and Tajikistan’s hydel potential. Perhaps the time has come for setting up a trans-Asian electricity grid. Cross-investments in each other’s energy sector is a potentially viable area of cooperation. Both countries have opened up their energy sector to overseas investors, although to varying degrees. China is planning to acquire upstream acreages for exploration in India through New Exploration Licensing Policy (NELP) licensing rounds. Chinese companies have also successfully bid for the construction of a pipeline in India. India has demonstrated strengths in building versatile refineries and Indian investors are exploring overseas investment opportunities. Indian industry could explore the possibility of setting up refineries in China.

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Finally, India, United States, and China have come together in an alliance of major oil importers with the objective of cooperating with each other to stabilize global oil prices. Just as OPEC has been a successful producers’ cartel, the time has come for a global consumers’ cartel, so that predatory pricing practices are dealt with—firmly and effectively.

POTENTIAL AREAS OF COMPETITION BETWEEN INDIA AND CHINA One manifest area of competition seems to be in overseas oil acquisitions where India and China could compete. Despite the success of the recent initiatives, this competition is inevitable in a world where available new acreages are few and far between. Where cooperation is likely to succeed, the two might go together, but the tendency would be to let it go alone and garner the asset. However, as pointed out before, a mercantilist approach is more a commercial venture rather than an initiative in pursuit of energy security.

POTENTIAL AREAS

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China’s presence in both Gwadar and Myanmar is viewed with concern by many Indian analysts. The fact that the Chinese are now astride the Persian Gulf through which 68 per cent of India’s oil supplies and virtually all its LNG supplies pass has given rise to a speculation over China’s objective in building the port at a cost of over USD 1 billion. However, considering China’s dependence on the GCC for its energy supplies and the distances that ships have to travel to reach its ports, China’s quest for alternate supply routes may indeed be a legitimate pursuit. Besides, the potential of Gwadar port to transform the economy not only of Pakistan, but of the entire region including Afghanistan, by providing transit for goods, cannot be ignored. Similarly, the recent MOU between Myanmar’s military junta and the Chinese government for sale of gas could be another area of concern for India. However, it must be remembered that the MOU specifies neither the quantity nor the source of gas to be supplied. It does not indicate any price either. The MOU could very well be a pressure tactic to force India to decide on a pipeline route. With three possible route options and each with its own set of problems, India has not been able to make up its mind as to which one it would take up for construction.

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CONCLUSION The future energy scene is marked by the dominance of two large Asian majors competing for global oil supplies. In absolute terms, India’s current oil imports are less than China’s. But India’s import dependence is more acute than China’s. India imports nearly three quarters of all the oil it consumes, as opposed to China which needs only 40 per cent of its requirements from overseas producers. Supply disruptions, therefore, could pose very serious problems for the Indian economy. In the case of India, petroleum imports account for a sizeable share of the total import bill (USD 45 billion in 2005) and pre-empt a chunk of export earnings, making it that much more vulnerable to global oil price spikes as well as volatility. China seems to be slightly better placed in this regard. Both China and India have initiated a range of measures to secure their energy supplies. In the diplomatic and the strategic spheres, China appears to have been more aggressive and successful than India. It has single-mindedly and purposefully pursued the acquisition of overseas oil acreages, whereas India appears to be following a much more measured approach. The GCC, which holds a quarter of the world’s oil resources and a third of the gas deposits, will continue to dominate the supply scene for years to come. Asia’s own dependence on the region, currently at 75 per cent, will go up to as much as 90 per cent within the next two decades. The dependence of both the Asian economies on the Gulf region for their energy supplies could pit the two oil-guzzling giants against the cartel power of OPEC. But if the United States and European Union countries move away from energy supplies from the Gulf region—as they have already been doing—it could create a modicum of mutual interdependence between the GCC oil producers and the Asian oil consumers. China is geographically more advantageously placed than India in terms of diversification of import sources. With sufficient investments in infrastructure, it will be able to access Central Asian, Russian, and Siberian oil and gas supplies much more easily and cheaply than India. The South China Sea reserves may also add to China’s energy supplies.

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Security of sea lines of communication is much more of a concern for China than it is for India. Japan, Indonesia, South Korea, and China compete for access to the chokepoints of Straits of Malacca through which their energy supplies flow. This region could, therefore, become a potential flashpoint if energy transit is threatened for whatever reasons. Unlike India, China is not beset by thorny relations with its energy-rich Asian neighbours. India’s troubled relations with Pakistan and Bangladesh make it difficult to access piped gas supplies from Myanmar, Turkmenistan, and Iran. In the economic sphere, both the countries have embarked upon reforming and restructuring of their energy industries to align them with global markets. Yet, both have demonstrated reluctance to abdicate energy delivery entirely to the markets. Both States have retained a strategic interest in the operation of their energy industries through majority control of NOCs. In a highly evolved global energy market, overseas oil and gas acreages are more in the nature of investment measures and are unlikely to serve energy security interests, except in extreme circumstances. Therefore, competition between India and China in this sphere is unlikely to impact the energy security architecture of the two countries. The potential for conflict is limited when there are many areas of synergy and potential cooperation which, if imaginatively pursued, could lead to a win-win situation for both the countries.

10 US AND INDIAN INTERESTS IN INDIA’S EXTENDED NEIGHBOURHOOD Ashley J. Tellis

The most dramatic development in the bilateral US–India relationship during the last five years has been the decision by both states to commit themselves to a new global strategic partnership. At the direction of President Bush and Prime Minister Manmohan Singh, the United States and India have begun yet another effort to break out of the sine-wave trap that traditionally characterized their bilateral relations. In this context, the recent civil nuclear agreement has become a critical symbol of their joint desire to elevate the bilateral relationship to a new level, which is marked by a willingness to cooperate on difficult issues. Despite this achievement, however, questions remain about how firmly rooted the US–Indian bilateral relationship is likely to be in the years ahead. The only way to assess this issue is by a systematic examination of the prospects for US–Indian collaboration on a range of functional and regional issues. This chapter attempts to begin the effort at systematic examination by focussing on the possibilities for US–Indian cooperation on key regional issues in India’s extended neighbourhood. The methodology employed for this purpose is a simple one: in each of the geographic areas in question, the chapter identifies US objectives and the strategies currently employed to reach those objectives; then, it identifies Indian objectives and the strategies currently employed by New Delhi to reach those objectives; finally, it offers summarizations and conclusions about the compatibility of US and Indian objectives and strategies in each of the areas in question together with a brief judgement about how both states are performing in regard to their goals thus far. An ‘extensive’ analysis, in the Kantian sense, would require consideration of alternative US and Indian objectives and strategies in each of these areas as well, together with an assessment of the

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degrees of mutual compatibility, but this work will not be carried out in this chapter. It is useful to begin the analysis by acknowledging explicitly that the United States and India are located at different levels of capacity in the international system. As the distribution of capabilities remains the key feature of international politics and accounts, more than any other variable, for the differences in goals and the capacity to achieve them on the part of various states, recognizing the differences in geostrategic weight between the United States and India is crucial for assessing the objective constraints that surround both countries and shape their capacity for mutual collaboration. In this context, the key difference between the United States and India is that whereas the former is a mature ‘hegemonic’ power, the latter is a rising global power. Consequently and necessarily, US grand strategic objectives must consist of preserving its geopolitical primacy, whereas Indian grand strategic objectives must, on the other hand, consist of systematically continuing its accumulation of national power, which if successful would have the effect of producing another pole in the international system. If the United States and India were the only two entities in international politics, or the only entities located at the core of the international system, their individual interests necessarily become ruthlessly competitive. In practice, however, this is not the case because the two nations are still separated by an enormous gap in power-political capabilities, however defined. This gap, especially in the military, technological and developmental dimensions of power would still persist, even if India were to rival the United States by some measures of national capacity. More importantly, however, the real reason why American and Indian interests are likely to be sometimes formally, but rarely substantively, in tension is because India is not the only rising power in the international system; that emblem is claimed by China in a far more apparent and intense way, given the superiority of its growth rates in the last three decades relative to both India and the United States. The presence of two rising powers in the international system—especially ones that share a history of mistrust and rivalry among themselves—makes the weaker of the two states a especially attractive partner for the reigning hegemon, which sees its interests enhanced by an association with the weaker

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that limits the potential threats posed by the more powerful rising competitor. These calculations alone ensure that India’s growing power would not be perceived as threatening in the same way as Chinese power would be perceived by the United States today: in a competitive global system, India’s relative economic weakness, in fact, turns out to be its geopolitical strength as far as the United States is concerned, as it has the effect of attenuating those tensions that might otherwise have come to dominate the bilateral relationship between a hegemonic and a rising power. The potential tensions between American and Indian interests are further minimized in this instance because of the growing convergence in values, political stakes, and inter-societal ties, which make it likely that the incompatibilities between the two countries’ grand strategies can be avoided either indefinitely or for a long time to come. The relationship between American and Indian grand strategies thus stands in sharp contrast to American and Chinese grand strategies, which goes a long way in explaining why the United States has now formally indicated its intention to ‘assist India to become a major world power in the 21st century’. Against this backdrop, the chapter will assess the objectives and strategies of the United States and India in five important quadrants of India’s extended neighbourhood—China, Southeast Asia, the Indian Ocean, West Asia and the Persian Gulf, and Central Asia— in order to assess the extent of compatibility confronting the two sides. The analysis suggests that, in general, there is a broad congruence between US and Indian goals in every one of these regions. Further, and more interestingly, there is a remarkable congruence in the strategies pursued by both states in each of these regions, with one significant exception—West Asia—where further engagement is necessary to minimize the discord that will inevitably arise because of the importance of this area to both countries. It is possible that if India’s immediate neighbourhood was made the subject of analysis, the differences between US and Indian goals and strategies might prove more significant, but this is a subject that requires further analysis and lies outside the scope of this chapter.

CHINA Given the abstract conclusions derived earlier about the relationships between reigning and rising powers, it should not be surprising that

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US and Indian objectives are congruent where China is concerned. What may be surprising, however, is how congruent they are, given the differences in power-political capacity, geographic distance, and economic interdependence characterizing the two states vis-à-vis China. The core American objective in regard to China—and one that is likely to persist for a long time well into this century—is to protect US primacy, US interests, and US-extended deterrence obligations in Asia and beyond against any Chinese challenges that may materialize over time. Stating the goal in this fashion does not presume that Sino–US relations are destined to take malignant shape or form; rather, it simply indicates in ‘neutral’ fashion that American grand strategy would, as a matter of necessity, seek to protect the country’s privileged position in international politics against any challengers, so long as it can without prejudice to other core national values. Despite the differences in relative capability in comparison to the United States, Indian objectives in regard to China are remarkably similar: given the history of Sino–Indian relations as well as the structural factors that shape the ties between the two states, India’s core strategic objective vis-à-vis China is to protect Indian security and interests in South Asia and beyond against any Chinese challenges. The formal similarity between current American and Indian objectives vis-à-vis China, however, masks a continuity in Indian policy towards China that has not been present even in the American case: even since the founding of China and India as modern independent states, New Delhi has always sought to immunize itself against the debilitating consequences of Chinese power. Whereas the United States has arrived at such an objective today— in the aftermath of the demise of the Soviet Union—Indian policy towards China in contrast has always been characterized by a steady constancy since 1947, namely, its desire to protect Indian security and Indian interests by a combination of external and internal balancing vis-à-vis China. Even when Indian ‘appeasement’ of China was at its peak—as, for example, in the early 1950s—New Delhi was always sensitive to the unsettling consequences of unchecked Chinese power at its doorstep. Consequently, even its ‘appeasement’ strategies, exemplified by the slogan, ‘Hindi-Chini bhai-bhai’, were designed to mitigate Chinese threats by normative means, while India slowly developed the capacity to protect itself against Chinese power by other instruments, if required. The Indian desire to

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balance against China, thus, has a consistency that is longstanding and one that has endured even as US policy towards China—under pressures of the Cold War—itself evolved from strident opposition towards tacit alliance. The congruence in American and Indian goals towards China today finds reflection in the strategies adopted by both states towards Beijing. As neither country wants to designate China as an adversary prematurely (even though both share varying degrees of anxiety about the Chinese growth in power) and as both states want to benefit from economic interdependence of China to the degree possible (because of its advantages for the promotion of social welfare at home and its possibly pacifying effects in international politics), both the United States and India are embarked on a complex range of ‘mixed’ strategies (in a game-theoretic sense) vis-à-vis China. American strategies towards China are built on the premise that engaging Beijing through a range of cooperative activities, both economic and political, remains the best instrument for shaping Chinese goals towards cooperation with the United States. The economic interdependence fostered by China’s integration into the global trading system and the political cooperation exemplified by encouraging Beijing to take the lead in the ‘six party talks’ are, for example, intended to communicate to China, to the extent possible, that the United States seeks friendly relations with its most important potential geopolitical challenger. Because this strategy of engagement is not assured of success, however, the United States also pursues, as a coordinate adjunct to engagement, a strategy of insurance which focusses on preserving its military capabilities to deter against, and defeat if necessary, a range of Chinese military threats to US vital interests and extended deterrence obligations in Asia and elsewhere. Included in this insurance strategy is a political component as well: the emphasis on strengthening existing US alliances, particularly with Japan, while building new partnerships with states on China’s periphery, such as India. Between the military and political components of the insurance strategy, the US policy seeks to ensure ‘downside protection’ in case the current effort at engaging China was to bear less than the desired fruit. Even after accounting for the relevant differences, Indian strategies towards China exhibit a fascinating parallelism with the strategies pursued by the United States. Like Washington, New Delhi too is currently emphasizing a strategy of engagement with China

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that spans both economic and political cooperation. The economic elements focus on rapidly increasing the bilateral trade between the two countries—at this moment, the most promising dimension of cooperation—and on exploring new avenues of science and technology cooperation, strategies for energy security, and cultural and people-to-people exchanges. As a complement, New Delhi is also focussed on political engagement centred mainly on rapidly resolving the outstanding border dispute, exploring new approaches to water management in the trans-border zones, and institutionalizing nascent forms of defence cooperation. The objective of maximizing the attainment of joint gains to the degree possible across the largest number of issue areas, thus, remains a key building block of India’s China strategy. The dissonance, however, in the bilateral relationship between the two states cannot be wished away. Beijing’s continued support for India’s primary challenger, Pakistan, remains unabated; Beijing’s efforts to intrude into India’s sphere of influence—South Asia—persist; and Beijing’s growing capacity to influence outcomes to India’s disadvantage on the Indian periphery ranging from its strategic presence in Burma, to its effort to build new ties with the island states in the Indian Ocean, to its ongoing military modernization in the regions adjacent to the Sino–Indian border raise troubling anxieties in New Delhi. India’s engagement strategy regarding China, consequently, has an insurance component as well: New Delhi seeks to develop the conventional military capabilities required to deter against, and defeat if necessary, any Chinese threats to Indian territory. Increasingly, this conventional military modernization is complemented by a nuclear component as well: this element, which is aimed at ‘replacing abject vulnerability with mutual vulnerability—no matter how asymmetrical it might be’, suggests that Indian policymakers are not prepared to hang their hopes solely on the peacefulness of Chinese intentions, especially over the long term, given that Beijing’s power is expected to grow even further and the relative differential in its strategic capabilities vis-à-vis New Delhi is likely to become even more manifest. Just like the United States, India’s insurance strategy has a political component as well. This component aims at developing new partnerships with key states either on China’s periphery (such as Japan) or in areas of contested influence (such as Singapore and Vietnam in Southeast Asia), but above all else, forging a new global partnership with the United States.

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Since India seeks to simultaneously balance against growing Chinese power and maintain its political autonomy, the thrust of its engagement efforts vis-à-vis the United States centres on efforts to persuade the latter to accept New Delhi’s independent foreign policy and India’s own emergence as a global power as ultimately beneficial to American international interests. The pursuit of this goal implies in turn that Indian security managers believe that the best insurance against assertive Chinese power lies not in participating in any evolving anti-China alliance but rather in emerging as a strong and independent power centre on China’s periphery. The great breakthroughs in US–Indian relations during the Bush Administration have materialized precisely because the United States, for the first time in recent memory, has come around to exactly the Indian point of view. This basic fact implies that there is a strong compatibility of Indian objectives and strategies with US goals and strategies vis-à-vis China in the near-to-long term, so long as Washington continues to perceive Beijing as the most significant potential competitor to US interests in Asia and beyond. Fortunately, for both the United States and India, both countries have also managed to conduct their foreign policies towards China with a modicum of sophistication in recent years—a sophistication that enables both to preserve their bilateral ties with Beijing on an even keel, even as they develop closer relations with each other, just in case China turns out to be the strategic challenger that both fear it might become over the long term.

SOUTHEAST ASIA The parallelism in objectives and strategies that characterizes current American and Indian approaches to China is also reflected, after accounting for the relevant differences, in their respective approaches to Southeast Asia. The Southeast Asian region is a quadrant of enormous diversity comprising both continental states (the three Indo–Chinese countries plus Thailand and Burma) sandwiched between two regional great powers (India and China) and insular republics (Malaysia, Singapore, Indonesia, East Timor, Brunei, and the Philippines), which sit astride the major regional sea lanes. Despite this diversity, however, their economic vibrancy and their strategic location at the intersection of the historic Indian and Chinese empires makes them a particularly important object

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of interest to both New Delhi and Beijing. The legacy of strong American involvement in the region dating back to the Second World War (if not earlier, as in the Philippines) has also resulted in the United States retaining enduring political, economic, and strategic linkages to the region, which have survived beyond the high tide of American involvement witnessed during the Vietnam war. American objectives in Southeast Asia today are oriented towards achieving four important goals. First and foremost, the United States seeks to protect the security, freedom, and autonomy of the key Southeast Asian states. This objective derives in part from the long history of US involvement in the region; it also derives increasingly from the expressed desire of the Southeast Asian states for continued American engagement. This yearning for continued American involvement grows out of the astute judgement on the part of the Southeast Asian states that they are indeed minnows in a sea of whales. Being located in a region that lies at the intersection of Japanese, Chinese, and Indian interests, the regional states see American strategic presence—so long as it is wielded adroitly—as the best guarantor of their physical security and political autonomy. The fact that the United States still has a patchwork of formal commitments to the region helps considerably: Thailand remains a formal US treaty ally; Singapore offers significant access facilities to American forces in the region; even the Philippines, although foreswearing formal defence links with the United States, views the American military presence in the region as the best defence against Chinese assertions over Filipino claims over offshore assets. This multifarious US role in protecting the autonomy of the regional states has only grown in importance over the years as the growth of Chinese power has become more evident. Given China’s strong and growing economic ties in the region and its increasing desire to tie the Southeast Asian region into a tight web of interdependence for both economic and political reasons, the desire of the regional states for enhanced freedom of manoeuvre has only grown commensurately. This preference is increasingly expressed through a greater willingness to countenance increased Japanese and Indian involvement in the region as well as a growing welcome of the US political, military, and economic presence. The second US objective in this context is to preserve the conditions for continued military presence and access to the region not only in order to service strategic goals within the area but also

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beyond. Although the United States does not have formal bases within Southeast Asia any more, there is little doubt that the new access arrangements offered by Singapore are highly prized; at the very least, their logistic benefits, which enable the repair and resupply of US warships operating in the Pacific and Indian Oceans, increases the flexibility with which the US military can deploy within and around the region. The third objective of the United States in regard to Southeast Asia is protecting the regional sea lines of communication (SLOCs) and the trading routes that traverse the area. This objective grows naturally out of the region’s strategic geography: The Strait of Malacca, which lies between the northwestern extremity of Sumatra and Singapore, is one of the most heavily trafficked in the world, with about 2,000 vessels per month passing through it. All the energy flowing from the Persian Gulf to East Asia flows through the Malacca Strait, as do other merchandise and cargoes. The Sunda Strait, the principal channel connecting the Java Sea and the Indian Ocean, and the Lombok Strait, which connects the Bali Sea to the north and the Indian Ocean to the south, are the other two chokepoints of critical importance to global maritime commerce. Although the regional states are nominally responsible for the security of traffic within these waterways, the ultimate responsibility inevitably falls on the United States as the hegemonic provider of global public goods. Protecting the SLOCs that pass through these chokepoints, however, involves more than simply maritime patrols, as SLOCs interdiction, except in case of all-out war, is always more demanding than that usually imagined. Rather, SLOCs security invariably involves enhancing the political stability and providing good order within the states that abut the SLOC, a considerably more challenging enterprise than simply providing naval vessels for maritime patrols. The fourth US objective in regard to Southeast Asia is preserving US economic and trade linkages with the key regional states. The steady growth of the Chinese economy in recent years and its deepening trade intensity with Southeast Asia often obscures the fact that the Association of Southeast Asian Nations’ (ASEAN’s) economic ties with the United States, Japan, and the EU-15 even today far outweigh those with China. Although Southeast Asian merchandise trade with China has grown rapidly, merchandise trade still remains only one part of the complex trading ties integrating the region into the global economy. Where

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services and finance are concerned, especially that available from international financial institutions (IFI) in the forms of grants and loans and bilateral foreign direct investment (FDI), the United States, Japan, and other developed liberal democracies continue to dominate the Southeast Asian scene. Continued US prosperity—not to mention other goals such as continued regional presence— demand enhanced US economic ties with Southeast Asia. In order to sustain these multiple goals, the United States has adopted a variety of strategies towards the region. Given the primacy of American geopolitical interests, the core US strategy has focussed on maintaining strong forward-operating forces, even if these elements are not in a strict sense deployed within the region. Between US bases in Japan in the north and in Diego Garcia in the south, a variety of US (particularly naval) forces constantly shuttle through Southeast Asia either en route to their regional bases or to the United States. The US Pacific command, which enjoys primary operational responsibility for the region, executes a detailed theatre engagement plan with each of the regional states that in its totality is focussed currently on prosecuting and winning the global war on terror; sustaining joint-and-combined war-fighting capabilities and readiness; advancing regional security cooperation; and posturing US forces for agile and responsive employment in regard to any contingencies that may arise within the region. The strategic objective behind this effort is simply to convey quietly—while carrying a big stick—the reassurance that the United States is committed to protecting the security and autonomy of all the regional states, because that goal comports perfectly with larger American interests as well. This military aspect of the strategy, which receives most attention both because of the history of US regional involvement and because of newer fears of a rising China, is supplemented by a focussed economic strategy that in its most recent incarnation aims at increasing US economic interdependence with South Asia. In 2002, President Bush announced the new ‘Enterprise for ASEAN Initiative’ (EAI), which aims to transform all existing bilateral trade and investment framework agreements (TIFA)—those existing with the Philippines (1989), Indonesia (1996), Brunei (2002), Thailand (2002), and Malaysia (2004)—into free trade agreements (FTAs). Simultaneously, the United States has begun negotiations for a TIFA with Cambodia, while including Filipino, Thai, Cambodian, and

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Indonesian exports to the United States into the US Generalized System of Preferences (GSP). Finally, the enhanced partnership that the United States seeks with Southeast Asia finds reflection in the diplomatic strategies of engagement, which includes diplomatic outreach, economic and military assistance, and public diplomacy initiatives towards the key Southeast Asian states. Indian objectives in Southeast Asia are perfectly complementary to those of the United States. Although India has had close civilizational links with the region that go back over a millennium, and historically, has been linked to Southeast Asia by culture, commerce, art, architecture, and language, the region was neglected in Indian foreign policy after New Delhi’s defeat in the 1962 Sino– Indian war. The inward turn in Indian foreign policy that followed that war resulted in a general neglect of the region, a policy that did not change until 1991 when India, motivated by its own economic reform, the rise of China, and the economic success of the Southeast Asian states, launched its new Look East policy that inaugurated the ‘return’ of East Asia more generally and Southeast Asia in particular into Indian policymaking consciousness. This new emphasis on Southeast Asia was clearly centred on the assumption that the region could not be neglected as it was heretofore and that India had to be diplomatically engaged within the region in multidimensional ways if it was to influence the shape of future extra-regional presence within Southeast Asia and secure certain strategic outcomes that were in its national interest. The core national security objective in this regard—and one that manifests a parallelism with US goals—is preventing the key Southeast Asian states from becoming strategically dependent on China. Indian policymakers are deeply aware that they cannot secure this objective entirely through the instruments of Indian power, given both the region’s intense interconnections with the Chinese economy and Beijing’s renewed economic, diplomatic, and political engagement with southern landward periphery. But India has two important intangible ‘assets’, which make its desire to see an autonomous Southeast Asia eminently practical. The first ‘asset’ is the passionate desire of the Southeast Asian states themselves for freedom and political space, goals that translate into a calculated regional strategy of inviting India, along with China, Japan, and the United States, to operate freely within the region. The second ‘asset’ is the

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multidimensional presence of the United States in Southeast Asia, which is viewed in New Delhi as advancing the cause of Southeast Asian autonomy more than any other. Given these two assets, Indian policymakers have concluded (correctly) that preventing the Southeast Asian states from becoming wards of China does not require any burdensome ‘heavy lifting’ on the part of New Delhi; rather, strengthening India’s political, military, economic, and diplomatic cooperation with the major Southeast Asian states with an eye to preserving a light Indian footprint in the region more than suffices to simultaneously satisfy both the regional states’ objective of having ‘a peaceful and politically stable Southeast Asia open to all’ and the US objective of protecting an enhanced economic engagement coupled with forward-operating forces—both objectives, in turn, advancing India’s own strategic goals in the region. This second objective, of sustaining a light regional footprint, is complemented by the third and newest Indian goal, which is to increase Indian economic integration with key Southeast Asian states to increase economic growth. Indian policymakers recognize that India and the Southeast Asian states share many complementarities, which permit inter-regional trade to become an important engine of future Indian prosperity. India’s trade relations with Singapore, Malaysia, Thailand, and Indonesia in particular are viewed as increasingly critical in a region which is experiencing the second-fastest growth in India’s bilateral trade links: Between 1991–92 and 2003–04, India’s exports to ASEAN increased more than five times to USD 5.7 billion from USD 1 billion, while its imports from ASEAN increased nearly seven times to USD 7 billion from USD 1.3 billion during the same period. The aim, based on current plans, is to increase merchandise trade between India and ASEAN to USD 30 billion by 2007 in the context of India’s trade with Pacific Asia more generally, which in itself accounts for 40 per cent of India’s trade and growing. Given this combination of strategic and economic goals, India has pursued three specific strategies that overlap both these areas. First and foremost, New Delhi has made a deliberate effort to enhance its ties with Singapore, Vietnam, and Indonesia as the fulcrum of its outreach to Southeast Asia. Singapore has been India’s most ardent regional champion; Vietnam has enjoyed close relations with India going back to the days of the Cold War; and Indonesia and India were co-founders of the non-aligned movement

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in the early 1950s. The Indian emphasis on strengthening ties with these three countries is intended to contribute towards the further multilateralization of regional security in the hope of strengthening the Southeast Asian states in their efforts to resist any predatory Chinese penetration, while also strengthening the case for India’s membership in larger regional organizations such as Asia-Pacific Economic Cooperation (APEC). Second, India is moving steadily towards increasing economic integration with the regional states through preferential access agreements. The centrepiece of Indian initiatives here is the Indo–ASEAN FTA, which is viewed as a critical instrument for bringing India closer to its target of achieving a 2 per cent share of global trade. An Indo–ASEAN FTA, moreover, would enable India to further reduce its relatively high customs duties, eliminate its still-existing sectoral FDI caps, continue its tariff reduction efforts, and finally, move beyond trade to new cooperative endeavours in science and technology, information technology, biotechnology, space technology, tourism, and human resource development, where the Indian–Southeast Asian complementarities are self-evident. Finally, and most ambitiously, India has moved aggressively in recent years to increase military-to-military cooperation with key regional states, especially Singapore. India has also joined with Thailand, a neighbouring state that controls the northern approaches to the Strait of Malacca, to express interest in joining ASEAN patrols of the vital straits and has become part of the Regional Cooperation Agreement on Combating Piracy and Armed Robbery against Ships in Asia (ReCAAP). India has also joined the Indonesian navy in joint patrols of the Six Degree Channel, the waterway just west of the Strait of Malacca, which lies between Indonesia’s Aceh Province and India’s Nicobar Islands. These initiatives have been complemented by Indian naval port visits throughout the region and training exercises with the navies of almost every Southeast Asian state. In addition, India has begun major military-to-military cooperation initiatives with other extra-regional maritime powers, such as the United States, Australia, and Japan, and in a first for New Delhi, has even conducted a naval search and rescue exercise with China. To complete the cycle, India has expressed a continuing interest in cooperating in ad hoc coalitions even outside the UN umbrella to deal with disaster management and maritime security.

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When US and Indian goals and strategies in regard to Southeast Asia are thus examined synoptically, the strong compatibility in both arenas in the near-to-long term becomes amply evident. Simply put, there are no elements of conflict at either the level of goals or of strategies. Even more importantly, both states have conducted their regional foreign policies in recent years with a remarkable measure of finesse: after some early hiccups in the global war on terror, the United States has becomes much more sensitive to the indigenous security requirements of the regional states and has moved with alacrity to assist them in this regard. India, given its relative weakness, has been far more sensitive than the United States has been to the charge of being assertive, and therefore has conducted its regional policy with an extraordinary degree of sensitivity. Where India has been found lacking is entirely in the realm of capabilities, particularly in its weaker economic links with the region in comparison to China. Should the Indo–ASEAN FTA be fully consummated, however, New Delhi will have the opportunity to join the United States and China in economically integrating itself with the region, even as it serves the purpose of providing the regional states with another buffer against excessive Chinese influence.

INDIAN OCEAN The Indian Ocean is the third largest of the world’s oceans, hosting four critically important access waterways—the Suez Canal (Egypt), Bab el Mandeb (Djibouti–Yemen), Strait of Hormuz (Iran– Oman), and Strait of Malacca (Indonesia–Malaysia)—which make it the major commons connecting the Middle East, Africa, and East Asia with Europe and the Americas. It is littered with numerous small islands that dot the continental rims but it also hosts important island nations such as Madagascar—the world’s fourth largest island—Comoros, Seychelles, Maldives, Mauritius, and Sri Lanka. The world’s largest archipelagic state, Indonesia, borders the Indian Ocean. The strategic importance of the Indian Ocean derives from its location as an important transit route between Asia and Africa and Asia and Europe: the Indian Ocean, for example, carries disproportionately heavy petroleum traffic from the oilfields of the Persian Gulf and Indonesia to the major consuming states in Europe, South Asia, and East Asia. Further, its marine life is of great and growing importance to the bordering countries for domestic consumption

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and export; fishing fleets from Russia, Japan, South Korea, and Taiwan exploit the Ocean for shrimp and tuna. Finally, the Indian Ocean region also hosts large reserves of hydrocarbons in the offshore areas of Saudi Arabia, Iran, India, and western Australia, with an estimated 40 per cent of the world’s offshore oil production coming from the area. The Ocean’s beach sands are rich in heavy minerals, including strategic minerals like thorium, and its offshore deposits are actively exploited by bordering countries, particularly India, South Africa, Indonesia, Sri Lanka, and Thailand. Not surprisingly, then, the Indian Ocean and the states on its littoral are of significant importance both to the United States and India. A region that contains one-third of the world’s population, 25 per cent of its landmass, and 40 per cent of the world’s oil and gas reserves, not to mention important international SLOCs, cannot but be of importance both to the reigning hegemon and to the newest rising global power. The fact that the Indian Ocean per se, however, physically subsists as a maritime frontier that affords access to the Indian landmass only makes it an area that is critical to national defence from New Delhi’s perspective, and as the ocean’s littoral also represents a home to most of the world’s Muslim population, its importance for India is further increased. The Indian Ocean, therefore, must be judged as intrinsically valuable to India because it bears directly on concerns relating to the country’s national security, whereas it is only extrinsically valuable to the United States insofar as its importance derives primarily from its existence as a transit route for cargoes of varying degrees of strategic and commercial importance. This difference in perspectives finds appropriate reflection in the goals pursued by the United States and India. US objectives with respect to the Indian Ocean focus principally on protecting freedom of navigation and maritime security in the SLOCs. Second, the United States seeks to prevent the Ocean’s waters and air space becoming transit routes for the movement of weapons of mass destruction (WMD) cargoes and associated materials. Third, the United States seeks to protect the Indian Ocean’s island territories from internal and external threats, while also preventing them from exporting any instability that may arise from contestations in their domestic politics. These relatively minimalist goals are appropriate given the extrinsic value of the Indian Ocean to US security. The relatively strong naval and air presence that the United States retains in the area, thanks to

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its bases at Diego Garcia and in the Persian Gulf, also frees the United States from the obligation of pursuing any more ambitious goals as the weight of US military power that is usually resident within the region (or available rapidly on call) generally suffices to preserve stability in the vast oceanic spaces. The strategies that the United States has adopted in support of these goals reflect this basic fact. The most important element here is the continuing American commitment to maintain strong and capable naval forces and associated intelligence, surveillance, and reconnaissance assets either present or operating in the Indian Ocean area. The US Navy alone maintains a nearly continuous aircraft carrier presence in both the western Pacific Ocean and the Persian Gulf. The US Air Force maintains bombers, tankers, and ISR aircraft at Diego Garcia, and the US Central Command maintains various tactical forces in the Persian Gulf. Although few US forces are permanently based in the Indian Ocean itself, the great mass of combat power that is located both in the western Pacific and in the Persian Gulf enable the United States to secure its political objectives in the Indian Ocean quite readily. While US military forces either routinely operating or deploying through the Indian Ocean remain a potent form of continual presence in the Indian Ocean, the political, diplomatic, and military investments made in the form of cooperative security relations with the various littoral states remain the second key element of American strategy with respect to ensuring Oceanic security. It has been clearly realized that investing in strong political and military ties with the key regional and oceanic states represents an investment that minimizes the demand on combat forces for the production of security. Accordingly, the United States has invested heavily in building a set of strategic relationships with key regional actors: first, in order to assist local actors to preserve a stable political environment within the countries in order to prevent domestic problems from seeping out to sea; second, to develop a network of cooperative ties that would enable the United States to use various military facilities in these host nations in time of crisis; and, third, to be able to engage in combined military operations with the littoral states if required in an emergency. Indian goals in the Indian Ocean are, in contrast, more ambitious than those of the United States because of the direct importance of the Ocean to India’s security. The first Indian objective in this context is

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the need to deter all seaborne threats that may emerge from the Indian Ocean to India’s territory and its political autonomy. Unlike during the Cold War, when such threats were seen to emanate from extraregional forces, primarily the United States, the most pressing threats today—ironically, for a time of relative global peace—emanate primarily from India’s neighbours. Pakistan and China today, either through their naval operations or through their relations with the littoral states on India’s periphery, represent the most consequential challenges to Indian security emerging from the Indian Ocean. The second objective pursued by India, most appropriately for a growing power that increasingly emphasizes connectivity with the international economy, is protecting freedom of navigation and maritime security along the SLOCs, particularly in regard to Indian trade and energy movements. In this respect, India is no different from the United States, or even China, which require oceanic security along the trade routes in order to sustain economic growth at home. The third objective, which in Indian calculations is intimately linked with the first and second goals, is to protect the Indian Ocean’s island territories from internal and external threats and from exporting instability that threatens wider Indian interests. This goal has a special resonance for India as its privileged location along the northern oceanic littoral, its large and competent naval forces, and its ethnic and cultural links with the island territories make India especially conscious of the need to protect certain key island states such as Sri Lanka, Seychelles, Maldives, and Mauritius from excessive Pakistani and Chinese influence. Taken together, these three goals simply reflect the importance of the Indian Ocean for Indian security and, accordingly, demand the full panoply of state instrument for their attainment. Not surprisingly then, India’s strategies for achieving its objectives in the Indian Ocean span a remarkable array of tools. To begin with, India has sought to protect its security interests by maintaining strong naval and maritime forces capable of executing a wide range of combat and non-combat operations. Although the Indian Navy was traditionally, and still is, the smallest of the three Indian fighting forces, it is widely acknowledged to be the pre-eminent navy in the northern Indian Ocean. The Indian Navy currently is the sixthlargest in the world and although still falling short of Western navies in numerical strength and technological sophistication, it is without doubt their peer as far as professionalism, seamanship, training, and sea time are concerned. The Indian Navy’s importance will continue

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to grow because of a number of factors. India’s fears about China as a strategic competitor, the continuing threat posed by Pakistan, and growing Chinese maritime and possibly naval presence on India’s periphery—all provide sufficient justification for investing in a large and capable navy. This implies a force consisting primarily of oceangoing ships, a developed base infrastructure, and gradually increasing presence in the Bay of Bengal, in particular, and a wide focus for ISR operations to include the entire Indian Ocean. This emphasis on developing strong and effective naval capabilities however, is reinforced by a second—clearly new—element of strategy, namely the emphasis on developing the capacity for naval and maritime cooperation with key friendly states, especially the United States, Japan, Singapore, and potentially Australia. This new emphasis on preparing for combined operations with friendly navies, if needed, serves not only to assure key regional actors about India’s own political intentions but also has the benefit of improving the quality and effectiveness of India’s own naval forces. The recent Indian emphasis on rapidly increasing military-to-military contacts, training, exercises, and collaborative activities with key Asian fleets is directed entirely towards this end. The third element of India’s strategy in protecting its ocean interests—and one that has received relatively lesser attention publicly—is the recent Indian emphasis on offering preclusive economic assistance and political support to key Indian Ocean island states. By taking the lead in offering the India Ocean island states an easy access to military resources, coupled with generous economic assistance—on the condition that these countries do not look elsewhere for diplomatic, military, or economic support—India has sought to protect its defensive perimeter in an effective but low-key way. Finally, Indian has sought to advance its larger strategic and political goals by integrating, to the degree possible, the Indian Ocean countries in a web of economic cooperation. Its principal instrument in this regard has been the promotion of the Indian Ocean Rim-Association for Regional Cooperation (IOR-ARC), initially known as the Indian Ocean Rim Initiative. This international organization, with 18 member states, aims to disseminate information on trade and investment regimes, with a view to reducing the impediments to trade and investment in order to expand intraregional trade.

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The Indian goals and strategies surveyed above clearly indicate their strong compatibility with US goals and strategies. Although there is clearly a difference in orientation, with US interests in the Indian Ocean region oriented primarily to averting threats while Indian interests are focussed on securing positive ends, the goals and strategies pursued by the two countries are pre-eminently complementary. It is thus not surprising that both states have agreed in recent years to very ambitious programmes of security cooperation in regard to the Indian Ocean and it is only to be expected that the US–Indian partnership agreement for defence cooperation will bear its first fruits in this issue area.

WEST ASIA Unlike most of the regional arenas surveyed earlier in this article, the West Asian quadrant of India’s extended neighbourhood remains the most significant focal point of potential discord between the United States and India. This potential for discord does not arise because of any substantial divergence in the objectives pursued by the two countries; rather, the problems likely to arise here are rooted entirely in some aspect of the strategies pursued by Washington and New Delhi. These elements of strategy, in turn, become problematic because they reflect the larger compulsions that bind each country, compulsions that often transcend the West Asian region itself. Both because these strategies are ‘necessary’ and because they have the effect of undermining core interests held by the other, managing the divergence caused by the differences in national strategies in regard to West Asia will likely end up being one of the two biggest challenges confronting the common US–Indian desire for strategic coordination for solving global problems. The fact that the West Asian region remains ‘vital’ to both the United States and India in different ways does not make the task of reconciling these differences any easier; if anything, it tends to make the competition in strategies more ‘absolute’ and, by extension, less amenable to easy resolution. Elaborating the US and Indian objectives and strategies in West Asia clarifies this tension adequately. When viewed from a longterm perspective, the United States can be judged as pursuing five distinct but related objectives in the great West Asian region. The

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first and most obvious objective is to protect the major oil-producing allies in the Persian Gulf region from external and internal security threats. These oil-producing allies, which include Saudi Arabia, Kuwait, Bahrain, Oman, Qatar, and the United Arab Emirates, are viewed as moderate regimes whose pro-Western orientation makes them critical to geopolitical stability insofar as it ensures that their huge oil wealth is not controlled by governments that are opposed to Western state interests. The second American objective, a corollary to the first, is ensuring that the energy outputs of all oil-producing states—but especially those Western allies—predictably and freely reach the international market. This objective requires not only physically protecting the production sources and the energy transportation system if necessary but also upholding the international energy market so as to permit an orderly distribution and allocation of resources that obviates the need for both mercantilist solutions and predatory control over energy assets. The third American objective in the greater West Asian region is a more explicitly political one and revolves around the containment of anti-American regional powers, such as Iran and Syria, including limiting their access to WMD capabilities. This objective is justified on both economic and political grounds. Preventing anti-American states from securing control over the region’s energy supplies by threatening their pro-Western neighbours has long been justified as a contribution towards both energy security and preventing the rise of regional hegemonies that might use their formidable energy wealth to pursue policies inimical to Western interests. The effort to prevent the spread of WMD capabilities to these nations is part and parcel of this same general logic. The fourth objective, and one linked to the third as well, is the resolution of the Israeli–Palestinian dispute—the contemporary heir of the older Arab–Israeli dispute— while protecting Israel’s security as a matter of national priority. Both as a result of the role played by the United States in the founding of Israel and the painful modern history of Jewish people, the special American relationship with Israel has required protecting the Jewish state on one hand (which includes preventing its Arab enemies from acquiring any usable military superiority, including WMD) while working to resolve the disputes with Israel and the Palestinians on the other. The fifth objective, one of more recent provenance that has grown in importance after 11 September 2001, is encouraging democratic

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transitions throughout the greater Middle East while stabilizing Iraq in the aftermath of the American toppling of Saddam Hussein. The new emphasis on democracy promotion derives from the conviction that illiberal regimes must reform if they are to cease posing a threat both to themselves and to US security over the long term— even though it is not yet clear whether the United States has found the right mix of instruments to induce such transformation successfully in the near term. The importance of stabilizing Iraq—even if the more idealist overtones are disregarded—stems fundamentally today from the need to extricate at lowest possible costs the United States from a quagmire, uphold American political and moral obligations to the Iraqi people, and limit the spread of Iranian influence and power in West Asia. In fact, the pursuit of the Iraqi stabilization is linked fundamentally to the two central challenges facing the United States (and India) today in the Middle East: first, the problem of managing the rise of a Shia-dominated, WMD-seeking, Iranian hegemony in the region, and, second, the challenge of arresting the entrenchment of terrorism in Iraq and thereafter, its spread throughout the region if the American endeavour in that country were to eventually fail. When mapped against this list of American objectives, Indian objectives in West Asia turn out to be remarkably complementary. Like the United States, India too seeks first and foremost to protect its access to the oil and natural gas resources from the greater Middle East through both market and preferential access mechanisms. Although the latter goal deviates somewhat from American objectives, which are entirely market driven, it is not a difference of great significance presently because Indian energy consumption volumes do not yet dominate the global market and because India’s preferential access strategies are still marginal to the larger energy market supply mechanism. The second Indian objective in West Asia also has interesting parallels with US interests. Ever since the 1970s when Indian immigrant labour became critical to running the modern Middle East, successive Indian governments have become more and more conscious of protecting the four million odd Indian nationals that are scattered throughout the region. Although the United States too has nationals scattered throughout the region—and military personnel in varying capacities, though no units routinely deployed on land—the scale of Indian obligations to its diaspora is simply without parallel. Although early-generation Indian migrant labour in the West Asia had a higher proportion of unskilled components,

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the migrant labour pool today consists predominantly of skilled labour and professionals without whom the West Asian economies would come to a screeching halt. Protecting these assets has become an Indian national objective today in a way that it never was previously. The third Indian objective in West Asia today—and a remarkable piece of evidence pertaining to how the world has changed after the Cold War—is protecting Indian access to Israeli technology without undermining India’s traditional supportive relationships of Arab governments. Israel today is the second most important supplier of military technology to India after Russia. Through Israel, India has access to critical military technologies at the sub-system level and Israel, more than any other supplier, has the competence to integrate India’s diverse military technologies sources from different states into a cohesive and workable whole. Protecting this access to world-class systems-integration capabilities is so important to India that New Delhi has even muted its traditional vocal advocacy of Arab causes, though it would be loathe to sacrifice its bridges to the Arab world entirely given its interests in energy and the protection of its citizens. Managing this dilemma competently remains one of the delicate tightrope walks characterizing the Indian foreign policy. The convergent character of US and Indian goals in West Asia mask the challenges embodied by some key differences in national strategies. US strategies towards the region take the following forms: maintaining existing American partnerships with key energy producers primarily Saudi Arabia and the other Gulf Cooperation Council (GCC) states; maintaining capable forward-operating and rapidly deployable forces in theatre—mostly offshore routinely—for both deterrence and protection; sustaining a friendly Arab regional coalition to contain Iran and Syria and help with Iraq; continuing the major diplomatic engagement to resolve the Israeli–Palestinian dispute; and supporting various economic transition initiatives to assist democratization in the greater Middle East. Indian strategies towards West Asia, at first blush, appear eminently compatible. They include, for example, an emphasis on developing preferential partnerships with key regional energy producers such as Iran, GCC states, and increasingly Saudi Arabia for continued access to oil and natural gas to underwrite India’s continued economic expansion; securing oil exploration and development concessions

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wherever possible in the greater Middle East and beyond; and, in a more recent prominence, maintaining capable naval forces, while developing modest expeditionary components for both the security of SLOCs and the protection of Indian nationals abroad. At the formal level, therefore, is clearly a high compatibility even of strategies between the United States and India over the near-to-long term. The principal challenge and one that needs careful managing are the bilateral differences in national perceptions about Saudi Arabia and Iran. US strategy towards West Asia hinges greatly on Saudi Arabia whose monarchy is seen as moderate and pro-Western. Although this perception is defensible when assessed against the criteria of state actions at the level of high politics, the fact remains that until very recently the Saudi state (and elements of Saudi society) had pursued perniciously anti-Western and anti-Israeli policies at the ideological level through the large-scale support of Wahabi proselytization. Although US policy since 11 September 2001 has focussed strongly on pressuring the Saudi regime to change these policies—which among other things gave rise to the murderous events on that fateful day—India has had, for almost two decades, been at the receiving end of these policies. Saudi resources have funded the largest wave of Wahabi proselytization in the subcontinent, not merely supporting the construction of thousands of madaris that promote an antediluvian theological worldview but more dangerously resulting in the underwriting of several terrorist groups at war with the Indian state. The Government of India, despite its own efforts to improve relations with Saudi Arabia, has therefore taken a dimmer view of the Saudi regime in comparison to the United States. The disagreement over Saudi Arabia is paralleled by a disagreement over Iran. In New Delhi’s view, the Iranian state is far more democratic than the Saudi system, and it has engaged in no-problematic proselytization comparable to the Wahabi effort in recent decades. Moreover, its close ties with New Delhi are critical to the success of Indian geopolitics in its own neighbourhood: Iran remains a very important source of energy for India; it provides India with the land bridge to Afghanistan and Central Asia, given Pakistan’s denial of transit rights to India, and it shares intensely the Indian objective of preventing a Taliban resurgence in Afghanistan. For all these reasons, Iran remains the fulcrum of India’s Near Eastern policy at precisely the time when US–Iranian relations have sunk

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to a new low over the dispute regarding Tehran’s pursuit of nuclear weapons. The US–Indian disagreement over Iran is, thus, likely to become the single most problematic issue in the emerging strategic partnership and one that deserves careful management because of Iran’s importance to both the United States and India. It remains the one element of potentially serious discord despite the otherwise high compatibility of US and Indian goals and strategies in regard to West Asia in the near-to-far term.

CENTRAL ASIA The last area of attention in India’s extended neighbourhood, Central Asia, displays the same high degree of convergence in the US–Indian goals and objectives witnessed in other regional surveys undertaken in this article. Although in Central Asia, like in other parts of the world, US and Indian goals are not identical, they are nonetheless strongly complementary. Although the Central Asian region is not central to American global strategy in a way that East Asia and Europe continue to be, the region is nonetheless important, at least in the near term, for extrinsic reasons. The United States has four specific objectives in Central Asia today. The first and perhaps the most important objective is to preserve the autonomy of the newly independent Central Asian republics from Russian re-absorption and from untowards Chinese influence over the long term. This goal derives not merely from some abstract dictates of geopolitics, but more practically from the expressed preferences of the regional states themselves. Consequently, the United States has supported the regional quest for autonomy primarily to the degree that such autonomy has been sought by the regional states themselves. The second objective, one that dates back to the fall of the Soviet Union, has been to help the Central Asian states to develop alternative access routes for their oil and gas to reach Western markets through non-Russian routes. In the initial stage, this quest for alternative routes was simply viewed in the United States as an effort at technical diversification, but with the recent upsurge in Russian ‘resource nationalism’, the effort to provide the Central Asian states with alternative access routes gains greater urgency. Although the current strategy of using its vast natural resources to rebuild its world status and prestige is a rational one for Russia, the consequences of using strategies focussed on the nationalization of

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reserves, state-dictated terms for exports, and centrally managed development of new production, do not augur well for the security of the weaker peripheral states. The third objective is to preserve US military access to Central Asia for anti-terrorism operations and possibly balance of power reasons, whenever possible, over an indefinite future. This objective, while important, is not overwhelmingly so for the United States as its current defence planning does not envisage major US conventional military operations in the Asian heartland. Rather, military access requirements presently are driven primarily by anti-terrorism operations conducted in nearby Afghanistan and these operations too can be conducted in an emergency from outside the Central Asian region, if required. The fourth objective, again driven by the exigencies of the moment, consists of assisting the Central Asian states to defeat Islamist fundamentalism and narcotics-trafficking, preserving domestic political stability within the recently independent republics, and helping them complete the democratic transitions that were hoped for at the time of their independence. To attain these objectives, the United States has pursued a variety of mostly low-key political strategies. These have included strengthening existing American partnerships with the most important regional states such as Kazakhstan, Uzbekistan, and Kirgizstan; continuing combat operations in Afghanistan with a view to stabilizing that country, preventing vicious spillover problems to the wider region, and eventually providing an alternative energy corridor to Russia and Iran; integrating Central Asia with South Asia more tightly by, inter alia, encouraging Indian trade, investment, and assistance to the Central Asian states; and providing US economic, diplomatic, and military assistance to the Central Asian states. Indian objectives towards Central Asia share one important characteristic with those of the United States: they are for most part relatively low-salience priorities pursued with a soft touch. The first and most important Indian objective in regard to Central Asia is to consolidate the historic ties India enjoyed with Central Asia over the millennia in order to advance certain geopolitical interests with an eye to the future. These interests include preventing the Central Asian states from being absorbed into the Chinese sphere of influence; strengthening Afghan autonomy and its ability to resist both Taliban resurgence and Pakistani blandishments; and limiting Pakistani influence and the export of Islamist ideologies in the

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region. These goals obviously have both positive and negative elements in them, and Indian efforts thus far have focussed primarily on the positive, on the assumption that restoring India’s old privileged access to the region would have the effect of warding off the most problematic challenges automatically. The second objective consists of securing access to Central Asian oil and gas resources through market or preferential access arrangements via an Afghan–Iranian (or an Afghan–Pakistani) pipeline to India. Although US preferences favour the latter, and Indian preferences are probably tilted towards the former, this is an issue of no immediate consequence so long as the situation in Afghanistan continues to remain unsettled. Indian strategies in pursuit of these goals reflect enormous diversity and are biased towards vague forms of ‘engagement’ rather than concrete initiatives for most part because of India’s own relative economic and political weakness, the lower order priority that Central Asia enjoys in India’s strategic interests, and because India’s relatively high comfort levels with Russia and extant Russian influence in Central Asia frees it from the burden of energetically intervening to fill some perceived vacuum of influence. Indian strategies in regard to Central Asia have, therefore, taken the following form: an emphasis on cementing diplomatic ties with the secular post-Soviet leadership in the critical Central Asian states such as Kazakhstan, Tajikistan, and Uzbekistan; attempting to increase trade links, economic reconstruction and political development programmes, and security ties with the key republics; stressing old cultural affinities and emphasizing support for the secular Central Asian elites and leaderships against Islamist forces within and around their societies; using India’s observer status in the Shanghai Cooperation Organization to interact with the Central Asian states on counterterrorism, while also providing them with alternative partnership opportunities to China; and finally, providing, in a modest way, various Central Asian states with technical assistance in education, infrastructure, and nation-building activities. All these Indian strategies towards the region are handicapped by three critical realities, which cannot be wished away. To begin with, India does not share a border with any of the Central Asian states and the troubles in Afghanistan and the denial of transit rights through Pakistan because of the troubled state of Indo–Pakistani relations only

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exacerbate the problems caused by lack of immediate physical access. Further, Indian initiatives in Central Asia are severely handicapped by a lack of resources (say, in comparison to China) and, perhaps, more importantly, by weak economic interdependence between India and the Central Asian states. Finally, Indian decision makers struggle with the inability to define how exactly Central Asia remains important to India: while all agree about the region’s importance notionally, translating that into a set of concrete priorities and funding those initiatives adequately has proved a more challenging task. Where Central Asia is concerned, therefore, there is a high complementarity between US and Indian goals in the near-to-long term. In fact, the complementarities are so significant that the Bush Administration has encouraged Central Asian integration with South Asia (and with India in particular) as a matter of priority. During the last several years, successive senior American interlocutors have urged the Government of India to help the various Central Asian republics with nation-building and promotion of democracy. Energy investments, educational outreach, and infrastructure development have also figured prominently in the US–Indian dialogue on Central Asia. The convergence between the United States and India even with respect to strategies in the near-to-long term could not thus be more real.

CONCLUSION Although it has now become a commonplace to assert that the civil nuclear agreement between the United States and India presages a new chapter in the bilateral relationship, there has been little work done so far that validates the conclusion that American and Indian interests are convergent today in a way that they have not been in recent years. This article suggests that at least where regional issues in India’s extended neighbourhood are concerned, US–Indian goals and strategies converge more often than is usually understood. That does not mean, however, that the United States and India will automatically collaborate on every problem that comes before the two countries. The differentials in raw power between the two sides are still too great and could produce either nuanced differences in how to implement operational objectives or disagreements over tactics even when the overarching interests are pre-eminently compatible.

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What does it mean then to say that US–Indian interests are strongly convergent, if bilateral collaboration cannot always be assumed to ensue automatically? It means three things: First, there is a grand summum bonum that the two sides can secure only collaboratively, even though each party is likely to emphasize different aspects of this quest. Second, the United States and India share a common vision of which end-states are desirable and what outcomes ought to be pursued—however this is done—by both sides. Third, there are no differences in vital interests, despite the tensions in the competing grand strategies, which would cause either party to levy mortal threats against the other or would cause either country to undercut the other’s core objectives on any issue of strategic importance. It is these three realities—informed by the convergence in interests, values, and inter-societal ties—that provide the basis for strong practical cooperation between the United States and India, realities that do not define US bilateral relations with any other major, continent-sized State in Asia.

11 INDIA AND REGIONAL SECURITY INTERESTS Vikram Sood

THE WORLD AS SEEN FROM NEW DELHI—AN OVERVIEW The world entered the 21st century as if it were some magical cut-off date, hoping that it had left behind one of the bloodiest centuries in history. A handful of religious radicals exploded this myth on 11 September 2001, sparking off a chain of events that today threatens to engulf the world in unending violence and religious hatred. Tectonic shifts are taking place on the Asian plate. The rise of China and the awakening of India, along with the resurgence of Japan, are occurring at the same time for the first time in history. All three are energy deficient and are competing not only for resources and markets, but also for global influence. Strong American military actions in Afghanistan and Iraq are proving to be counter-productive, with the Islamic street bitterly antagonized towards the West, particularly, the United States. This is bound to spill over into the subcontinent where the largest number of Muslims in the world live and also where around twothirds live in surroundings that are increasingly radicalized. Events in West Asia, as they unfold, will change the map of the region, leaving the United States with little control over events, triggering instability across the region including Saudi Arabia. A perception of declining US influence in the region, and in Central Asia, will propel China and Russia into consolidating their presence. NATO’s (North Atlantic Treaty Organization) performance and impact in our neighbourhood are already under question, raising

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serious doubts about its capability to handle crises in regions with which it is not familiar. This is increasingly evident in Afghanistan where NATO is riddled with conflicting voices. A search for new mechanisms to deal with global crises that involve Asia and Asians to a greater extent has become inevitable. The map of West Asia is changing in a manner that will only create further violence and turbulence in the years ahead. India will not remain immune to the influences and pressures that would be exerted, consequently.

DYNAMICS

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ASIAN RISE

The rise of Asia in the 21st century with China and India generally expected to provide the lead will not mean that the other paramount power, the United States, will recede into the background. In fact, the United States along with Russia, China, Japan, and India will fashion relations with each other and will determine the destiny of Asia for the next few decades. Other notable components of the Asian rise are as follow: 1. The United States, Russia, and China are all stakeholders in the energy-rich Central Asia and West Asia. India, with a large diaspora in the region, is still a poor fourth. 2. The United States and China are active players in South Asia with both providing vital military and economic assistance to Pakistan. 3. All five states are included in Southeast Asia while India is absent from Northeast Asia. 4. Two of the five states, Japan and the United States, have very close bilateral, military, and economic ties. Both have massive economic interests in China also. 5. The other three powers, Russia, China, and India are beginning to exchange views on a trilateral arrangement. Neither of these countries can afford to jeopardize its relations with the United States for the sake of other members of the triangle. 6. War may no longer be the prime threat in the region, but violence is. Small arms and hand-held weapons kill more than weapons of mass destruction (WMDs).

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INDIA

AND ITS

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Indians live in a troubled part of a troubled planet. We live in an era of exploding expectations with limited resources and in economies of shortages. We live in a region where poor governance has created more problems than it has solved. The region remains economically backward and politically unstable, and two of India’s most populous neighbours—Pakistan and Bangladesh—are rapidly slipping into religious obscurantism. Apart from terrorism that continues to emanate from Pakistan, India will face demanding challenges from Nepal’s domestic turmoil, Bangladesh’s rapid slide into a Talibanized country, and Sri Lanka’s fratricidal civil war. India faces additional sources of terrorism within, for instance, Maoist rebels in the huge north–south belt right through India and ethno-nationalist separatists in the northeast, bordering Tibet, Myanmar, and Bangladesh. Apart from military threats and terrorism, other threats which will have a bearing on our lives perhaps more intimately include energy and water shortages, environmental degradation, and demographic changes. As India’s economy pulls away from that of the neighbourhood, two things will happen. If the country’s agriculture fails to keep pace with the industrial and services sector, food production will suffer, triggering large-scale migration to urban centres. There could also be a simultaneous migration from the poorer neighbours seeking their fortunes in India. Socio-economic imbalances will sharpen and higher crime rates and increasing lawlessness will severely challenge the civil society. India’s young population with a favourable, productive age group is an asset if there are jobs for them or opportunities elsewhere; otherwise, they will be a powder keg. Perils of disease and illiteracy that haunt the subcontinent will drain resources, unless adequate and prompt measures are taken to considerably augment educational and health care delivery systems. There are no such signs available as yet. India baiting is a common phenomenon in Bangladesh, Nepal, and Pakistan. Some of our neighbours do not seek to share in the prospects for mutual prosperity India offers to them, but only share their poverty with us. These countries seek their own security by isolating themselves from India against the logic of geography.

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As a result, nations of the subcontinent are unable to maximize economic complementarities and opportunities to the extent that they hardly trade with each other. Transit routes are denied; common rail links and road links are non-existent. It is this lack of common economic and security perceptions among the neighbours which has hamstrung South Asian Association for Regional Cooperation (SAARC) unlike the EU or the Association of Southeast Asian Nations (ASEAN), which are functioning as a common platform for diverse interests of the regions they represent. Globally, India is being recognized as a rising economic power but not in the region where economic development has become hostage to security issues. The real test for India’s strategic policy will be to handle the increasing number of failed states on its borders. Six of India’s neighbours rank in the top 25 dysfunctional states in the world as calculated in the Failed States Index for 2006 prepared by the Washington-based Fund for Peace. The markers are refugee flows, rising demographic pressures, factionalized elites, a legacy of groups seeking vengeance, deteriorating public services, a security apparatus that operates like a state within a state, and criminalization or delegitimization of the state. A dysfunctional state has considerably reduced the ability to provide basic security and good governance to its people and has also lost control over the use of force within its boundaries. The possibility of a failed state in the neighbourhood is a nightmare. India cannot afford to have an influx of refugees or the induction of jihadi warriors from across its borders. India has faced the impact of the influx of Bangladesh immigrants—about 15–20 million in the northeast and spreading to the rest of India. It has resulted in considerable socio-economic tensions and has changed the ethnic component of several districts. According to latest statistics, 150,000 Bangladeshis in India are untraceable after having legally entered India. India does not have the capacity to bolster the sagging systems in all these countries for all times. The choice of whether to continue or not, to slide down the scale and become totally dysfunctional is also the individual choice of the states. Bangladesh, surrounded on three sides by India and crucial to India’s economic development, has the choice of either becoming the birthplace for the next Islamic revolution or a modern economic state. Closer tie-ups with India would generate employment and trade within its own boundaries. India could become an important stakeholder in Bangladesh’s economic

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prosperity but is hampered, to a large measure, by domestic politics in Bangladesh, which seeks sustenance in anti-India rhetoric. The same principle applies to Nepal. Sri Lanka has a majority problem—the Sinhala majority is unable to give the minority Tamils their place in the sun while India has a Tamil problem as Tamil Nadu politics prevents India from playing a more active role in helping to solve the island’s problems. Successive attempts to resolve the ethnic conflict between the minority Tamils, who have traditionally inhabited the northern and eastern regions, and the majority Sinhalese, concentrated in the central and southern regions, have failed. Sri Lanka’s problems are no nearer to resolution with the 2002 cease-fire collapsing, and Liberation Tigers of Tamil Eelam (LTTE) again announcing its return to violence. Ethnic violence has accounted for 100,000 deaths in the last 25 years, showing no sign of abatement despite the Sri Lankan Army pursuing the rebels with much greater vigour than in the past. It would seem that Sri Lankan government is looking for a military victory as part of the solution. The LTTE has consistently failed to commit to democratic values and human rights. It has resumed suicide bombing and continues to recruit child soldiers to kill political opponents. Nevertheless, the fatalities among the LTTE have increased since 2006 while those of the civilians and Special Forces (SF) personnel have declined. The LTTE has lost 2,319 of their men in 2006 and 3,345 in 2007, and has already lost 2,082 this year up to March 16. The civilian fatalities are down from 981 to 148 this year, and the SFs are down from 826 to 165 this year. This is a remarkable improvement and has helped the morale and fighting capabilities of the Sri Lanka Air force (SLAF). India has kept a low profile preferring to nudge the two warring parties to the table rather than actively seen to be participating. An all-party conference designed to produce a consensus around a political settlement has yet to make proposals. There were indications prior to the elections scheduled for January 2007 that these could be violent, with the real fear that these could even be called off and the army may intervenes. And so it came to pass. Both the Begums have been dethroned by the Army. They were incarcerated, and their parties and functionaries hauled into courts and some of them imprisoned. The outgoing dispensation of Khaleda Zia had leaned heavily on the support of her coalition partners, the right wing Jamaat-e-Islami and Islami Oikyo Jote, for her

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political survival. These two have made considerable inroads in the rural areas of the country. While the army with the façade of a civilian caretaker government re-orders the politics of the country, elections have been promised at the end of the year but it is possible that we have not heard the last word on this. In Pakistan, Presidential elections in October 2007 were carefully scripted by General Pervez Musharraf to ensure his longevity, but his tangle with the judiciary through imposition of the Martial Law was a massive setback to his already declining popularity. Under pressure from the United States and its people, the General lost his uniform and therefore much of his power, as his successor moved to consolidate his position. But subsequent events like the return of Benazir, her assassination, and the return of Nawaz Sharif would mean that the mainstream parties would either be excluded or weakened, allowing the mullah–military alliance to strengthen its hold over the country. Nepal has been through turmoil for the past 5 years and has now taken the first tentative steps towards a republican democracy but there is a considerable distance among the extreme left wing, the political parties, and the King.

PAKISTAN: SLIPPING INTO A JIHADI MINDSET? Pakistan’s leaders, both civilian and military, have not been able to reconcile to the reality that theirs is a smaller country and has fewer resources than India. The Pakistan Army, which has been ruling the country directly or indirectly, refuses to give up historical grudges and ambitions—to avenge the separation of Bangladesh and to create more Caliphates in India. As a result, the instruments used against India, the jihadis, and the proxy war have left the country in the grip of the military–mullah alliance that has effectively strangled any prospects of democracy. It is commonly believed that this mindset is a result of the madrasa culture. Undoubtedly, the madrasas have provided the foot soldiers of jihad but the leadership has often come from mainstream schools where children from middle class urban families have been taught distorted history, the virtues of jihad, obscurantism, hatred, and enmity with India for nearly 30 years since Zia’s Islamization. Many from this category end up in the corridors of power and the military.

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It is usually assumed that if the madrasas were taken care of the problem of jihad would eventually be solved. But it is not so. Only one-third of the children go to madrasas for education. The rest go to mainstream schools where the Curriculum Wing of the Ministry of Education fixes the curriculum. This wing formalizes the national curriculum and functions like a Mind Control Brigade. Efforts have been initiated only recently to change this but its effects will be known years from now. The Pakistan Army, the only institution capable of negotiating a turnaround, is either incapable or unwilling to shift course. General Kayani, even if willing, is severely handicapped by the army’s refusal to give up jihad as a key tool of foreign policy and a considerable presence of right-wing elements within its ranks and the officer cadre, as the assassination attempts on Musharraf in the past 2 years have betrayed. The army’s truce in Waziristan with Taliban Chief Mullah Omar, after suffering heavy casualties since 2004, further confirms the growing clout of right-wing elements within the officer-cadre. There is a real fear in the Pakistani establishment that a secular and successful India on its borders would undermine both Islamic Pakistan and the two-nation theory. This in turn would undermine the primacy of the army. The so-called Pakistan’s military parity with India is largely contrived with assistance from outside. This has led to years of adventurism, riding an over-arching belief that Kashmir could be wrested from India. General Musharraf perhaps began to realize, though reluctant to admit, the futility of such a delusion in a world which is dramatically different from the days of Afghan jihad. There is therefore a sense of urgency in his tone, interspersed with some bravado, when he offers various solutions. He has effectively projected himself as the serious peacemaker to his mentors in the West and to the media, but he has a history of reneging on promises in the past—like the promise to shed his uniform. Given the low level of trust that exists between the two countries, it is possible that this may only be a ploy to buy time and live to fight another day. The Pakistan Army is the strongest political party in Pakistan and in our region anti-incumbency is a strong factor. This is bound to happen in Pakistan one day and that would affect the entire country where the political systems have corroded and weakened, particularly since October 1999. The Pakistani rulers will continue their animus towards India and will periodically cite the Indian threat to extract more

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concessions both from an indulgent West and an understanding China. They realize that the United States will not pressure them any more and India will not do any more either. Pakistan is a nursery of terrorism and home to radical Islam. It is a vital component of the Islamic struggle against the Christian world. Yet, it is also a stalwart ally in America’s war against terror. Simultaneously, Pakistan has an all-weather friendship with China. For India, managing relations with Pakistan also means managing relations with the United States and China, both of whom have armed and supported Pakistan liberally in the past, and continue to do so. It is Pakistan that would need to sort its problems internally and settle with its neighbours. In its relations with India, having fed its people the solitary diet of Kashmir for more than six decades, it is almost impossible for any leader to backtrack. Such a decision would raise serious questions about the existence of the army itself. The only answer for India, at the present juncture, is to wait it out till Pakistani leaders figure out how to redefine their national identity, which has remained bound solely by hatred towards India. This can happen only when Pakistan becomes democratic and not ruled by military dictators. This will take time. The first step would be to break the stranglehold of the mullah–military alliance in Pakistan.

AFGHANISTAN

AND I RAN

Afghanistan is fast slipping into perpetual chaos, Talibanized, and under Islamabad’s control. Afghanistan remains a difficult case for India because of lack of direct access. Grafting democracy in an essentially tribal and strongly ethnic hierarchical society was never going to be easy. Economically, Afghanistan like all other countries would seek to benefit from access to Indian resources and expertise, but this is unlikely to happen so long as Pakistan considers Afghanistan its private preserve and prevents a strong independent government from emerging in Kabul. Afghanistan may thus remain unaffected by India’s economic gains—apart from the monetary assistance that India may be able to render from time to time. As of now it seems to show little promise of recovering from the mess it is in. Afghanistan’s present plight depicts endless conflict, a shortage of troops and equipment, a government at the centre that is less and less in control, corruption, and popular discontent. Afghanistan’s main problems are the ages-old ethnic divisions and

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apart from their religious fervour, the Taliban have never concealed their hatred for the Tajiks, the Hazaras, or the Uzbeks. The second problem is the obvious return of the jihadis from Pakistan which may include returning international Muslim fighters who had gone from Afghanistan to Iraq. It is no secret that the present mess is the result of policies that focussed on a cheap short war to try to impose a peace that was imbalanced and hasty. Continued US and NATO involvement has thus become an unfortunate necessity, but it will have to be at a larger scale because the existing troop deployment will not secure victories against a resurgent Taliban force that threatens to continue its campaign even in the winter. Obviously they are well-endowed. Yet, either way it will be a victory for the jihadis—‘staying on’ means more anti-American anger in the country, and ‘leaving now’ means giving the jihadis another victory in the region. This is probably Pakistan’s calculation who will be the ultimate winner in Afghanistan. The future does not look good for Afghanistan and the region. Building close relations with Iran and Afghanistan has been a long-standing Indian policy. It is sometimes forgotten that till 1947 India and Iran shared a common border. India’s support for the Chabahar port, rail link from Chabahar northwards, and road works is part of the Indian strategy to gain a foothold in the region and access the Central Asian Republics and Russia. This relationship has suffered a set back following the Indian vote. India cannot afford to continue to be on the wrong side of Iran. Indian strategic interests will suffer further in any prolonged international conflict with Iran. Iran is a complex but an important challenge for India. It is strategically important for access to Central Asia and Russia for trade and the regions’ energy resources that India would need to access in the years ahead. Isolated in a largely hostile Sunni world, Iran sits on enormous energy reserves with a total hydrocarbon (oil and gas) equivalent to 280 billion barrels of oil. This makes it the second largest after Saudi Arabia. Iraq is in turmoil, Saudi Arabia is internally unstable, and the monarchy is totally dependent on the Americans for its survival. India’s sources of energy are limited. Nuclear energy will run our factories and homes but will not be enough to run our vehicles, tractors, or keep our military machine mobile. There is no possibility that India can do without imported

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energy in the foreseeable future. Although Iran can provide access to Afghanistan, Pakistan is not willing to permit this. In this globalized world there have to be several triangular relations that India needs to work including those with the Iranians. A need-based relationship with Iran need not be construed as being adverse to US interests. Surely it would be in the US interest to see that India does not become energy starved at any stage that would jeopardize its economic growth. West Asia is strategically important for India, and instability in the region is of immediate concern. Apart from the Indian diaspora in the Gulf and the Arab world (4 million) which is of economic relevance to India and is part of soft power, India is otherwise disadvantaged. West Asia has entered its most uncertain phase, and the next few years are expected to be turbulent and chaotic with sectarian, religious, ethnic, national, and economic issues intertwined inextricably. India has to guard against radical spillovers. A period of acute instability is expected in the region. A new kind of West Asia is going to take shape and it may not be the kind the United States wanted. Iran is already the most powerful country in the Gulf. With Hamas, Hezbollah active in the Palestinian territory and in the Lebanon, and drawing inspiration from Iran and Syria, a peace deal between Israel and the Palestinians looks remote. This will fuel further unrest. Iraq will remain internally divided and Shia and Sunni strife will grow in the region. Weak central governments or oppressive regimes will both feed Islamic fervour.

SOUTHEAST ASIA Southeast (SE) Asia has been an area where India has begun to show interest rather late. The growing economies of the region require that there be a greater interaction between India and the countries of SE Asia. However, in the last few years some countries—Indonesia and Singapore—have witnessed growing Islamic radicalism and increasing threats of jihadi terrorism. The interconnectivity of this radical movement from Morocco to Philippines leaves India and some countries of SE Asia extremely vulnerable. However, there is new pragmatism and urgency in the Indian foreign policy that takes into account growing Chinese interests in the Indian Ocean region and the instability in West Asia as well as

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fervent in the Muslim world. India has begun to pay greater attention to SE and East Asia. Although China may not have a blue-water navy capability, Chinese long-term interests require that India factors this in her strategic planning. There are also historical reasons for SE Asia and East Asia to seek alternative balancers in the equation. China has interfered in Myanmar, Indonesia, Malaysia, the Philippines, and Cambodia through their communist parties. Its consistent support to the Khmer Rouge has not been forgotten either. The eminent rise of China with its growing economic hold and lingering territorial claims in the South China Sea add to regional uncertainties. It was possibly to keep China engaged that it was brought into the ASEAN Regional Forum (ARF), but India was also given membership of the ARF to counter-balance China. India’s evolving relations are perhaps reflected best in the recent statement issued after the visit of Indian Prime Minister Manmohan Singh to Japan in December 2006. The statement described Indo– Japanese relations as converging long-term political, economic, and strategic interests underpinned by a common commitment to democracy, and also spoke of the two countries as being natural partners. The two leaders decided to establish a strategic and global partnership. However, neither India nor Japan would want this to be seen as being aimed at China or as part of US strategies in the region.

CHINA AND INDIA—RIVALS OR PARTNERS Will India catch up with China? Statistics can be quoted variously, but there is enough speculation in the West that by 2035, China would have overtaken the United States, and India would be the third-largest economy. Even though there would be problems in both countries, the 21st century would belong to India and China but with the major difference that the Chinese have assured access to energy sources, while India claims an advantage in its young population. The other difference is that by 2035, India will be dependent up to 95 per cent on imported energy while China’s dependency will be 75 per cent. A country that is almost totally dependent on external sources of energy—nuclear or fossil fuels—will obviously be disadvantaged and must seek a way out now. For the first time, China and India are growing simultaneously. For China, this is happening amidst an unresolved territorial dispute

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with India and historical animosities with Japan, accompanied by competition for new resources, markets, and rising military expenditures. Japan’s transformation from a country capable of rapid militarization to a country willing to do this, along with the US-enhanced military and naval presence stretching from the Mediterranean to the western Pacific, has pushed China to break out and ensure its future. China sees the growing warmth in the India–US relations a part of this encirclement.

CHINA

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The Chinese response to this encirclement has been to forge trade and military relationship with India’s immediate neighbours, a reverse entrapment of India, strategically. China is the second-largest trading partner of Bangladesh after India. Just before Khaleda Zia’s visit to China in August 2005, Bangladesh hastily signed an agreement to procure 16 fighter planes at a cost of USD 118 million, in what is the biggest single purchase by the Bangladesh Air Force. Although there was no allocation for this in the budget for 2005–06, the emergency sanction was subsequently incorporated into the defence budget. As a quid pro quo, China agreed to give duty-free access for more Bangladeshi items and assistance for export-capacity building. Both the countries, significantly, have agreed to develop natural gas and petroleum as well as water resources in Bangladesh. China also offered cooperation in the field of nuclear energy. It is difficult to forget that a similar understanding with Pakistan contributed to nuclear proliferation through the illegal activities of A.Q. Khan. Sri Lanka is expected soon to sign a free trade agreement (FTA) with China, wiping off the slightest advantage India has held so far. China would try her best to wedge her way (politically, economically, and militarily) into Sri Lanka, as part of her strategy to find a foothold in the countries neighbouring India. Its interest in the Hambantota naval facility is yet another marker of China’s growing naval interest in the Indian Ocean on India’s periphery. One of China’s long-term objectives has been to bring Nepal into its camp by making it dependent on economic and military aid. Although Indo–Nepalese economic relations run deep, China can make serious economic inroads. Even though Beijing has been supporting the Nepalese government in its confrontation with the

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Maoists, the success of the Maoists would strategically strengthen the Chinese influence in Nepal at India’s expense. Restricting India to the Asian subcontinent remains Chinese policy. The tactics are simple: keep borders with India tranquil but do not solve the dispute, trade with India but arm Pakistan and wean away Nepal, Bangladesh, and Myanmar. As India retreated strategically from Tibet over the last 60 years, Han Chinese and missiles moved in—the former to change the demography and the latter as an exhibition of Chinese muscle and future intent. India today faces Chinese strategic competition in what it has traditionally considered its own backyard. Seeking energy security and a great power role in the future and sensing a US decline, China is positioning itself in the subcontinent and the Indian Ocean with interests from the Persian Gulf to the South China Sea. It has helped upgrade the Bandar Abbas port in Iran, constructed a deepwater naval port in Gwadar in Pakistan at the mouth of the Straits of Hormuz, container ports in Chittagong in Bangladesh and at Hambantota in Sri Lanka, and made an offer to finance the construction of a USD 20 billion canal across the Isthmus of Kra that would bypass the Strait of Malacca. There are road and rail links planned from Gwadar to Xinjiang and from Rangoon to Kunming. This is apart from the rail link from Golmud to Lhasa and the extensive road networks across the Indian border in Tibet. The road infrastructure along the entire 4057-km India–Tibet border has strategic implications for India in the context of an unresolved border. The Chinese plan to use their soft economic power to reach India’s north-eastern states and Chittagong and Myanmar through these trade links via Nathu La. The lateral roads from China into Pakistan and Myanmar, along with access to the ports in Pakistan, Myanmar, and, possibly, Bangladesh and Sri Lanka, are designed to put India in pincers and restrict India’s influence to its national frontiers. Continued Chinese assistance to strengthen Pakistan missile and military capabilities that are India-specific and the Gwadar port development are issues that India’s strategic planners cannot afford to forget. China’s global ambitions may require her to keep supporting Pakistan to contain India and maintain a stable relationship with an important nuclear weapons Islamic state that provides an additional access to the energy-rich but volatile Middle East as well as to the Arabian Sea.

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CHINA’S MULTILATERAL APPROACHES

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China’s membership in APEC in 1991 followed by its inclusion in the ARF in 2004, and now finally with an observer status in SAARC has been part of its policy to counter the United States by seeking economic dominance, and in SAARC to counter what it sees as growing Indian influence in the subcontinent. Interestingly, China’s case for membership of SAARC was sponsored by Nepal, Bangladesh, and Pakistan who have generally tended to be wary of, even hostile, to India. ASEAN countries have become dependent on China’s rapid rise for their own economic growth just as Australia has begun to balance its relations between China and the United States. Its offer of FTA with ASEAN that will become effective in 2010 is also designed to neutralize the China-threat theory. China hopes to be able to work out a security mechanism in Asia where it would play a dominant role.

CHINA–UNITED STATES DYNAMICS Given the new US doctrine of pre-emption globally and Chinese anxieties about US activity in South Asia, dealing with our neighbours inevitably involves dealing with these two major powers. China sees the United States as its most significant challenge in Asia. It may need the US influence and control in the western Pacific to recede, yet will not do anything that would alarm the United States. China has also sought a better relationship with Russia particularly after a display of unilateral and over-militarized response by the United States in the Middle East where China’s vital interests lie. It has sought to work alongside the Russians on the Iranian nuclear issue, yet be a responsible state. China’s strategic advance would inevitably mean that India would get increasingly involved with US strategy in the region under some kind of a joint partnership. China has continually been expanding its presence and influence in ASEAN and India’s close neighbourhood, including West Asia. The pace has been accelerated with an increased availability of additional resources due to the booming Chinese economy. What China is attempting and partly succeeding in is to get the hegemony over its own backyard and then make the leap to becoming a power to challenge the United States. This is similar to the route the United

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States had taken earlier in the Americas. The Chinese plan to have a naval presence from Gwadar in the Arabian Sea to Kyaukpu in the Bay of Bengal as part of the ultimate design to challenge the United States and stifle India. Efforts to modernize the People’s Liberation Army (PLA) Navy continue as it seeks to upgrade its surface fleet with Russian Sovremenny-class destroyers and upgrade its existing diesel-powered submarines, also with Russian assistance. Its efforts to acquire nuclear-powered submarines and aircraft carriers have made slow progress. It may be some years before China acquires true bluewater capability but the overall long-term aim cannot be ignored. China has sought to exclude the United States from Southeast Asia and East Asia as evident from excluding United States from the East Asian Community meeting in Kuala Lumpur this December. However, the Chinese have limited ability today to keep the United States away, given the strong strategic ties Singapore and Thailand have with the United States. Besides, the United States has begun to mend its relations with Vietnam and strengthen them with Indonesia. China’s initiatives in West Asia have been to meet its growing energy needs and also to check the US monopoly in the region. In pursuit of this it has sought to exploit the Islamic anti-Americanism in the region, and to ingratiate itself with West Asian regimes by supplying them with ballistic missiles and the required facilities for their production. It has also used North Korea as a proxy for this purpose in the region.

CHINA AND RUSSIA IN CENTRAL ASIA A getting together between Russia and China is noticeable in the past 2 years. The border issue is now settled, and there have been military exercises and Russian arms-sale commitments. Energy commitments to China have also increased (45 per cent of Russian arms sales have been to China and at the rate of USD 2 billion annually). The first-ever joint military exercise of the Collective Security Treaty Organization (CSTO—Russia, Belarus, Armenia, Kazakhstan, Kyrgyzstan, and Tajikistan) and the SCO (Shanghai Cooperation Organization) was held in 2007. There is no question that this was a reaction to the eastward expansion of NATO. The CSTO–SCO exercise took place in Chebarkul in Russia’s Volga–Urals area. Heads

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of state of the participating countries—Russia, China, Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan, Belarus, and Armenia witnessed the exercise. SCO-observer countries (Iran, Pakistan, and India) could even be invited. In the years ahead, both China and Russia, in competition with each other or jointly in asymmetric opposition to the United States, will seek geostrategic space and vital strategic minerals in Central Asia and the Caspian region. China can be seen to be increasingly present in what has been Russia’s traditional heartland. Having resolved its territorial disputes with Russia, Kazakhstan, and Kyrgystan, China has begun to assert itself. China also seeks a transport corridor all the way to Europe for its exports, as also to the Persian Gulf. One route is the China–Pakistan–Karakorum Highway to be expanded further, with Kazakhstan added as another destination. Chinese assistance is also available for road construction from Tajikistan and Kyrgystan into China. Chinese preference for the land route is also evident in the rapid construction of overland pipelines from Kazakhstan into China. The USD 700-million 960-km pipeline with an initial annual capacity of 10 million tons and full capacity of 20 million tons was a joint venture between China’s National Petroleum Corporation and KazmunaiGaz. The initial supply to China’s northwest may be small but the idea is to break away from dependency on West Asia sources and sea lanes. As India’s energy demands grow, this Eurasian belt of Central Asia, the Caspian Sea given the continued political instability in the Gulf region.

INTERNATIONAL TERRORISM, CROSS-BORDER TERRORISM, AND OTHER THREATS Terrorism today is a global concern. No discussion of any security scenario, especially in the Indian context, is complete without a discussion about the continuing threat from terrorism sponsored by the neighbouring states. About 75 per cent of all terrorist acts since 2000 occurred in Asia and there are very few signs of this slowing down. Even General Musharraf admitted on 21 July 2005, after the London bombings, that ‘wherever these extremist or terrorist acts occur in the world, a direct or indirect connection is established with this country’.

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In the present context of the region, terrorist threats would essentially refer to Pakistan and Bangladesh-sponsored terrorism and to activities of Al Qaeda affiliates like the International Islamic Front for Jihad Against the Crusaders and Jews (IIF) formed by Osama bin Laden in 1998, which has a number of Pakistani and Bangladeshi terrorist organizations as signatories. It is this affiliation the world has to fear in the future. Not only is India under a serious threat from these jihadis but also the United States, Israel, and in fact, everyone who is not ‘Islamic’. Terrorism remains a barely concealed instrument of foreign policy both on its western frontiers and on its eastern frontiers. The former to extract concessions from a benefactor and the latter to act as a force equalizer. Although Al Qaeda is not active in India, its influence is discernible in the evolution of more jihadi cells in the country amongst disaffected Muslim youth, especially in the mega cities where Osama is eulogized and hatred for America and Israel is a common theme. Pro-Al Qaeda organizations like the Lashkare-Tayyeba, Jaish-e-Mohammed Harkat-ul-Mujahedeen, Harkatul-Jihadi-Islami, and Lashkar-e-Jhangvi, are also quite active in India since 1993. Their proclaimed aim is to establish Islamic Caliphates in India and then globally, rid Islam of its impurities brought about by the distorting influence of Buddhism and Hinduism, and to ‘Arabise’ the religion. External sponsorship of terrorism remains a major problem. Till now, the external sponsorship was largely confined to the intelligence agencies of Pakistan and Bangladesh with most of the terrorists being Sunnis and operating also through the Nepal and Bangladesh borders. The Varanasi blasts of 7 March 2006 had a Bangladesh connection when three members of Harkat ul Jihad ul Islami (HuJI—Bangladesh) were arrested in April. One of the Indian suspects arrested had connections with the Jaish-e-Mohammed of Pakistan and had also gone to Bangladesh and had been enrolled in the HuJI, which is considered the training wing of Al Qaeda in Bangladesh. With a religious diehard now as the President of Iran, the external sponsorship by the intelligence agencies of Iran for Shia terrorism is only a question of time if it has not already started. The interest of Pakistan and Bangladesh is in facilitating the emergence of a Muslim majority state and its ultimate secession from India. The interest of China is in weakening the Indian capability

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to protect Arunachal Pradesh in the likelihood of the unresolved border dispute over this state, thereby leading to a confrontation between India and China one day. The definition of terrorism remains very flexible and usually something that is highly subjective and politically expedient. No wonder, India which has suffered relentless Pakistan-inspired terrorism for at least 17 years, finds no mention as one of the victims of terrorism in the US national security strategy report of 2006. Instead, the report thoughtfully and sympathetically mentions that Pakistan was one of the places that terrorists struck in 2005.

THE FUTURE 1. Sino–Indian relations today are enjoying a period of stability and growth. But there are unresolved disputes and emerging competition and even conflicts between the two countries ranging from boundary issues to energy security that require strategic vision, diplomatic skill, and mutual accommodation. 2. A stable Sino–Indian relationship requires an effective management of the delicate China–India–Pakistan triangle and now, increasingly, a Sino–Indian–US relationship and even the Russia–India–China triangle. The well-known all-weather relationship with Pakistan was a key component of China’s South Asia policy as Beijing sought to tie down India and extend its influence to the subcontinent. China may give the appearance of being more accommodating on bilateral issues but is unlikely to give India much manoeuvrability in the subcontinent. 3. China’s foreign policy challenge in Southeast Asia lies in impeding the emergence of effective strategic partnerships of the countries of the region with the United States. It will be a difficult task. All of ASEAN, particularly Singapore, Thailand, and Indonesia, as well as Japan and South Korea, are apprehensive of possible Chinese expansionism and have a strong relationship with the United States. 4. If China has to secure its future energy security needs in West Asia, it can only be facilitated by accommodating US interests and not in opposition to them. Iran, currently the centrepiece of China’s strategic initiatives, can hardly be China’s cats-paw against the United States in the region. China has to take into account that even though it may be able to create tactical and strategic irritants for the United States in West Asia, it is militarily ill-equipped to dislodge the former from the region.

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5. China’s unresolved border dispute with India and its assistance to Pakistan designed to keep India in check have been the factors determining India–China relations in the past and the growth of the two economies will only add to this complex equation. Normalization of political relations will take time even though economic ties are expected to have a momentum of their own. War with China or a repeat of 1962 may be a remote possibility but China has steadfastly armed Pakistan and provided it with nuclear weapon equipment and technology and missiles that has encouraged Pakistani adventurism. 6. China’s strategic advance would inevitably mean that India would get increasingly involved with US strategy in the region in a joint partnership. Partnerships are between two equal powers which India and United States are not, so when the United States speaks of convergence of interests it means convergence with their interests. 7. India will have to go the extra length to underplay its growing alliance with the United States so as not to jeopardize its fledgling ties with China. At the same time, India does not have to be apologetic or feel the need to explain the new India–United States friendship. 8. Peace with Pakistan is possible only if there is a change in the mindset of the rulers there. It is possible only if the army, which controls Pakistan’s policy on India, Afghanistan, and strategic assets, decides that the peace dividend with India is larger than the conflict dividend. All indications are to the contrary. The present phase may be a tactical manoeuvre to buy time. 9. Pakistan today is a nursery of terrorism and home to radical Islam. It is a vital component of the Islamic struggle against the Christian world. Pakistanis consider they have a fair weather friendship with the United States but an all-weather friendship with China. Latest indications are that the Pakistanis who deal with the tribals in its frontier regions has only Talibanized the region, something that is possibly irreversible and definitely a base for forays into Afghanistan. Terrorists from other regions are increasingly making the Federally Administered Tribal Areas (FATA) area of Pakistan as a safe haven. 10. Given the low level of trust that exists between India and Pakistan, a ruling class that seems reluctant to assist its present

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benefactor and saviour to the extent it can or should is hardly likely to do so for its arch-enemy, India. 11. The Pakistan Army, the strongest political party in Pakistan, will increasingly face the problems of growing public dissent and other anti-incumbency factors, making it vulnerable to sudden changes. 12. India’s neighbourhood will remain troubled and hence there is an urgent need to set up institutionalized arrangements for conflict resolution. This is particularly relevant in a nuclear neighbourhood. 13. Afghanistan shows little promise of recovering from the mess it is in. Afghanistan’s present plight depicts endless conflict, a shortage of troops and equipment, a government at the centre that is less and less in control, corruption, and popular discontent. By all indications, the Taliban, with an active support of Pakistan, is returning with a vengeance. The recent Waziristan truce and talk of similar pacts with the Taliban in southern Afghanistan will only further whittle down President Hamid Karzai’s control and raise the spectre of Afghanistan returning to pre-9/11 days. 14. Apart from immediate neighbours, India must deal with the neighbour’s neighbours. There is a need to pay greater attention to Iran and Afghanistan against a recalcitrant Pakistan, and to Russia and Japan to counter an economically and militarily powerful China without alarming the latter into taking defensive or offensive steps, and above all, to the most powerful country in the world today, the United States. 15. Besides military threats and terrorism, the subcontinent will be severely affected by energy and water shortages, environmental degradation, and demographic changes in the not-so-distant future. 16. The long-term presence of NATO in the neighbourhood is a reality. NATO’s performance and impact are, nevertheless, already under question. A search for new mechanisms to deal with global crises that involve Asia and Asians to a greater extent has become inevitable. 17. While China–India–Russia strategic arrangement does get discussed, neither of these countries can afford to jeopardize its relations with the United States for the sake of the other members of the triangle.

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18. The United States is still the sole super power but its global dominance is being challenged through an asymmetrical response from the Russia–China axis. The United States, caught in a growing multifaceted quagmire in Afghanistan and Iraq, and international uncertainties in Iran and North Korea, its own economic problems and excessive dependency on imported energy from a politically volatile area, sees that the rest of the world may start to move away and begin to put their faith in other currencies, weakening the dollar. 19. There are no easy solutions. Restoration of responsive and responsible governments, economic development, and so on, are often the recommendations but what we also need in the region is institutionalized arrangements for conflict resolution. This is particularly relevant in a nuclear neighbourhood. Only an enlightened, self-confident leadership in these countries can promote a realization that the future of countries in South Asia is inextricably interlinked.

12 THE EVOLUTION OF SINO–INDIAN RELATIONS IMPLICATIONS FOR THE UNITED STATES C. Raja Mohan

INTRODUCTION In the transformation of Indo—US relations under the Bush Administration, there has been an interesting debate within the United States on the relevance of the China factor. Although the Administration itself has not openly talked about the value of India in balancing a rising China, many have presumed that this has been one of the motivations of the Republicans in warming up to India and agreeing to change the domestic and international non-proliferation law in favour of New Delhi. Some in the United States have argued that a non-aligned India will never offer itself for a putative American containment of China and that the Bush Administration was on a fool’s errand. Yet others have suggested, even if India were to have the political will to confront China, New Delhi might never have the capacity to balance Beijing. Ethnocentrism perhaps is only partly responsible for the American perceptions on how it can shape the dynamic of Sino– Indian relations. The post-Cold War hubris in Washington easily reinforces the myth that it has the power to define all bilateral or regional security environments at will. What is at issue is not merely the nature of the policy choice in Washington. Equally important has been the opaque nature of the ties between New Delhi and Beijing. The diplomatic relations between the two leaderships are among the most formal in the world today, unleavened by any personal warmth or rapport of the type that marks Indian

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leaders’ interactions with their Western counterparts. The two governments speak to each other in a coded language and argue over every word and phrase on difficult issues and tend to obfuscate differences through a hoary rhetoric. Only a handful of people in the government are privy to the bilateral negotiations and the public is served up generalities that reveal little. As a consequence, the fact that the Indian discourse on either the past or future of its complex relationship with China is ill informed has little bearing on the real policy. Unlike in the United States, where the China factor has figured prominently in the debate on Indo–US relations, there is no equivalent debate in India. New Delhi seems quite happy to conduct its engagement with the dominant power and the rising power in a mutually exclusive manner and proclaim ‘strategic partnership’ with both. It is also a fact that New Delhi’s relations with both Washington and Beijing are today in their best phase ever since India’s independence. This chapter is an attempt to offer a cautionary note against the prevailing debate in Washington about the triangular relationship between India, China, and the United States. I argue that any triangulation of this relationship will have to take into account the unique nature of Sino–Indian relations. Although the world has always impinged upon the manner in which modern India and China have interacted with each other, the evolution of Sino–Indian relations has demonstrated a measure of autonomy that defied the principal patterns shaping international relations over the last few decades. When the Western world and much of Asia shunned Communist China in the 1950s, India was its most vocal champion. And when the United States and its allies reached out to China at the turn of the 1970s, New Delhi’s ties with Beijing were at their lowest ebb. As China and India rise on the global stage, their relations are more likely to fit the traditional pattern of autonomy rather than the tight dependence on US policies towards either of these nations. More boldly, I would suggest that the United States might be the ‘repondeur’ to the changing dynamics of Sino–Indian jockeying for power in Asia rather than a ‘demandeur’ on the bilateral relationship between New Delhi and Beijing. After a brief historic overview on the evolution of the ties between New Delhi and Beijing until the turn of the millennium, this chapter offers some insights into the current play of bilateral relations. I then explore the likely future direction of the relationship in a number of issue areas and follow

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up with a concluding section that lays out the implications for the triangular relationship with the United States.

THE PAST AS PROLOGUE Sino–Indian relations until the late 1990s are now well researched and documented,1 and what follows is a brief survey of their essential features. Although India had less of an interaction with China in the first half of the 20th century than the United States, the Indian national movement cultivated and promoted an extraordinary romance about China. As the notions of ‘Asian solidarity’ against colonial rule and an ‘occidentalism’ that emphasized the superiority of Eastern civilizations over the Western gained hold in the Indian nationalist discourse, an empathy towards China grew by leaps and bounds in the inter-war period. At the Congress of the Oppressed Nationalities in Brussels in 1927, the Chinese and the Indian delegations issued a bilateral manifesto, apparently drafted by Jawaharlal Nehru, which extolled millennia of cultural contact and proposed greater contact and cooperation between the two peoples and mutual cooperation in the anti-imperialist struggle. The Indian delegation also promised to step up its pressures on the British to desist from using the Indian Army in China. During the Sino–Japanese war, the Indian National Congress extended a strong support to the Chinese nationalists, mobilized the national sentiment by observing ‘China days’, and dispatched a medical mission to China to participate in the war effort against Japan. The widespread sense of solidarity did not, however, easily translate into a greater mutual understanding between the two societies. Tagore’s reception in China was not too warm as the poet cautioned against ultra-nationalism and Western materialism. Nor did China understand the Indian emphasis on a nonviolent struggle against imperialism. If Nehru continued to whip up the enthusiasm for China, other Congress leaders remained

A number of good surveys of the bilateral relationship are available. See John Garver, Protracted Contest: Sino–Indian Rivalry in the 20th Century (New Delhi: Oxford University Press, 2001); Francine Frankel and Harry Harding, eds, The India –China Relationship: What the United States Needs to Know (New York: Columbia University Press, 2004).

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unimpressed. The changed international context of the Second World War too put paid to the hopes of a joint struggle against imperialism. In their fight against Japan and their need for allied support through India, the Chinese nationalists sought to persuade their Indian counterparts to focus on the ‘anti-fascist war’. The Indian leadership’s fight was against the British and emphasized an early independence. After his rather cool meeting with Chiang Kai Shek in Calcutta in 1942, Gandhi wrote to a colleague, ‘I would not say that I learnt anything, and there was nothing we could teach them’.2 That would remain an enduring metaphor of bilateral relations for decades to come. Even as a Nehruvian romance dominated a large section of the Indian National Movement, sections of the departing British establishment had strong concerns about China’s potential threat to independent India and Asia.3 This was also shared by a small realist school among the Indian nationalists, most notably K.M. Panikkar who argued that the inevitable emergence of a more powerful China after the Second World War would pose difficult challenges for India in Burma and Southeast Asia.4 And these concerns about an emerging China would present themselves starkly when Communist China occupied Tibet. It was one thing to be romantic about China in general terms and entirely another to be dispassionate about a large neighbour. When the Indian nationalists came of age in the early decades of the 20th century, China was not a neighbour. Communist China’s occupation of Tibet in 1950 transformed the tranquil Indo–Tibetan frontier into a nearly 3,600-km-long contested border for decades to come. An India, geopolitically weakened by the partition and preoccupied over with the conflict with Pakistan on Jammu and Kashmir issue, did not have the wherewithal to contest the Chinese occupation of Tibet. Although many of his colleagues were cured of the romanticism

2 Cited in Guido Samarani, ‘Shaping the Future of Asia: Chiang Kai-shek, Nehru and China–India Relations During the Second World War Period’ (Working Paper 11, Centre for East and South-East Asian Studies, Lund University, Sweden, 2005), 14. 3 Peter John Brobst, The Future of the Great Game: Sir Olaf Caroe, India’s Independence, and the Defence of Asia (Akron: University of Ohio Press, 2005), Ch. V, pp. 60–76. 4 K.M. Panikkar, The Future of India and South East Asia (London: Macmillan, 1943).

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with China, Nehru bet on what we might now call a ‘hedged engagement’ with India’s new neighbour who involved balancing as well as outreach. On the one hand, Nehru signed independent India’s first treaties offering security protection to Bhutan (1949) and Nepal (1950), which were concerned about Communist China on their frontiers. At the same time, Nehru hoped that befriending China might encourage Beijing to accept the border line drawn up by the British between India and Tibet in 1914 and respect the aspirations of the Tibetan people for a substantive autonomy. These hopes were dashed when the 1959 revolt in Tibet saw the flight of the Dalai Lama to India and escalation of the border conflict. The 1962 border war became inevitable and left an enduring scar of hostility in India. If romanticism and a misreading of Chinese intentions prevented India from adopting a pragmatic policy towards China in the 1950s, the 1962 war left an entrenched unreasonable negativism about Beijing that New Delhi finds it so hard to overcome even four and a half decades after the border clash. Nehru’s ‘hedged engagement’ turned out to be a double failure. It succeeded in neither constructing a stable bilateral relationship nor preventing clash of interests in the larger Asian arena. Nehru was convinced rightly that China was destined to play a larger role in world affairs. He was right in not choosing to look at China through the anti-Communist prism. But his hope to socialize China by integrating it into the regional and international system was, to say the least, premature. Nehru’s decision, against Western advice, to end China’s diplomatic isolation by acting as an interlocutor for Zhou Enlai at the 1955 Bandung Conference turned out to be a disaster. Zhou not only refused India’s help but also outsmarted Nehru at the Bandung Conference. Zhou also reached out to Pakistan, one of the pro-Western powers at that time, to lay the foundation for an enduring partnership with India’s arch rival. Bandung was not just a diplomatic set back for India but also made it abundantly clear that India and China were rivals in the Asian arena, and that Beijing had ways to significantly limit Indian influence as well as keep it off balance by aligning itself with Pakistan. The post-1962 years saw intense political hostility between the two countries. India played the Tibet card against China, initially in cooperation with the United States and later with the Soviet Union. Beijing paid back with a strong support to Pakistan in the dispute with India over Kashmir, to the Maoist revolutionary

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movement, and the various insurgent groups in India’s northeast. As China began to put the Cultural Revolution behind it, the two countries re-established diplomatic relations in 1976. In 1979, the then Foreign Minister Atal Bihari Vajpayee attempted a breakthrough but came to grief amidst Chinese attack on Vietnam during his visit. But the political change in China under Deng Xiaoping opened the space for a resumption of Sino–Indian dialogue. Although Beijing was ready for a full normalization of bilateral relations, India insisted on a resolution for the boundary dispute as a precondition. The border talks during the 1980s made no headway until Rajiv Gandhi injected a measure of pragmatism into India’s China policy. Reversing the traditional Indian policy during his visit to China in December 1988, Rajiv Gandhi came up with a threefold understanding with Deng—more purposeful boundary negotiations, a commitment to maintain military peace and tranquility on the frontier, and a simultaneous expansion of bilateral relations. This resulted in a more relaxed relationship between the two countries, but there was no breakthrough on the boundary nor was India willing to imagine a vibrant Sino–Indian relationship. During the mid-1990s, there was an incremental progress in bilateral relations with two new agreements on military confidence-building measures being signed in 1993 and 1996. The continuing Chinese support to Pakistan’s nuclear and missile programmes saw a rapid deterioration of India’s security environment. The acquisition of nuclear weapons saw Pakistan emboldened to pursue a low-intensity conflict with India by fomenting crossborder terrorism. India, in turn, crossed the nuclear Rubicon in 1998, and its mention of the China threat as a justification introduced a new chill in bilateral relations. Recognizing the dangers of a new confrontation with China, India was quick to make amends by declaring that it does not see Beijing as a threat but would like to create the basis for a resumption of the bilateral dialogue.

BUILDING A RELATIONSHIP Although Atal Bihari Vajpayee’s nuclear decision in May 1998 produced immediate difficulties in Sino–Indian relations, it also paved the way for a positive approach in New Delhi towards Beijing. Four factors helped to engineer the change. One, the sense of a psychological

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parity if not operational nuclear equivalence with China, ended a long-standing Indian diffidence in engaging Beijing. Two, rapid economic growth resulting from the economic reforms gave a new sense of optimism to the decision makers in New Delhi that whether they catch up with China or not, India could certainly entertain the hopes of becoming a developed country by 2020. Three, unlike the older generation of the Congress Party, which was burdened by the ‘guilt of 1962’ and unwilling to take bold steps to resolve the boundary dispute, Atal Bihari Vajpayee and his advisors were ready to take a pragmatic view and change the framework of the negotiation. Finally, China which for long believed that India will never get its act together was surprised by New Delhi’s success in breaking out of the isolation that followed the nuclear tests, was impressed by its big power diplomacy especially towards the United States, and acknowledged India’s new prowess in the information technology (IT) sector. As a consequence, the ground was cleared for a forward movement across the full spectrum of bilateral relations. Despite being neighbours, the Sino–Indian trade relationship was a miniscule, amounting to barely a billion US dollars at the turn of the century. Since then, the bilateral trade relationship has galloped at annual growth rates of nearly 50 per cent. At the end of 2006, it had reached nearly USD 25 billion and is projected to reach nearly USD 60 billion by 2010. Although bilateral trade remains unbalanced with India exporting fewer manufactured goods than China, the pace of growth and the enduring complementarities have surprised most observers. All indications are that China will emerge as India’s largest trading partner in a few years. The two governments had set up a joint study group to explore the prospects of comprehensive trade cooperation in 2003. Among its many recommendations submitted in 2005, the Study Group proposed the negotiation of a free trade agreement (FTA) between the two countries.5 Like in all its other free trade negotiations, India is extremely cautious in ceding the market space. The Indian industry remains divided with some of them seeing huge opportunities in the Chinese market, while others remain opposed

5 See Ministry of External Affairs, Government of India, Report of the India–China Joint Study Group on Comprehensive Trade and Economic Cooperation (New Delhi, 2005); available at http://meaindia.nic.in/treatiesagreement/2005/11ta1104200504.pdf

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to opening up the Indian market for Chinese goods. India lodges the maximum number of anti-dumping complaints against China. The Indian security establishment too remains wary of letting unhindered entry of Chinese investments into India.6 The Chinese have formally taken up the wide ranging obstacles to economic cooperation with India, which has promised to look into them. Since the early years of this decade, there has been a new determination in both capitals to resolve long-standing political differences. Vajpayee’s visit to China in June 2003 saw two important political breakthroughs. One was the resolution of the dispute over Sikkim’s integration into India in 1974. Under an agreement on border trade between Tibet and Sikkim, China agreed to recognize the absorption of Sikkim into India and issue new Chinese maps to that effect. India in turn offered a new formulation on Tibet. Although some in India saw this as a dilution of India’s traditional stand on Tibet, India was quite happy to get the Sikkim issue off the table.7 India’s new pragmatism understood the futility of playing word games on Tibet and recognized the greater gains in resolving territorial conflicts with China. As part of the new arrangement, India and China opened up a historic trade route that connected Tibet to the Gangetic plains through the Nathu La pass in Sikkim. Although India is hesitant about embarking on transit trade at Nathu La, there is growing pressure from within Sikkim for leveraging the above opportunity for the growth of sub-Himalayan territories.8

6 Siddharth Srivatsava, ‘Delhi Divided over Chinese “Threat”,’ Asia Times Online, 8 November 2006, available at http://www.bilaterals.org/article.php3?id_article= 6409 7 The new formulation on Tibet read: ‘The Indian side recognizes that the Tibet Autonomous Region is part of the territory of the People’s Republic of China and reiterates that it does not allow Tibetans to engage in anti-China political activities in India. The Chinese side expresses its appreciation for the Indian position and reiterates that it is firmly opposed to any attempt and action aimed at splitting China and bringing about ‘independence of Tibet.’ See Atal Bihari Vajpayee and Wen Jiabao, ‘Declaration on Principles for Relations and Comprehensive Cooperation between the Republic of India and the People’s Republic of China,’ Beijing, 23 June 2003, available at http://www.mea.gov.in/jdhome.htm 8 For an assessment of the benefits of Sino–Indian transit trade at Nathu La, see Mahendra Lama, Sikkim–Tibet Trade via Nathu La: A Policy Study on Prospects, Opportunities, and Requisite Preparedness (Gangtok: prepared by the Nathu La Trade Study Group for the Government of Sikkim, August 2005).

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Vajpayee’s 2003 visit also saw the initiation of a new effort to resolve the boundary dispute. Although the Chinese leadership was quite happy to leave the boundary question to the future generations to resolve, Vajpayee and his advisors were determined to find an early solution. In his talks, Vajpayee won a commitment from the Chinese for a serious and purposeful negotiation on the boundary question. In return, Vajpayee signalled India’s readiness to negotiate a territorial settlement on a practical basis instead of merely claiming that China was the aggressor and demanding that it vacate all the ‘occupied territories’. The two sides agreed to appoint empowered representatives who would ‘explore from the political perspective of the overall bilateral relationship the framework of a boundary settlement’. This seemingly simple formulation marked a big departure from the traditional Indian negotiating position on the boundary dispute. The understanding was that the two special representatives would meet frequently and embark on the resolution of the dispute in three phases—the identification of political parameters, the negotiation of specific mutual territorial concessions, and the actual delineation and demarcation of the new boundary. Prime Minister Wen Jiabao’s visit to New Delhi in April 2005 saw the completion of the first stage under the Congress government that succeeded the Bharatiya Janata Party (BJP)-led coalition. Prime Minister Manmohan Singh and Wen issued a statement on the guiding principles for the settlement of the boundary,9 marking a big step forward on an intractable issue that hobbled bilateral relations since 1950. Since then, the second stage of defining a territorial compromise has been difficult. Negotiations since 2005 have tended to meander amidst China’s insistence on substantive Indian concessions in the Tawang region of Arunachal Pradesh and New Delhi emphasizing minimal territorial adjustments to the status quo.10 Although this territorial compromise would require a major exercise of political will in both capitals, the progress lies in the fact that the argument is no longer about principles but on the specifics 9 Government of the Republic of India and the Government of the People’s Republic of China, Agreement on the Political Parameters and Guiding Principles for the Settlement of the India–China Boundary Question (New Delhi, 11 April 2005), available at http:// www.mea.gov.in/treatiesagreement/2005/11ta1104200501.htm 10 For an assessment of the stalled second stage, see C. Raja Mohan, ‘Coonoor Conundrum,’ The Indian Express, New Delhi, 20 April 2003.

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of territorial exchange. China’s perception of where India is headed could be a key factor in a more reasonable position from Beijing, which could open the door for a conclusion of the second phase of boundary negotiations. The central achievement in Sino–Indian relations over the recent years has been the construction of a wide-ranging and healthy bilateral relationship, which had eluded them for decades. The new engagement, now defined as a ‘strategic partnership’, covered regular high-level political exchanges, a booming bilateral trade, and greater contact between the two countries’ various branches of government including the armed forces, and above all, increasing people-to-people contact. As the Indian middle class discovers China, entrepreneurs and tourists are making a beeline to the northern neighbour. As in so many other bilateral relations, the Indian civil society and private sector have a way of engaging other societies without a reference to the government policies. That big critical moment of a substantive engagement between the two societies is now at hand.

SECURITY DILEMMA OR COOPERATIVE SECURITY? The long-overdue flowering of the relationship between the great Asian civilizations, however, has not taken away the prospect for a new rivalry. Although many past unresolved issues like the boundary dispute remain on the agenda, the real cause for concern arises from the unfolding change in the standing of the two Asian giants on the regional as well as the world stages. As rising powers, China and India are likely to find a clash of interests, not as much in the traditional bilateral disputes but in the pursuit of their interests in the region and the world. Even as a classical ‘security dilemma’ begins to develop between China and India, their growing interests beyond borders accentuate the need for a peaceful regional and global environment, to consolidate the economic gains of the reform and spread them in a more equitable manner at home. This, in turn, would call for an approach of ‘cooperative security’ from Beijing and New Delhi. The following is an analysis of the tension between the competing dynamics of ‘security dilemma’ and ‘cooperative security’ between India and China in three broad areas.

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First, the subcontinent which has long been seen as an arena of rivalry between the two Asian powers. India tended to see the Chinese role south of the Himalayas as an attempt to ‘balance’ India within South Asia. Beijing, in turn, has complained about New Delhi’s attempts to limit Chinese influence in South Asia, criticized India’s ‘hegemony’, has wooed the smaller nations with the slogan of ‘sovereign equality’, and has also offered military and economic cooperation. Contrary to the popular image, the Himalayas were never a separator between the ambitions of China and India. New Delhi has been unwilling to give up on its historic cultural and political interests north of the Himalayas in Tibet, Xinjiang, and Mongolia. China has affirmed of its own rights for unhindered relationships with the South Asian countries not to speak of territorial claims on the southern slopes of the Himalayas. The smaller nations of South Asia have learnt the art of playing China and India against each other in pursuit of their own internal and external objectives. The jockeying between the two nations has now acquired a new edge amidst the rise of the economic capabilities of both the nations—China’s decision in 1997 to ‘Go West’ with a massive plan to develop its remote hinterlands, and an expansion and modernization of its transport corridors into the subcontinent. India has responded with both external and internal balancing. On the external front, when Pakistan and Bangladesh pushed for China’s membership in the South Asian Association of Regional Cooperation at the 13th South Asian Association for Regional Cooperation (SAARC) summit in Dhaka at the end of 2005, India first resisted. When it found that it could not keep China out of SAARC, New Delhi manoeuvred to ensure that Japan, the United States, South Korea, and the European Union (EU) too would become observers along with SAARC.11 When King Gyanendra of Nepal sought to play the China card against India during the struggle for the restoration of democracy during 2005–06, New Delhi overcame its past inhibitions on political cooperation with the United States, UK, and Europe in South Asia. It was this strong external coalition that created the space for the democratic movement that eventually succeeded in April 2006.12 11 C. Raja Mohan, ‘China and Japan Set to Redefine South Asian Geopolitics,’ RSIS Commentary, 30 March 2007; available at http://www.rsis.edu.sg/publications/ Perspective/RSIS0242007.pdf 12 Author’s personal conversations with senior Indian officials, April 2006.

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India was also spurred into an internal balancing of China. As China’s new rail network rolled down towards its borders through Tibet and Xinjiang, and its road networks began to link up with India’s neighbours, India has undertaken a massive programme to modernize its own internal connectivity on the Chinese border as well as trans-border connectivity with the smaller neighbours to the north.13 Concerned at the rapid growth in China’s economic relationship with India’s neighbours and worried that India was ceding its natural economic hinterlands to Beijing, the Foreign Office has begun to push for a more liberal attitude towards trade with neighbours in South Asia. At the 14th SAARC Summit in New Delhi during April 2007, Prime Minister Manmohan Singh offered the least developed countries (LDC) of South Asia unilateral concessions on market access.14 Forward-looking sections of the Indian establishment have begun to appreciate the long-term consequences of China’s rise on South Asia’s international relations. They also recognize that exclusive spheres of influence, of the kind India has enjoyed in parts of South Asia, are no longer sustainable. It is also likely that the Indian decision makers will take the next step in recognizing the opportunities from the rise of China. Beijing’s massive investments and accelerated development of its western regions has brought back into view the possibility for restoration of historic trade routes between northern India on the one hand and Xinjiang, Tibet, and Yunnan on the other and building on the natural geographic synergies between western China and South Asia. Reviving these trade routes will allow India to develop her own sub-Himalayan regions more rapidly, and pressure has begun to mount from these regions for greater cooperation with China. More fundamentally, India could leverage the Chinese economic weight to accelerate economic integration in South Asia.

Foreign Secretary Shyam Saran, who is also one of India’s leading China hands, took the initiative for a change in the Indian approach on connectivity in the northern borders and pushed for a massive national commitment. Some of the ideas that motivated Saran could be gleaned from, ‘Does India have a Neighbourhood Policy?’ A talk by the Foreign Secretary at the Indian Council of World Affairs, New Delhi, 9 September 2006, text available at http://www.mea.gov.in 14 See ‘Address by Prime Minister Manmohan Singh to the 14th SAARC Summit,’ New Delhi, 3 April 2007, available at http://www.mea.gov.in/index.htm 13

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Second, the tension between the dangers of a ‘security dilemma’ and the opportunities of ‘cooperative security’ are also visible on a much broader arena—stretching from Southeast Asia to Central Asia, the Middle East, and Africa. In all these regions, the density of China’s engagement is far thicker than that of India. That does not necessarily mean India has no desire to catch up with China in extending its influence in what it considers its own ‘extended neighbourhood’. If India’s socialism had disconnected it from the flows of trade and investment for decades, New Delhi is now consciously reaching out to these regions in search of greater economic, political, and security cooperation. The Look East policy towards Southeast Asia unveiled by India in the mid-1990s is the most comprehensive approach to a particular region by New Delhi. The policy has been successful in raising the prospect for India’s longer-term integration with East Asia. As all trend lines point to the rising profile of China and India in all the sub-regions of Asia and in Africa, the shape of potential rivalry is manifest most clearly in Burma, which shares long borders with both the nations. Rivalry with China has been a key factor in India’s shift from supporting the democratic movement during 1988–92 to a deepening engagement with the military government.15 Amidst the rising regional footprints of China and their intensifying quest for natural resources and political influence beyond their borders, a deepening security dilemma appears inevitable. Although there are growing anxieties within the Indian strategic community about rising Chinese influence in different parts of Asia, Beijing has tended to downplay the potential rivalry with India.16 The Indian leaders, too, have repeatedly insisted that Asia has space for both India and China to grow. The joint declaration by Manmohan Singh and Hu Jintao in New Delhi during November 2006 firmly stated the non-antagonistic nature of their relationship and the opportunities that each nation’s economic growth presents to the other as follows:

15 See Renaud Egreteau, Wooing the Generals: India’s New Burma Policy (New Delhi: Authors Press, 2003). 16 John Garver, ‘Asymmetrical Indian and Chinese Threat Perception,’ Journal of Strategic Studies 25, no. 4 (2002): 109–34.

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Each side welcomes and takes a positive view of the development of the other, and considers the development of either side as a positive contribution to peace, stability and prosperity of Asia and the world. Both sides hold the view that there exist bright prospects for their common development, that they are not rivals or competitors but are partners for mutual benefit. They agree that there is enough space for them to grow together, achieve a higher scale of development, and play their respective roles in the region and beyond, while remaining sensitive to each other’s concerns and aspirations.17

The trick clearly lies in finding that ‘sensitivity’ to mutual concerns and avoiding a potential degeneration of their current economic competition into a political and strategic rivalry. Despite their participation and occasional cooperation in a wide range of multilateral forums, India and China have not had a substantive regional security dialogue. A similar dialogue between India and the United States that begun earlier this decade has significantly boosted mutual trust and confidence. The potential opportunities for cooperation in the sensitive energy sector have been discussed elsewhere in this book (Mahalingam’s chapter). A similar potential exists for Sino–Indian cooperation in promoting joint mega transnational projects for accelerating economic development in many parts of Asia and integrating these regions into the growing Chinese and Indian markets as well as the rest of the world. Sections of the Indian and Chinese establishments have also begun to see the loss of policy control amidst a knee-jerk competition as in Burma. If the military in Burma has benefitted from it, Beijing and New Delhi would need from their own longer-term perspective that political change might be necessary to promote stability and sustainable economic growth. Political cooperation between India and China might hold the key in Burma where all other external efforts to promote change have come to a naught. The Indian Ocean is the third arena where a Sino–Indian security dilemma might be taking shape. The rapid growth of China’s interests abroad, particularly energy needs, building a modern Navy, and expansion of its maritime profile, have emerged

See ‘The Joint Declaration by the Republic of India and the People’s Republic of China,’ New Delhi, 21 November 2006, available at http://www.mea.gov.in/ jdhome.htm

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as the major, grand strategic objectives of Beijing.18 That a rising China will have armed forces that are commensurate with its interests should not be surprising. However, India which has enjoyed a relatively important position in the Indian Ocean is bound to respond to the inevitable increase in the Chinese naval and maritime presence in the region. For many in the West and India, Beijing’s assistance to the construction of a high-profile port in Gwadar on Pakistan’s Makran coast, overlooking the world’s energy supplies from the Persian Gulf, has become emblematic of the new Chinese maritime strategy. Western analysts now describe China’s naval and maritime infrastructure development in the Indian Ocean region as a ‘string of pearls’ strategy, raise questions about its consonance with Beijing’s proclaimed strategy of ‘peaceful development’.19 Many in India too see the Chinese interest in building maritime infrastructure in the Indian Ocean, including in Bangladesh, Burma, Sri Lanka, Maldives, and the Western Indian Ocean islands, as proof enough of a naval threat in the making.20 India’s official reaction has been more muted, but the Indian Navy carefully monitors every single naval and maritime thrust in the Indian Ocean. The Indian government has often sought to persuade some its neighbours and friendly nations in the Indian Ocean littoral to observe some limits on maritime cooperation with China.21 Beijing meanwhile has stepped up political and diplomatic efforts to convince its neighbours that China’s rise is not threatening to the region. It has unveiled a focussed ‘military diplomacy’ to reach out to neighbours and major powers. China is inviting military officers from neighbouring countries to observe some of its annual army David Walgreen, ‘China in the Indian Ocean Region: Lessons in PRC Grand Strategy,’ Comparative Strategy 25, no. 1 (2006): 55–73. 19 Christopher J. Pehrson, String of Pearls: Meeting the Challenge of China’s Rising Power Across the Asian Littoral (Carlisle, PA: Strategic Studies Institute, US Army War College, July 2006), available at http://www.strategicstudiesinstitute.army.mil/ pdffiles/PUB721.pdf 20 B. Raman, ‘Gwadar, Hambantota and Sittwe: China’s Strategic Triangle,’ 6 March 2007; available at http://www.saag.org/papers22/paper2158.html 21 Amit Kumar, ‘A New Balance of Power Game in the Indian Ocean: India Gears Up to Tackle Chinese Influence in Maldives and Sri Lanka,’ IDSA Strategic Comments, 24 November 2006, available at http://www.idsa.in/publications/stratcomments/ AmitKumar241106.htm 18

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exercises and has conducted naval exercises with a large number of countries including India. As a new Chinese naval diplomacy unfolds in the region, India has not been sitting on its hands. Much like Beijing, New Delhi has increased its naval engagement in the region. India now conducts naval exercises with all the great powers including the United States, Japan, and China, as well as neighbours in Asia. The range, scope, and intensity of the unfolding Indo–US military relationship have not gone unnoticed in Beijing. China also views with some alarm the decision taken by India, the United States, and Japan to conduct joint naval exercises in April 2007 off Okinawa.22 China, which has seen India join the US, Japanese, and Australian navies in offering relief after the Tsunami at the end of 2004, is concerned at the Japanese Premier Shinzo Abe’s proposal for building strategic cooperation among the four Asian democracies.23 India has also stepped up its own naval cooperation with many of the littoral countries of the Indian Ocean from Seychelles to Vietnam. It has signed a substantive defence cooperation agreement with Singapore and has beefed up its traditional naval ties with western Indian Ocean island states. There is also speculation that India might be developing multipurpose maritime facilities in Mauritius and other western Indian Ocean islands.24 As Chinese and Indian powers, and more generally those of the regional states, grow a new race for the construction of naval bases, a competition to project power through forward deployment may well be on the cards.25 Put another way, Sino–Indian rivalry is an important element in the broader transformation of the power distribution in the Indian Ocean. An equally important factor has been the growing imperatives for maritime cooperation among the major powers for the pursuit of such collective goods as the protection of sea lanes, combating piracy, and confronting maritime

22 Martin Walker, ‘India’s New Alliances,’ 13 March 2007, available at http://www. upiasiaonline.com/security/2007/03/13/indias_new_alliances/ 23 C. Raja Mohan, ‘Asia’s New “Democratic Quad”,’ ISN Security Watch, 19 March 2007, available at http://www.isn.ethz.ch/news/sw/details_print.cfm?id=17383 24 Steven J. Forsberg, ‘India Stretches its Sea Legs,’ Proceedings of the U.S. Naval Institute 133, no. 3 (March 2007): 38– 42. 25 Donald L. Berlin, ‘The Great “Base Race” in the Indian Ocean: Conflict Prevention or Stimulation,’ Contemporary South Asia 13, no.3 (September 2004): 239–55.

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terrorism. Even as they circle each other, India and China will have many common maritime interests in the Indian Ocean. Two broad views have emerged in the debate on the rise of China and India. One holds that a conflict between the two is inevitable. The other view suggests that there will be enough of an incentive for the two Asian giants to build on shared goals from the perspective of their own self-interest. It would be premature to jump to a conclusion on which argument would ultimately prevail. The coming years are likely to witness the simultaneous unfolding of both the impulses— balancing and cooperation—in the relationship between China and India. In the short run, neither would want to proclaim the other an adversary and would find ways to limit the prospect for a debilitating conflict.

THE FUTURE OF THE TRIANGULAR RELATIONSHIP The US response to the rise of China and India has reflected a number of considerations. One is the belief that the rising powers must be made to abide by the current rules of the international system. This leads to the often-posed question whether China and India are ‘stakeholders’ in the international system. Although this question has been posed largely in the context of the debate on China’s rise, it is also being asked about India.26 This question is at best a part of the well-known tradition that extant great powers seeking to constrain and shape the behaviour of the rising powers. Although China and India might often pretend to respond to this question, they are unlikely to be fazed by it, for the rise of China and India have systemic consequences. As they recognize their own power to affect the system, China and India are unlikely to abandon their interests in places like Sudan and Burma merely because some in the West are uncomfortable with the naked pursuit of national goals by the two Asian giants. After all, great powers of the past have not let others’ concern come in the way of defending what they thought were national security interests. The

26 Xenia Dormandy, ‘Is India—or Will It Be—a Stakeholder?’ Washington Quarterly 30, no. 3 (Summer 2007): 117–30.

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current great powers have come to terms with the prospect that China and India are likely to look beyond a mere accommodation into the current system; they will insist upon writing the rules of a new system. A second concern is about nature of the relationship between India and China. As our assessment of the past, present, and future of Sino–Indian relations shows, the United States was not the principal factor shaping them. The US tilt towards either power, briefly in favour of India from the late 1950s to the early 1960s and more substantially towards China from the 1970s until the end of the Cold War, caused some grief to the other but did not determine the evolution of Sino–Indian relations. There were weightier internal, bilateral, and regional factors that shaped the fundamentals of the Sino–Indian ties. The same is likely to be true for the future. As large civilizational states, with oversized national egotism and great power aspiration, sharing the same neighbourhood, India and China will have enough of local imperatives driving their relationship. Some in the United States are naturally concerned at a prospective ‘alliance’ between India and China that could turn against the United States. The rhetoric on ‘Asian solidarity’ and ‘multipolarity’ in the world and New Delhi’s participation in the construction of the so-called ‘strategic triangle’ are often cited as evidence of an Indian interest in a countervailing coalition against the United States. To be sure, India, like all other second-tier powers, is wary of the American ability to undermine its interests or complicate its pursuit of national goals. But any one familiar with the origin of the Indian policy on the ‘strategic triangle’ would know that it is a Russian initiative. India’s participation has been defined by a desire not to offend Russia rather than an enthusiasm for balancing the United States. India is also conscious that for both Moscow and Beijing, cooperation with the United States remains a primary objective and the proposed strategic triangle is at best a leverage to define the terms of engagement with the United States. India is also aware that it is the weakest of the three powers, a factor that limits its influence on the triangle, and that China was never enthusiastic about New Delhi’s participation in the triangular dialogue. India has an enduring interest in the construction of a ‘multipolar Asia’ amidst the rise

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of China, and it should not be difficult to see why this naturally takes precedence over the promotion of a ‘multipolar world’. It is this search for a ‘multipolar Asia’ that has intensified India’s new enthusiasm for bilateral strategic cooperation with the United States and Japan. What comes out of the trilateral dialogue between New Delhi, Beijing, and Moscow is mostly rhetoric. In comparison, security cooperation has developed more rapidly between India, United States, and Japan including the first ever trilateral naval exercises in April 2007. India has also turned down a Chinese request for concluding a ‘peace and friendship treaty’ in the run-up to President Hu’s visit to India at the end of 2006.27 Some analysts in the United States are apprehensive that India wants to draw the United States into its balancing politics vis-à-vis China. For others in Washington, limiting China’s power should be the principal objective of strengthening India. There is yet another school which suggests India is really incapable of providing balance against a rising China. The self-absorption of Washington’s debate ignores one simple reality. India did not accept in the past and nor will it in the future settle for a second place behind China. Many Americans might believe India cannot hope to match Beijing in the near future on any measure of national strength. That is unlikely to change—either the Indian ambition to catch up with China or New Delhi’s conviction that it will not play a second fiddle to Beijing. Balancing China, we might say, is in the very DNA of India’s geopolitics. From the first security treaties that India signed with Bhutan and Nepal, to its lone support in Asia to Cambodia and Vietnam, from the late 1970s to late 1980s to its current Look East policy, balancing China has been an enduring national security objective for India. Irrespective of whether the United States is friendly, neutral, or hostile towards China, this element of Indian policy will remain unchanged. That does not, however, mean India is not interested in a cooperative relationship with Beijing or will present itself as a frontline state in an American containment of China. The other great powers can certainly define the context of India’s engagement with China, but

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Author’s conversations with senior Indian officials in New Delhi, October 2006.

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its terms will be defined solely in New Delhi. As the 2-billion-plus populations of China and India become richer and more powerful, they are bound to change the very template of international relations, defined until now by the Euro–Atlantic world. What would endure, however, is the logic of power. As India and China find ways to manage a complex bilateral relationship amidst their rise in the international system, Washington must be expected to make its choices on the basis of its own interests. Great powers, even the strongest of them, are not known to do favours to other powers, especially rising ones. A third American concern relates to the construction of a security order in Asia. Whatever might be their posturing, China and India are likely to pursue a balance of power system rather than a collective security order. Although India has often talked about the primacy of norms and international institutions, it has never been willing to subsume its own sovereign freedom in the arena of security to presumed universal interests. India’s rejection of Brezhnev’s collective security system for Asia in 1969, despite strong ties to Moscow, is worth recalling. India is unlikely to want the East Asia Summit or any other system emerging as a supranational structure in Asia. Two, India is also opposed to any system of security in the region that transcends the notion of sovereignty. Much like China and the United States, India will not allow any regional system to interfere in the management of its security threats. Three, at the pan-Asian level, India’s preference will be for an inclusive arrangement rather than an exclusive one. China’s seemingly exclusivist approach had not only targeted the United States but also India. Despite its participation as an observer in the Shanghai Cooperation Organization, India has no interest in joining Moscow and Beijing in pushing American military presence out of Afghanistan and Central Asia. Four, even as it redefines its relations with great powers, bilateral security cooperation with regional actors will remain an important dimension in India’s approach to Asian security. India does not envisage a single overarching structure of Asian security emerging in the near future. Asia is quite far away from forming a European-style security community. The Asian security efforts at resolving intra-state, inter-state, and regional conflicts have not been impressive. The current attempt at building security

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institutions in Asia is premised rightly on the value of limiting conflict in the region amidst a fundamental change in the distribution of power. But the very process, as we have found, is not immune from the new dynamic of mutual suspicion and great power rivalry among the great powers. Most powers in the region do believe that while multilateral arrangements are useful, they are no substitute for building credible alliances, both formal and informal. India is no exception. Amidst all the debate about a collective security system in Asia, the real challenge might be about engineering a credible balance of power. The stronger India gets, the more eager it will be to construct a new balance of power system for Asia. Although China has the potential to complicate the traditional US alliance system in Asia, India has little reason to look towards a weaker American role in Asia.

13 THE CONTEXT AND PURPOSES OF US–INDIA STRATEGIC COOPERATION Richard J. Ellings

It was Princeton University Professor Robert Gilpin who captured most succinctly the fundamental challenge we face in Asia today. He wrote that the great enduring challenge in international affairs is peaceful adjustment to change.1 By change he was referring to the differential rates of growth among nations that require constant attention and policy responses, including first and foremost various forms of balancing behaviour. In this imperfect world, all too often, states fail to adjust sufficiently or face no peaceful alternatives to capitulation, and wars break out. Indeed, uneven growth among states followed by war has been the salient characteristic of international—and inter-city-state—relations, as far back as we have written history. Modern nations tend to respond to threatening changes in the distribution of power by one or more of the following: reforming their economies to boost growth, reforming their bureaucracies to better address international challenges, developing and redeploying their militaries, reaching out for help and to establish new coalitions or alliances, inventing new international regimes and institutions, and reconfiguring memberships and leadership structures in the existing international organizations. Peace hinges, at least in part, on astute balancing actions and adapting international decisionmaking mechanisms to the new realities.2 Today, first-, second-, and

1 Robert Gilpin, War and Change in World Politics (Cambridge: Cambridge University Press, 1981), p. 230. 2 See Kenneth Lieberthal’s list of initiatives to take with China as a contemporary example of the latter in his chapter.

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third-tier actors are employing all of these strategies to cope with an extremely dynamic system. The purposes of this chapter are to provide a brief explanation of the major forces behind US—India strategic cooperation, why China’s rise is the central strategic issue in international affairs, and the reason behind the sorts of issues that India and America might tackle together—and in many cases, collaboratively with China or other actors.

THE BALANCE OF POWER TURNED UPSIDE DOWN The current changes in the distribution of power in world affairs as well as new security-related diplomatic initiatives are transforming the Asian and global strategic landscapes. In issue area after issue area, from nuclear strategic balances to international pollution, new fora and new pecking orders among actors are emerging. And the pace of change is breathtaking for peacetime among the Great Powers. Imagine in 1988 the howl raised by suggesting that the organized and useable power in the world would be, in less than two decades of relative peace, centred in Asia and the Pacific, and within the whole Eurasian landmass itself the balance of power would be turned upside down. Europe is not organized to mount an effective foreign or defence policy. Russia, a shadow of the Soviet empire, is a two-dimensional ‘spoiler’, with mainly military-related assets and energy resources to call on, and has a very uncertain future.3 That leaves (offshore) the United States as the pre-eminent power, Japan and China as other truly important players, a fast-rising

Russia’s demographic, economic, and political problems are well described by such authors as Rajan Menon and Alexander Motyl in ‘The Myth of Russian Resurgence,’ The American Interest 2, no. 4 (2007): 96–104; Nicholas Eberstadt in ‘The Russian Federation at the Dawn of the Twenty-first Century: Trapped in a Demographic Straightjacket,’ NBR Analysis 14. no. 2 (2004); William Wohlforth in ‘Russia: Russia’s Soft Balancing Act,’ Strategic Asia (Seattle: National Bureau of Asian Research, 2003–04); Celeste Wallander, ‘Russian Transimperialism and Its Implications,’ The Washington Quarterly 30, no. 2 (2007): 107–22; and Dmitri Trenin, ‘Russia Redefines Itself and Its Relations with the West,’ The Washington Quarterly 30, no. 2 (2007): 96–106.

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India probably joining them in a decade or two, and a wild-card Russia and politically hamstrung Europe in the second tier.4 With the structure of world power in flux and quite ambiguous, these powers have been busy jockeying for influence and countering the advances they perceive other states are making. They have also been trying to solve problems, which, given the pace of change, are viewed as requiring new coalitions. Recall the strategic diplomacy of these powers over just the past few years. We have witnessed multilateral initiatives like the Shanghai Cooperation Organization (2001; aimed to solve problems and balance US-led coalitions) and the Six Party Talks (2003; created to solve the North Korean nuclear threat). We have seen bilateral balancing initiatives that are thinly veiled responses to China such as the United States–India Nuclear Agreement (2006) and the Japan–India Global Partnership (2006). Indeed, there truly are fundamental power realignments and strategic responses, and since the collapse of the Soviet empire they have been driven most profoundly by the continued rise of China. In short, this volume is based on hugely important developments that, if history is any indication, constitute the principal threat to the international system.

THE FACTOR OF GEOGRAPHY IN CHINESE–INDIAN STRATEGIC RELATIONS The structure of power is conditioned by the basic facts of geography. For example, traditional land powers with substantial security risks in their immediate neighbourhoods behave differently than maritime powers protected by oceans. The former maintain large land armies and must pay considerable attention to border issues and adjacent land-based threats. The latter emphasize navies and power projection across great distances. In spite of their large coastlines, China and India have been land powers because of their

4 Beginning in 2001, the Strategic Asia book series and database analyze and track these changes. As of September 2007, seven volumes have been published. For a convincing study of Japan’s re-emergence as a great power, see also, Kenneth Pyle, Japan Rising: The Resurgence of Power and Purpose (New York: Public Affairs, 2007).

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centuries-long, weak, inward-looking economies, and the adjacent threats they have lived with, which include their own rivalry. It was less than 40 years ago that Chinese leaders were preparing for an invasion by a vastly superior Soviet army, and 45 years ago that China and India fought a border war. India has been preoccupied with the conflict with Pakistan and unrest in Kashmir since independence six decades ago. Although natural competitors, India and China have been existing nevertheless, in quite distinct geostrategic environments. The Himalayas and the surrounding lightly-populated areas with little infrastructure have provided a buffer between them, and the two are littoral nations on different oceans. With their growth and technological progress however, the geographic ‘factor’ is diminishing in salience. China’s enormous economic success has been built on development of infrastructure, even in western China, and a global extension of the country’s interests—to overseas sources of energy and supplies of a full range of materials and manufactured goods, and to overseas markets for finance and its own goods. Chinese economic interests have penetrated the hinterlands and far beyond, virtually surrounding India. China has lost no time in seeking to develop military capabilities consonant with this extension of its economic interests. From nuclear weapons and delivery systems, space and cyber warfare capabilities, submarines, and air power projection, China is transforming its traditional, land-power orientation. India too is modernizing its forces to respond to the advances made by China as well as the challenges posed by Pakistan (aided by China). From the Indian perspective, China is a multi-pronged problem with economic, political, and security dimensions. India understands the vastly superior economic growth of its rival to the north, and is likewise, acutely aware of the development of China’s relations with countries around India and the Indian Ocean—from Sudan and Iran to Pakistan and Burma. India needs to upgrade its nuclear capabilities, navy, air force, and army, but its smaller economy prevents it from keeping pace to the extent desired. The world’s greatest mountain range and the small nations in and around it are losing their buffer status, with India sensing its increasing vulnerability in spite of its own remarkable accomplishments.

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THE INDETERMINATE NATURE OF THE CHINA CHALLENGE One can begin to appreciate the issues ahead in US–India strategic cooperation upon a careful examination of core realistic concerns.5 The early chapters of this volume assess the rapidly growing capabilities of China versus India. The major finding is that virtually across the board, with the notable exception of reform of the domestic political system, China is surging ahead of India. Underinvestment in infrastructure, remaining power lodged in bureaucracies, protection of the economy from the world economy, and laws that stifle the development of labour-intensive manufacturing put India in a disadvantageous position in contrast to the comparatively free-wheeling China.6 And China is joining the international system in many responsible ways. It has dropped most of its trade barriers and invited and rewarded foreign investment. By joining international institutions such as the World Trade Organization (WTO), and focussing its policies, both domestic and foreign, mostly on its economic development, it has become vested in major international institutions while posing no immediate threat to traditional rivals. Indeed, its growth and integration into the world economy have kept global inflation in check and have also served as the economic engine for nations around the world. It boasts of its ‘peaceful rise’. It has settled or downplayed border issues. It has sought to keep a lid on North Korea by hosting Beyond the fundamental issues of changes in the distribution of power and the declining factor of geographical barriers, drivers of strategic cooperation (or conflict, for that matter) are legacies of history that lie in the collective memories of societies, varying forms of nationalism and ambition, habits of perception, biases emanating from bureaucracies, governmental types and the legitimacy of governments, economic relations, etc. Some of these factors are analyzed in other chapters in this volume. They will be largely ignored in this effort to retain a sharp focus in a short study. 6 See chapter by Nicholas Lardy. Complicating this picture are India’s very impressive current economic growth rates, in the 9–10 per cent range, and the implications of its population growth. India is projected to exceed China as the world’s most populous nation in 2030. See ‘Population Division of the UN Department of Economic and Social Affairs,’ Populations Challenge and Development Goals (New York: United Nations Publishers, 2005), available at http://www.un.org/esa/ population/publications/pop_challenges/Populations_Challenges.pdf 5

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and supporting the Six Party Talks, albeit not exercising its full influence to end the nuclear threat. It has refrained from acting militarily against Taiwan. And it has supported, with limits, the war on terrorism. So why do Great Powers such as the United States, Japan, and India respond to China warily? Exceptional Chinese economic growth would by itself not be alarming. It is this fact together with others that raise fears among Indian, United States, and other leaderships: 1. the potential size and competitiveness of China’s economy; 2. the tendency of the Chinese government to protect many industries, otherwise promote domestic companies (through direct help or indirect ways such as promoting alternative technology standards), and fail to protect intellectual property; 3. the pace and scale of China’s military modernization; 4. the nature of Chinese foreign policy, which ranges from emphasis on ‘soft power’ to supporting odious regimes for narrow economic interests and securing overseas access to bases, suggesting that China has ambitions to play a serious security role outside its immediate region; 5. the authoritarian, corrupt, and opaque nature of the Chinese government; 6. anti-Western and anti-Japanese nationalism evident in the Chinese population, especially in the younger educated elite, and the willingness of the Chinese government to encourage targeted xenophobia at times for a variety of purposes; and 7. the belief that the Chinese government has such inherent weaknesses that the future stability of China and the basic purposes of the state are open questions. Will China solve its considerable rural–urban problems, its environmental challenges, and the dilemma of building a fair and responsive legal system in an authoritarian governmental structure, not to mention the challenge of establishing a representative government? Will it become an aggressive fascist state with the world’s largest economy, or will it reform into a benign pluralist polity? Many China ‘futures’ seem plausible today. With the future of China so highly unpredictable, the country has become the obsession of strategists both in the region

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surrounding it and in the United States. Most understand China’s current focus on economic development and ‘peaceful rise’ but at the same time, they all ponder to what purposes this power will be applied in the future, should the country maintain its current economic and military trajectories. Those concerns have engendered various hedging strategies, the cheapest of which is nascent coalition behaviour. There are no clearer examples of this behaviour than two developments in 2006: the US–Indian Nuclear Deal and the December Summit during which the prime ministers of India and Japan formed their Global Partnership. We might label these steps as strategic partnerships for consultation, coordination, and more. This is balancing behaviour, and the essential baselines of it include common perceptions of China’s rise, the need to strengthen fellow economies and capabilities, and various self-assessments justifying collaboration such as shared political systems and values. As prime ministers Shinzo Abe and Manmohan Singh put it in their joint statement, Japan–Indian relations are ‘driven by converging long-term political, economic, and strategic interests, aspirations, and concerns and underpinned by a common commitment to democracy, open society, human rights, rule of law and free market economy’.7 As if to put an exclamation mark on these events a few months later, in spring 2007, Japan initiated four-way talks with the United States, Australia, and India during the Association of Southeast Asian Nations (ASEAN) Regional Forum in Manila for the purpose of strengthening ties among them. The major hedging strategies that India may take unilaterally are threefold: spurring its own economic development and opening further to trade, reforming bureaucracies, and accelerating defence modernization. Of note here on the economic front are legal and bureaucratic reforms that India has taken over the past dozen years that have boosted India’s growth and prospects, albeit with limits. India is working to achieve a credible second strike nuclear capability and missile defence. Other efforts include procuring a balanced fleet to counter China’s submarines and a powerful surface navy that China might develop in the future. India is developing a more

Prime Ministers Abe and Singh, ‘Joint Statement towards Japan–India Strategic and Global Partnership,’ 15 December 2006, available at http://www.kantei.go.jp/ foreign/abespeech/2006/12/15joint.pdf 7

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extensive network of overseas sources of supply and support for its naval forces.

INDIAN INTERESTS AND THE LIMITS OF STRATEGIC COOPERATION Great Powers and their distantly located friends are frequently disappointed with each other because they do not precisely share geostrategic positions and interests, nor the historical legacies and political systems that help to form perceptions and strategies. America was often frustrated with West German policy towards East Germany during the Cold War, and is often now at odds with South Korea over the policy towards the North. Indian leaders perceive their nation’s relations with China to be of a critical interest, and have perceived so for a long time. This is in sharp contrast with their perception of relations with the United States. If the assessment of C. Raja Mohan is accurate, and I think it is, Indian leaders understand that their country’s relations with China beat to a separate drum, that is, due to their extraordinary importance and peculiarities, the dynamics of Sino–Indian relations may at times run counter to the broader dynamics in international affairs, as experienced by the United States and other actors. As Dr Mohan puts it, the United States ‘might be the repondeur to the changing dynamics of Sino–Indian jockeying for power in Asia rather than a demandeur on the relationship between New Delhi and Beijing’.8 This is a cogent reminder of the complex world of diplomacy and a warning that there are bidirectional influences in cooperative relationships. Still, China’s meteoric development raises new issues for India, and in the absence of comparable Great Power alternatives, lifts the value of strategic cooperation with the United States. This cooperation is based on the realistic assessment that a mix of engagement and hedging policies is required. Like the United States and other powers with strong interests in Asia, India is responding to China’s rise with a two-prong strategy: cooperating with China to reap the benefits of a fast-rising, fairly open economy and, simultaneously,

See the chapter introduction of C. Raja Mohan’s chapter in this volume, ‘The Evolution of Sino–Indian Relations: Implications for the United States’.

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seeking to balance the growth of Chinese power while managing the difficult job of accepting some, and not accepting other, elements of the extension of China’s economic, diplomatic, and security interests regionally and globally. India, like the United States, looks for opportunities for ‘cooperative security’ with China, to use the term preferred by Mohan. Examples in the region, imperfect as they are, include the fight against terrorism and the effort to curb nuclear proliferation. The major differences between India’s and America’s approaches today stem from geographical and relative capabilities. India is shedding some of the historical legacies, especially that of the 1962 border war with China, which limited its perceptions and options in the past. India is more concerned today with China’s expanded involvement in the vast arc of littoral states of the Indian Ocean and the states along the Himalayas and beyond. Where the United States has not seen China’s involvement in Burma to be sufficient to jettison a human rights policy there, India has. As Ashley J. Tellis points out, Beijing raises deep anxieties in New Delhi through its continued support for India’s primary challenger, Pakistan; … efforts to intrude into India’s sphere of influence—South Asia…; growing capacity to influence outcomes to India’s disadvantage on the Indian periphery ranging from its strategic presence in Burma, to its effort to build new ties with the island states in the Indian Ocean, to its ongoing military modernization in the regions adjacent to the Sino-Indian border.9

Invariably, some of the regional impacts of Chinese policy assume different levels of priority in New Delhi than Washington. Even in the region, however, basic American and Indian interests overlap considerably, beginning with the relations that they have with Japan and Southeast Asian countries. The United States and India value the independence, security, and economic openness of East Asian countries. It is important to them that many East Asian states will cooperate on military matters, and both have a deep strategic interest in the pre-eminent US military presence in the region that secures, among other benefits, open Sea Lines of Communication from the Strait of Malacca to the Sea of Japan. India’s Look East policy is a complement to the free trade and 9

See Ashley J. Tellis’ chapter in this volume.

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cooperative security initiatives of the United States. The enormous stakes each has in the Indian Ocean are compatible as well, for each emphasizes freedom of the seas—seas that are secure from threats— and the capacity to cooperate in naval actions. It is in West Asia that India and the United States find their strategies discordant, and I commend the interested reader to the discussion on the matter by Dr Tellis earlier in this volume. On balance with regard to regional issues, Tellis sees a sound basis for building the strategic partnership they have publicly declared. To engage the United States successfully, India has had to overcome historical legacies and differing interests and policies in the region, and the United States has had to change course on some of its policies in the subcontinent, as amply documented in this volume. For many years, the key stumbling block was a US policy beholden to the nuclear issue. The commitment to the nuclear non-proliferation regime trumped better relations with India repeatedly, most recently in the wake of the nuclear bomb tests in 1998, which derailed initiatives taken by the Clinton Administration. With that issue well on its way to being resolved, the relationship includes formal consultations and other activities, such as Prime Minister Manmohan Singh’s visit to Washington in July 2005 and President Bush’s subsequent visit to New Delhi in March 2006, their joint statement in the 2005 summit declaring a global partnership between the two countries, joint military exercises, significant progress in the formal process known as the Next Steps in Strategic Partnership (NSSP), as well as the passage in Congress of the Henry J. Hyde United States–India Peaceful Atomic Cooperation Act facilitating the sale of nuclear material to India for civilian use for the first time in 30 years.10 As the Indian Ministry of External Affairs puts it: There has been steady progress in relations between India and the US in recent times. There is a strong commitment on both sides to further widen, deepen, and strengthen these ties. India and US interaction today includes strategic and security issues, defence, counter-terrorism, counter-proliferation, science and technology, health, trade, space,

10 State Department website, ‘Background Notes on India,’ Section on US–India Relations, available at http://www.state.gov

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energy, and environment. There is an increasing convergence of views on global, regional, and bilateral issues of mutual concern.11

The Obama Administration has signalled its commitment to strengthening the partnership between the US and India. President Obama and Prime Minister Singh met at the G-20 Summit in April 2009, and following Singh’s reappointment as prime minister in May 2009 Obama invited him to visit Washington.

UNITED STATES’ INTERESTS: CHINA’S RISE AND MUCH, MUCH MORE American interests are global as a consequence of the nation’s unique power and role in world affairs since World War II. The interests of United States with regard to China are critical, as China has assumed a central role in the global economy and seems to be the only power with the potential in the next few decades to challenge the existing order and American pre-eminence. As I see it, United States’ long-term strategy in engaging China is rooted in five propositions: (i) that a prosperous, stable China is better than an economically stricken, unstable China; (ii) there simply is no good alternative to engagement today; (iii) by integrating China as a beneficiary of the international system, in the words of Bob Zoellick, it has a better chance of becoming a responsible stakeholder; (iv) that the forces of globalization will hasten the day China will join the family of law-based democracies, calming fears in the region; and (v) that preserving American pre-eminence is advantageous in the long term, but particularly necessary, given China’s military advances and more bothersome policies domestically and overseas, until China democratizes and fully supports acceptable international institutions and values. America’s interests in India are not simply derivative of its concerns with China. They derive as well from the nation’s extensive global interests. America needs allies in the war on terror and partners for protecting the Indian Ocean and sea lines of communications (SLOCs). It needs collaborators to halt proliferation of weapons of mass destruction (WMD) and their delivery systems, and it desires 11 Indian Ministry of External Affairs, ‘United States Country Briefing July 2005,’ available at http://www.mea.gov.in

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new centres of economic growth to accelerate international prosperity. To further stabilize the international system, it desires to bolster existing democracies and to encourage additional, preferably democratic, centres of power. From the US perspective, India is a long overdue strategic collaborator for a variety of very good reasons. One of the issues with which India and the United States need to grapple jointly is the kind of threat that derives from a nuclear, multipolar world. We understand the bipolar stand-off that took place during the Cold War, but the United States and India might benefit from cooperating on figuring out the full strategic implications of an international system in which many actors possess, or could arguably soon possess, nuclear weapons. Proliferation is a fact in Asia, and it is a process that is probably not over. For that matter, all sorts of security and military issues could be discussed, especially: 1. Comparing threat environments to more deeply understand each other’s challenges and policies, particularly related to nuclear weapons. 2. SLOCs, which will be patrolled increasingly by competing powers. 3. Doctrine, for mutual understanding and sharing concepts. 4. Interoperability, for joint activities. 5. All sorts of modernization issues, to build security in the region. 6. Military aid, where it may be useful and cost-effective. Because the United States and India share a common interest in each other’s overall strength and capabilities, collaboration would be useful as well in a wide range of economic, environmental, and diplomatic activities—any sphere where sharing precious information and limited resources might yield significant benefits in bolstering national effectiveness. This should include bringing India onto the UN Security Council as a permanent member and the integration of India much more fully into the international economy, in part by developing India’s infrastructure. Both United States and India will need to engage China directly on security issues to enhance transparency and reduce concerns as well as to solve ‘third party’ issues. Broader engagement is critical too. Certainly, one of the areas of national competition gaining momentum in Asia is over energy supplies. Mercantilist approaches to securing energy resources pervade the region, despite there being

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no evidence that nations have any success in circumventing the global energy market. India seems to be in a disadvantageous position to play the mercantilist game with China, either in an ‘eachguy-for-himself’ scramble over equities or through a collaborative strategy. Given their superior resources and market, how frequently might the Chinese sense a need to partner with the Indians? And, given the recent history of China’s energy diplomacy with odious regimes, would India’s partnering with China support its larger interests? A more effective energy policy might be based in pursuing a collaborative strategy that supports the market by encouraging production, distribution, and new technologies and types of energy. The United States and India might broaden and raise the priority of their formal dialogue to strengthen energy security and promote stable energy markets by initially working with Japan and then with China, and sort out the meaningful geopolitical issues from the economic ones. More purely economic issues are urgent as well. Within the confines of India’s historical experiences and political realities, some economic reforms are particularly difficult but, especially at the level of international trade, the United States and India might find areas where some progress could be made. An issue driven by economic relations—globalization—might also be an area of discussion. Paving the way for better understanding in US–India economic relations would be collecting economic and trade data much better than we have before. Ongoing efforts to reform the ways by which United States measures its own economy— especially in services and as services relate to manufacturing, innovation, trade, and jobs— could allay what are probably misplaced fears about net job losses in America due to outsourcing in India and China. New internationally accepted, more definitive metrics are needed. Political realities in the United States necessitate that the issue must be addressed. In a contracting economic climate, which is inevitable at some point ahead, the issue could undercut so much of the progress made in liberalizing the world economy. China and OECD’s (Organization for Economic Cooperation and Development) participation in reforming the ways we measure and track international economic activity will be essential too, so multilateral engagement will be required. The ultimate globalization issue with regard to China is the political effect of its integration into the world economy. Should

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more and more Chinese people prosper and value private property, how important to them will be their freedom and an effective justice system? Will they demand the development of true rule of law and democracy? Here too, there may be room for the United States and India to collaborate in encouraging the further liberalization of the Chinese political system, as they certainly share this interest. Beyond the security and economic realms lie opportunities for cooperation on trans-national issues and various ‘neighbourhood effects’ (in the way economists use this term), some of which the current dialogue between the two countries is already addressing. These issues compel continued attention before they spill into the security realm. Here we recognize disaster relief (already covered in the partnership), threats to human health (beyond the two countries’ collaboration on HIV/AIDS), and the most serious environmental issues the effects of which transit China’s, India’s, and even America’s borders. Acid rain across Northeast Asia, deforestation, global warming, water shortages, and smoke from huge forest fires in Indonesia are examples of these kinds of issues. One issue that seems to demand more robust multilateral attention because of its immediacy and the available opportunities for high success is the threat from deadly contagious diseases such as SARS or avian or swine flu. The potential for pandemics, in fact, is the focal point of some very close collaboration developing among the United States, India, China, Europe, Japan, and elsewhere.12 A pandemic’s security ramifications are crystal clear, as are our common interests to prevent it. There are competitive dimensions to this interaction, of course. For commercial and national security reasons each of the participants is interested in the new technologies that are needed to solve biological threats. There is much money to be made, indeed entire industries built on these technologies, and there is the potential for these technologies to be used in biological warfare.

CONCLUSION This brief survey has sought to provide context and explanation to United States–Indian cooperation, and where it might go in Pandemics: Working Together for an Effective and Equitable Response, a report from the Pacific Health Summit, Seattle, USA, 12–14 June 2007 (Seattle: National Bureau of Asian Research, 2007). Related pandemic meeting hosted by Chinese CDC in Beijing in January 2007.

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the months and years ahead. We face an increasingly dangerous period in the relations among the Great Powers which today count, principally among them the United States as the premier global power, then China and Japan, followed in a second tier by India, Russia, and Europe. Power is again concentrating in Asia after several difficult centuries, reflecting once more the concentration of the world’s population there. The enormity and pace of structural change, not to mention a recent history of difficult relations among them, present the Great Powers with the sobering challenge over the next half century or more of not repeating the mistakes of their forebears—of not letting their competition, ambitions, grievances, misperceptions, weaknesses, and miscalculations make the administrative system devolve into a major war. The US–Indian strategic partnership is driven primarily by the fundamental, structural change underway, the most important element of which is China’s rise. During periods of change such as our current one, the international system must adapt. Its actors must have the ability to recognize the challenges before them and the adeptness to neither under- nor over-react to developments. They must be able to reconfigure their relations to maintain sufficient balance in coalitions so that no untrustworthy power sees the opportunity to dominate. It is within the greater Asia–Pacific region, what may be called Strategic Asia, that the big decisions will have to be made.13 The major actions taken thus far strike me as appropriate and also suggest that the lessons of history and the realities of the changing structure of power are understood in the capitals of the Great Powers. But the issues are inordinately complex due to layers of regional and global dynamics, so the leaders taking responsibility for dealing with them must maintain a collective focus on the core structural issue to keep a general peace. The strategic partnership between the United States and India makes sense for many more reasons beyond the rise of China, thus adding to its potential resilience. There are other shared direct and indirect threats to security beyond the extraordinary rise of 13 Aaron Friedberg coined the term in the first volume of the Strategic Asia series (Aaron L. Friedberg, ‘Introduction,’ in Richard J. Ellings and Aaron L. Friedberg, eds, Strategic Asia 2001–02: Power and Purpose [Seattle: National Bureau of Asian Research, 2001], 1–25). He uses the term in characterizing the regular strategic interactions that cut across Asia, which define it as a major zone of strategic interaction. At the same time, he traces the re-emergence of Asia as the centre of world production.

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an unpredictable China. There are shared economic needs and opportunities, regional problems, environmental challenges, and opportunities to protect and to promote human health. It is up to President Obama and Prime Minister Singh, and the leaders who succeed them, to seize on these issues as well as to deepen their cooperative agenda and build upon the achievements to date. The stakes are high, as the partnership is vital to the future of global stability.

14 SITUATING THE REALIGNMENT C. Raja Mohan and Alyssa Ayres

INTRODUCTION It will take some decades before we can fully grasp the impact of the great changes taking place in Asia—the power realignments of this volume’s title—on the relationships among the world’s largest countries, China, India, and the United States. The global changes addressed in the preceding chapters reflect developments of tremendous consequence for the world that we live in. Reflecting on them, it seems almost impossible to imagine that for a brief moment in the early 1960s, the Sino–Indian conflict suggested the possibility of an India–US alignment; yet since then, there has been little reason for thinking about the United States, China, and India in the same breath. Amidst the rise of China and the emergence of India, it is no longer possible to think of these three powers and their bilateral relations separately. For each of them has begun to impinge on bilateral relations between the other two. This triumvirate stops short of behaving as a ‘strategic triangle’, if by that we understand that changes between any two affect the third.1 As Harding noted some years ago, this is in part due to the fact that relations among China, India, and the United States have been a secondary pattern due to India’s relative weakness. And yet, the rapidly increased and dynamic interaction among these three now, at least in the minds of government strategic planners and 1 See Harry Harding, ‘The Evolution of the Strategic Triangle: China, India, and the United States,’ in Frankel and Harding, eds, The India-China Relationship: What the United States Needs to Know (New York and Washington, DC: Columbia University Press and Woodrow Wilson Center Press, 2004), 321–50.

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private sector actors, appear increasingly likely to engage each other in deep and symbiotic ways, signalling the coming emergence of one of the most consequential strategic triangles in the world due to scale. What’s more, even if the factors driving strategic decision-making have not involved triangular calculations, that so many observers in each of these countries ascribe that intention to policy decisions would seem to strengthen the argument for its emergence as a central pattern in international relations. The big shift in US policy towards India from 2005 forward is a case in point. Although the Afghan and Iraq wars compelled the first term of the Bush Administration to focus on the Middle East, the second term of the Bush Administration began with a determination to transform relations with India. The Bush Administration sought a way to overcome long-standing non-proliferation constraints to cooperation between the United States and India, in large part on the inherent promise of the shared perspective coming from both countries’ commitment to democracy. But other factors, such as helping India emerge as a ‘pillar of stability in a rapidly changing Asia’,2 understandably attracted attention among many observers, often assumed to refer to managing the rise of China. The steps taken to advance a new US–India relationship were hugely consequential. First, the path-breaking 10-year-defence framework signed in June 2005, followed shortly by the civil nuclear initiative announced in July 2005: together they redefined the agenda of Indo–US cooperation beyond the imagination of anyone in either New Delhi or Washington. That there are difficulties in implementing them does not in any way reduce the salience of the fact that the nature of the discourse in Indo–US relations has been altered irrevocably. Both these initiatives have been surrounded by speculation that they were driven by the need to build India as a potential counterweight to China. (China’s diffidence to the civil nuclear initiative in particular, and its reported efforts to frame a ‘criteria-based exemption’ rather than one solely for India in the Nuclear Suppliers Group underscores this

US Secretary of State Condoleezza Rice, ‘The US–Indian Civil Nuclear Cooperation Agreement,’ testimony before the US Senate Committee on Foreign Relations, hearing on ‘US–India Atomic Energy Cooperation: The Indian Separation Plan and the Administration’s Legislative Proposal,’ 109th Congress, second session, 5 April 2006, available at http://www.state.gov/secretary/rm/2006/64136.htm

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triangular discomfort.)3 It stands to reason that officials in Washington and New Delhi deny such motivations, but there is no way of thinking about the current upswing in Indo–US relations without any reference to China. In February 2008, US Defense Secretary Robert Gates travelled to New Delhi in what might well be the last major visit by a senior official of Bush Administration to India. The Indian trip was part of Gates’ swing through Asia that also included Australia, Indonesia, and Turkey. Officials travelling with Gates underlined the fact that all the stops were democracies, and that China’s growing role and influence was a theme raised by government officials with Gates in Canberra, Jakarta, and New Delhi. Of course, Gates stated publicly that he did not ‘see our improving military relationships in the region in the context of any other country, including China’, and that ‘these expanding relationships don’t necessarily have to be directed against anybody’.4 But the question perdures. Whether the principal cause of, or as a secondary interaction, that China has become an enduring element in the evolution of Indo–US relations, has motivated this volume. Irrespective of their divergent tone, approach, and expectations, the preceding set of essays is significant for one simple reason. It has arisen out of the first ever substantive Indo–US experts dialogue on China. For all the reasons elaborated here, we have no doubt that this will not be the last Indo–US dialogue on China. This volume is only the first cut at understanding the world’s most important emerging relationships. Not surprisingly, though, there is no consensus either among the Indian or the American contributors on how the new importance of China in their bilateral relations might be managed. Our purpose here is not to summarize the discussion in the previous pages, but to reflect on a number of questions that remain germane for policymakers and analysts who might preoccupy themselves with the impact of China on Indo–US relations. These include the relationship between India’s future economic performance and Asian geopolitics, the role of shared political values between India and the United States in dealing with a See Norman Zia Mian Wolf, Michael Krepon, and Daryl G. Kimball, ‘Arms Control Association Panel Discussion Transcript,’ 2006, available at http://www. armscontrol.org/events/20061114_India_Transcript.asp 4 Reuters, ‘China Rise Factors in Gates’ Focus on U.S. –Asia links,’ 1 March 2008; available at http://in.news.yahoo.com/reuters_ids_new/20080301/r_t_rtrs_nl_ politics/tnl-china-rise-factors-in-gates-focus-on-1848067.html 3

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China which does not share them, the changing nature of the Asian regional context that will frame much of the dynamics of the triangular relationship and beyond, and the systemic consequences of the rise of China and India for global governance.

INDIA’S ECONOMIC PERFORMANCE AND ASIAN GEOPOLITICS That India will remain the weakest of the three powers for a long time to come is not under dispute. Nor is it surprising that there has been considerable scepticism among both Indian and American contributors to this volume about the pace of India’s economic growth and its effect on the overall balance between New Delhi, Washington, and Beijing. It is only in the middle of the first decade of the 21st century that India has seen continuous high annual economic growth rates, averaging bet-ween 8 and 9 per cent. Whether this reflects a structural change in Indian economy or a flash in the pan will undoubtedly be debated for a long time. It is also necessary to remember here that optimism about India’s future in itself is a new feature. As Gowher Rizvi suggests, optimism about India was politically incorrect in Western academia.5 To be fair, that was even more true of the Indian political class since independence. Clearly, the quality and durability of its recent economic performance is the key to India’s importance in the emerging strategic triangle. It is our contention that the debate is unlikely to be clinched any time soon. For every optimistic projection of where India might be headed, there is a long list of negatives that continue to weigh down India.6 Although that debate goes on, there is a growing confidence within India as well as the outside world that India’s economic performance has shifted to a higher trajectory and will emerge as the third-largest economy in the next few decades.7 India is no longer spoken of in the same context as Pakistan, but rather alongside Gowher Rizvi, ‘Emergent India: Globalization, Democracy, and Social Justice,’ International Journal (Ottawa) 62, no. 4 (2007): 753–68. 6 See Sadanand Dhume, ‘Is India an Ally?’ Commentary Magazine (January 2008): 25–30. 7 Dominic Wilson and Roopa Purushothaman, ‘Dreaming with BRICs: The Path to 2050,’ Goldman Sachs Global Economics Paper No. 99, 2003, available at http:// www2.goldmansachs.com/ideas/brics/book/99-dreaming.pdf 5

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China. Some analysts have even suggested that Indian economy could eventually outperform the Chinese economy.8 Our contributors have joined this debate. The inconclusive outcome from that debate is perhaps less important than the fact that the expectations about India’s economic performance have significantly risen over the last decade, and have begun to affect the strategic calculations in the world’s chancellories. The change in the perceptions about India is also reflected in the renewed fashion of comparing the Chinese and Indian economic performances. A rash of new books in recent years indicate that it is no longer objectionable to talk about the growth of China and India in the same sentence.9 That brings us to an important question debated in this volume: Can India’s economy ever catch up with China’s? Although that question is an important one, it is our view that it is not determinative to the future role India will play in the strategic equation between the United States and India. To be sure, China has long been a political spur to India’s own debates on growth. Those who support and those who oppose Indian economic reforms frequently cite China to justify their arguments by referring to different dimensions of the northern neighbour’s achievements. (That China can mean the opposite thing to different interest groups in India should be the subject of a separate essay.) Although comparisons with China are unlikely to ever stop, the important question for India is somewhat different. This is not about equalling China’s growth rates, or matching China in any of the numerous metrics where China outstrips India by any measures, but rather emerging as a significant economy in its own right even on the basis of lower growth. Ashley J. Tellis, another contributor to our volume, argued some years ago that: If India pursues continuing reform (whether on its own initiative or as a response to crisis) that moves it closer to the 7 per cent or higher growth rate, it will not only cement its regional hegemony within South Asia

Tarun Khanna and Yasheng Huang, ‘Can India Overtake China?’ Foreign Policy, Washington DC (2003): 74–81. 9 Tarun Khanna, Billions of Entrepreneurs: How China and India are Reshaping Their Futures—and Yours (Cambridge: Harvard Business School Press, 2008). 8

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but also position itself as a significant rival to China even if it does not ultimately surpass it.10

Tellis adds that: India’s relevance in this regard is not contingent on its ability to resolve all its basic developmental problems. Rather, India simply needs to grow sufficiently so as to be able to provide its national leadership with the marginal resources necessary to pursue its power-political ambitions in Asia, including those related to the defense of its interests vis-à-vis China.

Since then, India’s economic performance has inched towards an annual rate of 9 per cent. Although India’s growth rate remains lower than that of China and the density of its economic interaction with East and Southeast Asia remains far thinner than that of China, New Delhi has already begun to position itself as an important player in the region. India’s Look East policy, initiated in the early 1990s, has been one of the more successful foreign policy achievements of India. This had as much to do with the warm Southeast Asian embrace India received, despite the fact that New Delhi remains far weaker than Beijing. The Association of Southeast Asian Nations (ASEAN) chose to invite New Delhi into a regional framework called the East Asia Summit (EAS) not because they believed India was either an integral part of the region or a potential equal to China. A Senior Minister of Singapore, Goh Chok Tong, explained the decision: ASEAN Foreign Ministers agreed on a set of criteria that would allow the participation of India, Australia and New Zealand in the first East Asia Summit. This was a wise decision. It kept East Asian regionalism inclusive, forward-looking and open. It underscored the importance of adapting to new developments and not being trapped by narrow and outmoded geographic notions.11

Ashley Tellis, ‘South Asia,’ in Richard J Ellings and Aaron Friedberg, eds, Strategic Asia, 2001–02: Power and Purpose (Washington: NBR, 2002), 244. 11 Goh Chok Tong, ‘Constructing East Asia,’ Speech at the Asia Society Conference, Bangkok, 9 June 2005; text available at http://www.asiasociety.org/conference05/ goh.html 10

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For Singapore, Indonesia, and other ASEAN members who supported India’s entry into the EAS much against the known reservations of China, the issue was not whether New Delhi was China’s equal, but the perception that it could help manage the rising power of Beijing in East Asia. In a metaphor now regularly used to describe India’s role in the ASEAN region, the senior minister called India one of ‘two wings’ on the regional jumbo jet—noting that both are needed to fly.

SHARED DEMOCRATIC VALUES Although economic factors remain central for sustaining India’s new geopolitical relevance, there are often other intangible factors that shape great power relations. One such is the question of shared political values among great powers. The question of shared values was not discussed in the preceding chapters—it is difficult to quantify, to measure, and certainly India and the United States are only just beginning to explore cooperation in the field of democracy. But it will remain an important factor shaping the relationship between India, United States, and China, and how others view them. Singapore’s Minister Mentor, Lee Kuan Yew, has posed the question of why India’s emergence does not raise apprehensions in a manner that China’s rise does.12 Lee points to India’s problems with its neighbours, the domestic political constraints on pursuing ambitious external goals, and above all, he refers to the fact that as a democracy, India does not generate the same fears as China. In recent decades, many Indians and Americans have been deeply sceptical about the potential weight of shared democratic values in their future cooperation. Americans have sought to engage India in global democracy promotion; India prefers instead to offer technical assistance to countries only if asked. Indeed, attempts in the 1990s to make democracy promotion a common platform between New Delhi and Washington did not really take off.13 Both sides see the other’s

12 Lee Kuan Yew, ‘India’s Peaceful Rise,’ Forbes, 24 December 2007; available at http://www.forbes.com/forbes/2007/1224/033.html 13 See C. Raja Mohan, ‘Balancing Interests and Values: India’s Struggle with Democracy Promotion,’ The Washington Quarterly 30, no. 3 (Summer 2007): 99–115.

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approach to the role of democracy as a foreign policy tool, as not fully comprehensible. It is not for nothing that ‘estranged democracies’ became an apt phrase to describe Indo–US relations during the Cold War.14 But change is clearly under way. Robert Blackwill, a member of George Bush’s foreign policy team during his first-presidential campaign and ambassador to India during 2001–03 affirms that the President’s admiration for Indian democracy, expressed much prior to his election in 2000, undergirds the political investments he has made in orienting the United States towards India.15 But admiration for India in the United States now extends across party lines and throughout the American political class. Bush’s decision to offer a civil nuclear exception to India is often explained in terms of personal preferences of leadership, or of a willingness to work outside global regimes. But how then does one explain the fact that 80 per cent of the US Congress supported the Hyde Act in 2006, which changed US domestic non-proliferation law to New Delhi’s favour? One of the many factors that explains the new positive sentiment towards India in the American political class will necessarily have to be Indian democracy. Americans and Indians see something of themselves in each other, and want to work more closely together across the board. China has figured a noticeable absence in the evolution of the debate on Indo–US cooperation in promoting democracy, such as in the short-lived proposal for strategic cooperation among the four Asian democracies. This idea of ‘quadrilateral cooperation’ among the United States, India, Japan, and Australia ultimately died in multiple political transitions, but its brief life is worth noting.16 The concept appears to have emerged after the quickly mobilized cooperation between the four countries’ navies when the Tsunami hit the Indian Ocean at the end of 2004. The brief and effective coordinated humanitarian work of the navies and the foreign offices of the United States, India, Japan, and Australia was regarded by all as a superb demonstration of what could

Dennis Kux, Estranged Democracies: India and the United States 1941–1991 (New Delhi and Thousand Oaks, CA: Sage Publications, 1994). 15 Robert Blackwill, ‘A New Deal for New Delhi,’ The Wall Street Journal (21 March 2005). 16 C. Raja Mohan, ‘Asia’s New Democratic Quad,’ ISN Security Watch, 19 March 2007, available at http://www.isn.ethz.ch/news/sw/details.cfm?ID=17383 14

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be achieved together.17 The idea was later developed into a formal proposal by Japanese Prime Minister Shinzo Abe in 2006, then formally endorsed by Prime Minister Manmohan Singh during his visit to Tokyo in December 2006. One formal meeting of the senior officials from the four offices took place on the margins of the ASEAN Regional Forum meeting in May 2007. India’s decision to host a massive multilateral naval exercise involving the United States, India, Japan, Australia, and Singapore in the Bay of Bengal in September 2007 was widely seen as a continuation of the idea of a ‘Democratic Quad’. However, it was a one-off Indian initiative. But there were significant reservations about the danger of the ‘Democratic Quad’ being seen as an open attempt to contain China. The fall of the Abe government in Tokyo and then that of John Howard in Australia in 2007 took the steam out of the initiative. Although Abe’s successor Fukuda was lukewarm, the Kevin Rudd government in Australia explicitly demurred, stating that it was not interested in the quadrangular initiative. The United States took no public position on the quadrilateral, beyond noting that the United States, Japan, and Australia have a long-standing trilateral security dialogue, and that Japan had sought to expand that.18 Compared to the other three governments where internal differences cast a shadow over the ‘Democratic Quad’, India surprisingly remained steadfast in its support. India which was quite comfortable engaging China and Russia in a trilateral framework found no problems in the simultaneous pursuit of a quadrilateral initiative with the United States, Japan, and Australia. And the idea of Asian democracies working together has an enduring bipartisan resonance in the United States, including among the three presidential candidates. The proposal has been explicitly endorsed by Hillary Clinton, and many Obama advisors strongly support the notion of S. Jaishankar, who headed the American desk in the Indian Foreign Office during this period, gives an account of how this cooperation developed. See his, ‘2004 Tsunami Disaster—Consequences for Regional Cooperation,’ 26th Annual Pacific Symposium on Asia Pacific Democracies: Advancing Prosperity and Security, 8–10 June 2005, National Defense University, Washington DC, available at http://www. google.co.in/search?hl=en&q=S.+Jaishankar%2C+asian+democracies%2C+coop eration&btnG=Google+Search&meta= 18 See press roundtables with former US Under Secretary for Political Affairs R. Nicholas Burns in Singapore and Canberra, available at http://www.state.gov/p/ us/rm/2007/96058.htm and h ttp://www.state.gov/p/us/rm/2007/96226.htm 17

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building a ‘Concert of Democracies’. In a speech outlining his foreign policy platform, Republican John McCain has called for a new global league of democracies.19 But it was India that walked back from an American political initiative on democratic change in Burma at the end of 2007. As the Burmese military regime cracked down on peacefully protesting monks and the United States sought to mobilize international condemnation and sanctions against Rangoon, India surprisingly found itself on the side of China. Paradoxically, it is the rivalry with China for influence in Burma which puts New Delhi on the same side as Beijing. Having once been isolated as a result of its earlier support for political change in Burma, New Delhi now resolutely follows a realist policy of engaging the military rulers without any regard for the internal situation there.20 So even on the question of promotion of democracy that should have naturally engaged India and the United States in contrast to China, and the outcome is likely to surprise.

STRUCTURAL CHANGE IN ASIA In the preface to this volume Francine Frankel offers an important insight: that India, the United States, and China are not merely adapting to a changing world but also creating a new one. The longterm structural consequences in Asia of the rise of China and India are only now beginning to be understood. The trendlines highlighted by David Shambaugh on the impact of a rising China21 on Asia might eventually be seen in relation to India as well. As India’s economic growth acquires traction, its regional influence too will be impressive. Taken together, China and India are bound to reshape the political and 19 See Rory Medcalf, ‘Chinese Ghost Story,’ The Diplomat (Canberra) (February– March 2008); http://www.the-diplomat.com/article.aspx?aeid=5250. On McCain, see text of his 26 March 2008 remarks to the Los Angeles World Affairs Council: http://www.johnmccain.com/Informing/News/Speeches/872473dd-9ccb-4ab49d0d-ec54f0e7a497.htm 20 For a critique of India’s Burma policy, see Renaud Egreteau, Wooing the Generals (New Delhi: Manmohar, 2003). 21 David Shambaugh, Power Shift: China and Asia’s New Dynamics (Berkeley: University of California, 2006).

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economic dynamics of Asia. The new context, however, is not amenable to analysis on the basis of old verities. One, India’s traditional concerns about China’s role south of the Himalayas had been focussed on Beijing’s security cooperation with New Delhi’s immediate neighbours, notably resentment at China’s nuclear and missile cooperation with Pakistan, which has altered the regional balance of power to India’s detriment. In many ways that is water under the bridge. Further support from China to Pakistan in these sensitive areas no longer alters the nuclear balance between New Delhi and Islamabad, for nuclear parity cannot be influenced by the size of either nuclear arsenal. It is China’s turn, however, to worry about the potential impact of Indo–US cooperation in missile defence, which might affect to some degree the nature of the nuclear dynamic between India and China as well as between India and Pakistan. If the Indo–US missile cooperation does take off, the nature of China’s response is not clear at this stage, and would be of considerable interest all around. Even more significant, however, is the US–India engagement in defence, expanding both military-to-military cooperation as well as defence trade. This takes place amidst continuing US reluctance to sell arms to China and Washington’s pressure on its European allies not to lift the arms embargo against Beijing. India has a significant distance to go before it could match China’s military capabilities, but long-term defence cooperation with the United States could significantly ameliorate India’s relative weakness. The first two Indian acquisitions of weapons platforms from the United States—the USS Trenton-landing platform docking ship and the C-130J military transport aircraft for moving special forces—both enhance India’s power projection capabilities. Meanwhile, India has its own concerns at the new uncertainties in arms transfers from Russia, and there are unstated concerns about Moscow’s growing military cooperation with Beijing. Until now Moscow has tended to supply India with better weapons than it transfers to China. New Delhi has begun to suspect that India’s edge is wearing thin. Moscow, meanwhile has its own concerns about losing its near monopoly of the arms market in India to Israel and now the United States. India’s incipient purchase of major arms systems raises the broader policy challenge to New Delhi: Should it move decisively towards becoming part of an increasingly

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integrated Western defence industry led by the United States or should it hang on to the current arms procurement from Russia? Meanwhile, New Delhi seems to have reconciled itself to the new reality that the United States might become a major arms supplier to both India and Pakistan. After nearly five decades of unremitting protests against US arms sales to Pakistan, India has been noticeably silent since 2005 as expectations of its strategic partnership with the United States began to rise and Indo–Pak relations themselves moved towards greater stability. None of these developments fits in with the hitherto known patterns of power play in the region. Second is the question of India’s perception of the hierarchy of threats in its neighbourhood. As Vikram Sood explicated in this volume, the Indian security establishment retains a profound ambivalence on the role of both the United States and China in its immediate neighbourhood of South Asia and the extended neighbourhood of Asia and the Indian Ocean littoral. Since the partition of the subcontinent, India has claimed the Raj legacy of being the protector of the region and sought, not with much success, the influences of outside powers. After the Sino–US rapproachement, New Delhi deeply resented what it saw as joint efforts by Washington and Beijing to undermine India’s natural sway over the region. Amidst the current realignment among India, the United States, and China, the future might look very different from the past. India is increasingly concerned about the rising economic and strategic profile of China, a natural consequence of its rise in the subcontinent and the regions abutting it. China has begun to emerge as one of the largest trading partners of its neighbours, just as it has become one of India’s. China’s plans to develop new transport corridors—from Pakistan in the west to Burma in the east—and build ports and other maritime infrastructure in the subcontinent, from Gwadar in Pakistan to Hambantota in Sri Lanka to Sittwe in Burma and Chittagong in Bangladesh has rung alarm bells in New Delhi. If the earlier talk in New Delhi of China ‘encircling’ India was an abstract political notion, it today has a solid economic and infrastructural basis. Meanwhile, China has reasons to arch an eyebrow at India’s growing maritime activism in East and Southeast Asia. Although on a much lesser scale, Indian security policy in the East imitates that of China in South Asia. That China and India view each

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other’s role in their own presumed backyard is not new.22 But it has acquired a new edge, along with their growing impact on their own peripheries. It is this new context that provides a template for Tellis’s analysis of a new convergence of Indian and American interests in much of Asia and the Indian Ocean. This is no longer in the speculative realm. All indications from New Delhi in recent years, despite the demurring of India’s national security conservatives, is that India now sees coping with China’s rise as far more important than keeping the United States out of its neighbourhood. Note, for example, the Indian decision to actively support the entry of the United States and Japan as observers in the South Asian Association for Regional Cooperation (SAARC)—after it could not prevent Pakistan and Bangladesh from pushing for Chinese entry into the regional organization. The United States too has begun to consult with India in dealing with the crises in smaller South Asian countries like Nepal, Sri Lanka, and Bangladesh. The expanding Indo–US naval cooperation in the Indian Ocean stands in contrast to the previous positions in New Delhi that the United States and other great powers should vacate the Indian Ocean. The emergence of a security dilemma bet-ween India and China has inevitably created space for greater political and security cooperation. Shambaugh is right to warn that hedging strategies on the part of the United States and India could degenerate into more dangerous balancing policies. Nevertheless there appear to be some limits to Indo–US cooperation as well. Both have differences over the Persian Gulf, Pakistan, and Burma. None of these are likely to disappear very soon. Here again we are unlikely to have either/or answers to how the three-part dynamic might play itself out. Third, the competition with China has had some beneficial effects on India’s policy. Following China’s rapid modernization of its boundary infrastructure in Tibet, Xinjiang, and Yunnan, India has been compelled to embark on a similar effort in its border areas. China’s economic penetration of its peripheral states has encouraged India to adopt the slogan of promoting a ‘peaceful periphery’, open its market for goods from the neighbours, and go more than halfway in resolving the many contentious bilateral political disputes. Notwithstanding Sood’s 22 For a discussion of the idea of overlapping spheres of influence, see John Garver, Protracted Contest: Sino–Indian Rivalry in the 20th Century (New Delhi: Oxford University Press, 2003).

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pessimism about India’s relations with its neighbours, a structural shift is already underway. New Delhi has recognized the strategic necessity of transforming its relations with the neighbours. It might also begin to see the need to end its defensiveness on cooperation with China in promoting trans-regional cooperation in a neighbourhood they share. India has been hesitant in accepting Chinese proposals for greater cooperation between south-western China, the eastern subcontinent, and parts of Southeast Asia under its so-called Kunming initiative. India instead has sought to promote its own proposals for trans-regional cooperation that exclude China, for example the Mekong–Ganga initiative and the BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation). A cooperative approach between New Delhi and Beijing, however, could help reconstitute the once-connected spaces of western China and the wastern subcontinent. This would mean integrating more than 500 million people into the global market.

ENERGY, ENVIRONMENT, AND SYSTEMIC CHANGE As the two-and-a-half billion people of China and India move towards higher living standards, the management of energy and environmental sustainability has become a critical concern. Four articles in this volume offer expansive treatment of the subject, now increasingly viewed as part of a country’s national security interest. Two of them dealt with the massive challenges of addressing sustainable growth. As Elizabeth Economy chronicles in these pages, China’s rapid industrialization without attention to environmental health has begun to take a toll on Chinese citizens as well as those in East Asia. Industrial waste and airborne pollution has poisoned China’s water and air, harming the country’s future generations and rendering some parts of the land quite literally toxic. Moreover, China’s polluting practices are affecting those well beyond China as the scale of its environmental impact has grown so large (China became the world’s largest carbon emitter in 2007, and is a leading source of marine pollution and deforestation in Southeast Asia). Ramakrishnan approaches the question of sustainability from another direction, the ground up; his chapter explores the long-term impact of agricultural methods designed for efficiency of yield but which, over time, harm the land itself. He calls for a focus and adherence to a ‘contour path’

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of development, one which draws upon local knowledge as the source for insights about agricultural practices and how to maintain them in a long-term equilibrium. Ramakrishnan sees India’s democracy as an inherent advantage to this process, for NGOs have been vocal about defending local sustainable practices and carved space for public debate. Two others have addressed sustainability in terms of ensuring access to energy resources from outside. Sudha Mahalingam and Kenneth Lieberthal chart the similar courses that China and India have embarked upon in order to secure energy security. Both have moved to acquire equity stakes in oil and gas fields around the world, in some cases in joint bids, in what many have referred to as a new period of energy mercantilism. The political impact of this process has been far greater than its economic impact, as political leaders around the world begin to worry about the two giants taking oil ‘off the market’. But the international consequences of the high growth rates in China and India are barely understood. To be sure, there is a greater recognition today of the contribution of economic growth in China and India to world oil prices and the role of the two Asian economies in managing worldwide carbon emissions, but agreement on how to square the imperatives of economic growth in China and India and the global effects of their rapid growth has remained stubbornly elusive. This has emerged as the single most important international issue, a ‘global public goods’ problem where coordinated collective action offers the only path to a solution. In that sense, the rise of China and India does not only alter the balance between the three powers but also alters the very nature of the international system. There are also other international issues that emerge out of the demands that China and India are going to make on the world’s resources. These include questions on the tension between the two Asian giants’ quest for energy security and the presumed Western consensus on the organizing principles of international security. The well-being of the nearly two-and-a-half billion people living in China and India now depends on their access to natural resources, not just oil and coal but also minerals and food, beyond their borders. Even a modest level of prosperity in China and India is bound to have a massive effect on the availability of resources and the nature of their use. Addressing these issues would require an unprecedented level of engagement and cooperation among Washington, New Delhi, and Beijing. And these issues go well beyond the now

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real and urgent issue of resource use to the very core principles of organizing international security.

CHINA AND INDIA AS ‘NEO-IMPERIALISTS’ The dependence of the future growth of the economies on resources beyond their shores raises some fundamental questions about the nature of the foreign policies of China and India. As China and India ‘go-out’ in a determined quest for equity oil and mineral assets in far-off lands, they are beginning to confront charges of ‘neocolonialism’. For the moment Beijing is a larger target of criticism than New Delhi. China has been far more aggressive than India in pursuing its economic interests around the world. Western critics, not entirely accurately, argue that the hunger for resources in China and India and their incipient political rivalry is akin to the scramble for Africa among rival European colonial powers in the 19th century. Irrespective of the analogy, India is certainly competing with China for oil and mineral resources in Africa, and the recent attention in the West to new Chinese and Indian engagement with Africa—led by oil equity stakes and mining but increasing in other sectors—show how this new phenomenon and the span of its future impacts are only beginning to be felt.23 New Delhi might be way behind Beijing but it is on the same road. More importantly, their rising dependence on energy and mineral resources in the developing world has often put them at odds with the Western powers. International financial institutions and major aid donors for Africa have been critical of Chinese and Indian economic policies towards Africa. They insist that Beijing and New Delhi should not repeat the mistakes of the United States and the West in bank-rolling for decades such unsavoury regimes as that of Mobutu Sese Seko in Zaire. Although their aid policies are completely tied to national interest, India and China insist that they are providing new economic options for the rest of the developing world. They suggest that much of the Western criticism is motivated by the fear of losing See the recent essay by Harry G. Broadman, ‘China and India Go to Africa: New Deals in the Developing World,’ Foreign Affairs 87, no. 2 (March/April 2008): 95–109. 23

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the dominant positions of influence in Africa, Latin America, and Asia. Although growing demand for resources in China and India has lifted the economies of the developing world, Western critics are apprehensive that the greater flow of resources will accentuate rather than ameliorate conflict in the third world. After decades of seeing themselves as victims of imperialism, China and India will find the tag of neo-imperialism and neocolonialism shocking, if not distasteful. Yet New Delhi, like Beijing, must confront a new reality. The greater their economic and political capacity to inf luence outcomes elsewhere in the world, the stronger will be the international scrutiny of their policies. Equally important is the need to acknowledge that the policies of China and India towards the developing world—whose resources and markets the two rising powers badly need—are undergoing a profound transformation. As high growth rates propel China and India, the two Asian giants are being compelled to design foreign policies for larger economies that no longer are self-sufficient. Their rhetoric might be that of the Third World, but Chinese and Indian foreign policies could increasingly look like those of great powers, especially in the defence of the new economic interests beyond their borders. As their dependence on imported oil and mineral resources expands rapidly in the coming years, China and India, although they are loathe to admit this, will be under pressure to defend these interests through the time-tested means employed by great powers. These include large volumes of economic assistance, subsidizing domestic capital in capturing export markets, supporting friendly governments, and selling arms to such regimes which might use them against their internal and regional adversaries. In extremis, this might even involve sending troops to preserve order and stability to defend ‘vital’ national interests. The criticism of China and India is sharpest for supporting the governments in Sudan and Burma, both of whom are facing massive international criticism for their internal repression. Beijing and New Delhi, with their huge investments in Sudan’s oil fields, are unwilling to sacrifice their energy interests to compel Khartoum to change its behaviour. The same is true in Burma, where both countries are competing for influence. Beijing and New Delhi will point out that these are not the only instances where major powers have elevated ‘national interests’ above presumed ‘ international principles’. They cite the long record of US policy of self-interest towards the oil-rich Persian Gulf. China and

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India, however, cannot cite injury from accusations of neo-colonialism on the one hand while asserting that other powers do the same. They will need to find a measure of balance between interests and principles. To get there they very much need the cooperation of the United States.

SOVEREIGNTY AND NON-INTERVENTION Although India is the world’s largest democracy and China has emerged as the world’s most powerful non-democracy, their approaches to conflicts within the developing world seem broadly similar. Both of them are deeply wary of the doctrines of humanitarian intervention and the responsibility to protect. They are unwilling, at the moment, to endorse these as necessary principles to deal with contemporary international security challenges. Given their interests in cultivating ruling regimes for access to raw materials, China and India seem to prefer the virtues of ‘regime stability’ and are reluctant to confront the risks of ‘regime change’. Do values—such as liberal democracy which the Indian elites cherish so deeply at home—have any relevance for the conduct of its foreign policy? Do China’s differing political values mean Beijing can never be a credible partner in dealing with the range of new security threats that demand international coercion of recalcitrant states? This apparent contradiction between the current Western notions of ordering international security on the one hand and the Chinese and Indian notions of sovereignty on the other, however, can easily be over-determined. While the Chinese and Indian multilateralists do sound the same when defending the notion of ‘absolute sovereignty’, India’s diplomatic practice tells a very different story. Within the subcontinent and its environs, which is India’s presumed sphere of influence, New Delhi has a record of using force beyond its borders. Long before ‘humanitarian intervention’ became international fashion, India chose to intervene in East Pakistan to end a genocide there by the Pakistani Army. India’s successful creation of Bangladesh occurred in the face of opposition to the United States and also the United Nations Security Council and the UN General Assembly. India also used force, unsuccessfully, in Sri Lanka in the late 1980s to defend the territorial integrity of Sri Lanka as well as protect the political rights of the Tamil minority there. More

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recently, India intervened, politically, to support the pro-democracy forces in Nepal. India’s attitude of non-intervention has always had two distinctive elements to it. At the global level it had sought to oppose interventions by the great powers which could set the precedent for potential interventions against itself. This was a nation fearful of other powers undermining its territorial integrity. Within its own neighbourhood, however, India mirrored Western powers by choosing to intervene when its interests or principles demanded so. Beyond its own region, India has contributed actively, and very successfully, in the past to United Nations Peacekeeping—a form of collective intervention by the international system. China, too, has had a record of promoting political change beyond its borders. It is also deeply fearful of Western interventions against it. After prolonged opposition to international peacekeeping operations, China has now begun to actively participate in them. These precedents suggest good reasons to believe that the positions of China and India on intervention would evolve in the coming years. Given their own rising stakes in access to resources, China and India might not be entirely averse to either unilateral or multilateral interventions in future to defend their interests. After all, the principal objective of China and India is to sustain the high growth rates and not the permanent upholding of the principle of non-intervention. As defensive powers, China and India until now have found it useful to cite the principle of non-intervention. As the two countries generate more advanced conventional military capabilities, including the development of expeditionary forces, they will surely begin to debate the merits of a more interventionist policy. If and when they arrive at that juncture, the reaction of the Western powers could be a lot more alarmist than their current criticism of their policies of non-intervention. Nor is there a reason to believe that the current Chinese and Indian preference for order over justice in resource-rich developing countries will endure. Decision makers in both Beijing and New Delhi have begun to grapple with the inevitable contradiction between their own short-term interests in regime stability and the longer-term interests in promoting a sustainable environment for ensuring adequate supply of raw materials from beyond the borders. They are also not unaware of the consequences of taking sides in civil wars and internal conflicts in developing countries.

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China and India are keen to engage the West and look beyond the false contradiction between intervention and sovereignty, and regime stability and regime change. The real challenge lies in bringing the debate on when, where and how to intervene in internal conflicts. Neither the European belief in empowering a super-sovereign United Nations to involve itself in unlimited interventions, nor the muscular American idea of unilateral intervention has proved to be effective. The real questions before the international community are how China and India can be encouraged to define their resource security in broader terms and how they can be drawn into a more effective international approach to conflict resolution within developing countries. That would require fundamental changes in the current attitudes of the West as well as those of China and India.

RISING POWERS AND GLOBAL GOVERNANCE In the last few years it has become fashionable to demand that China and India prove they are ‘stake-holders’ in the international system. As they begin to influence resource security issues, there is a growing Western resentment that China and India are acting as ‘free riders’ who take advantage of the international system without paying for its construction or maintenance. Beijing and New Delhi, however, find this is part of a historic pattern of condescension from the old powers towards the rising ones. China and India, from their own enlightened self-interest, should go beyond criticizing Western hypocrisy on resource security and accept their new international responsibilities. Great powers, defined as those who enjoy global economic, political, and military reach, do not talk about autonomy. In the absence of world government, it is the function of great powers to construct and sustain a measure of order in international affairs. Put another way, great powers define rules for the rest. Most states tend to accept the rules, given the knowledge that a rule-based order serves their interests better than anarchy. It is only states with national ambitions to improve their relative power position which insist that they will not let the international system constrain their freedom of action and pay the costs for defiance. The emphasis on strategic autonomy was natural for China and India which emerged out of colonial rule in the middle of the last

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century. Yet the founders of the two nations have talked about their manifest destiny on the world stage. As once-weak-but-ambitious states, China and India have had a strong desire to prevent other powers from limiting their own room for manoeuvre. Therefore, they have often refused to abide by rules they considered discriminatory or unequal. Six decades later, as two of the world’s largest economies, China and India have the potential to shape the international system. They must now learn to share the costs of managing it rather than merely avoiding the discipline of an existing set of rules. The United States, on the other hand, will be extremely unrealistic to assume that rising China and India will simply abandon the imperatives of economic growth and suddenly pursue values-driven foreign policies. Efforts—even those led primarily by American or European NGOs—such as holding the Beijing Olympics hostage to Darfur, or demanding China and India give up their economic interests in Burma, will reinforce cynicism rather than promote responsibility in Beijing and New Delhi. On a whole range of issues— from devising better market mechanisms for resource security to defining new norms on when and where to intervene, and from devising a collective mechanism to limiting carbon emissions to finding a balance between regime stability and regime change—we need a new engagement between the United States and Asia’s rising powers to find common ground. There is nothing to suggest that the West has all the answers for these problems and that China and India merely need to defer to the current conventional wisdom. This, however, is precisely the challenge before the world today. As power shifts to the East, China and India are becoming architects of new kinds of engagements. The rise of China and India is not merely about redefining the balance of power. It is about devising the new rules for international governance across a whole range of issues: economic institutions, regional and global security, values and international law, energy regimes, and environmental management. The coming years promise an exciting adventure in thinking about and managing the triangular relationship.

ABOUT THE EDITORS AND CONTRIBUTORS EDITORS Alyssa Ayres joined McLarty Associates, the Washington-based international strategic advisory firm, as director for India and South Asia in 2008 after serving in the US Department of State as special assistant to the Under Secretary for Political Affairs. Previously, Dr Ayres was at the Center for the Advanced Study of India at the University of Pennsylvania, and before that, at the Asia Society in New York. A cultural historian of modern South Asia, Dr Ayres has carried out research in India, Pakistan, and Indonesia. Her book on nationalism in Pakistan, Speaking Like a State, was recently published by Cambridge University Press. As project director of the Asia Society’s Task Force on US Policy toward India, she was the primary author of its 2009 report, Delivering on the Promise: Advancing US Relations with India. Her essays have appeared in the Wall Street Journal, Journal of Asian Studies, Current History, and World Policy Journal, among others. In addition, she co-edited the two most recent India Briefing volumes published by the Asia Society. Dr Ayres speaks fluent Hindi and Urdu and in the mid-1990s worked for the International Committee of the Red Cross as an interpreter in Jammu and Kashmir. She received an AB magna cum laude from Harvard, and an MA and PhD from the University of Chicago. C. Raja Mohan is the Kissinger Chair in Foreign Policy and International Relations at the Library of Congress in Washington DC during 2009–10. He is a contributing editor with The Indian Express, New Delhi and a Visiting Professor at the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore. Earlier, he was a professor of south asian studies at the Jawaharlal Nehru University in New Delhi. He also served as the

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Strategic Affairs Editor of The Indian Express in New Delhi, and the Diplomatic Editor and Washington Correspondent of The Hindu. Dr Raja Mohan has a masters degree in Nuclear Physics and a PhD in international relations. He was a member of India’s National Security Advisory Board during 1998–2000 and 2004–06. He was a Jennings Randolph Peace Fellow at the United States Institute of Peace, Washington DC, during 1992–93. His recent books include Crossing the Rubicon: The Shaping of India’s New Foreign Policy (2004) and Impossible Allies: Nuclear India, United States, and the Global Order (2006).

CONTRIBUTORS Vivek Bharati is Executive Director, PepsiCo India Holding Pvt Ltd. He was an advisor to the Federation of Indian Chambers of Commerce and Industry (FICCI) and headed its national programmes and policy division. He has also served as Advisor to the Country Director, World Bank, India. He was a financial journalist from 1984 to 1996, senior editor at The Times of India, and editor at The Economic Times. As a regular columnist and editorial writer, he has contributed hundreds of pieces on the Indian and global economy, politics, and international relations. He is a keen commentator on India’s political economy. He was a Jefferson Fellow at the East-West Center in Hawaii in 1992. He has delivered talks and lectures on India in the US, Hong Kong, the UK, and the Middle East, and has anchored numerous TV programmes. He began his career as a lecturer of economics at Delhi University. Elizabeth Economy is the C.V. Starr senior fellow and director for Asia studies at the Council on Foreign Relations. She has published widely on both Chinese domestic and foreign policy. Her most recent book, The River Runs Black: The Environmental Challenge to China’s Future (2004), won the 2005 International Convention on Asia Scholars Award for the best social sciences book published on Asia, was named one of the University of Cambridge’s Top 50 Sustainability Books in 2008 and one of the top 10 books of 2004 by The Globalist. She also co-edited China Joins the World: Progress and Prospects (with Michel Oksenberg, 1999) and The Internationalization of Environmental Protection (with Miranda Schreurs, 1997). She has

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published articles in foreign policy and scholarly journals including Foreign Affairs, Harvard Business Review, Harvard Asia Quarterly, Survival, and Current History; and op-eds in the New York Times, The Washington Post, and International Herald Tribune, among others. She is a frequent guest on nationally broadcast radio and television programmes, has testified before Congress on numerous occasions, and regularly consults for US government agencies and companies on Chinese environmental issues. She is currently working on a new book focusing on the implications of China’s global quest for natural resources. Dr Economy received her PhD from the University of Michigan, her AM from Stanford University and her BA from Swarthmore College. In 2008, she received an honorary Doctor of Laws degree from Vermont Law School. Richard J. Ellings is president of the National Bureau of Asian Research (NBR), a non-profit, non-partisan institution whose international network of associates conducts advanced research on important policy issues concerning American relations with all of Asia, including Russia. Dr Ellings is co-founder of NBR, has served as the institution’s executive director, and sits on its board of directors. Prior to serving with NBR, he was assistant director of the Henry M. Jackson School of International Studies at the University of Washington. He is also affiliate professor of international studies at the University of Washington where he received the Distinguished Teaching Award. He is the author of Embargoes and World Power: Lessons from American Foreign Policy, co-author of Private Property and National Security, and co-editor of Asian Aftershocks with Aaron Friedberg. With Nicholas Eberstadt, he co-edited Korea’s Future and the Great Powers, and with Sheldon Simon, co-edited Southeast Asian Security in the New Millennium. He is the founding editor of the NBR Analysis series, and also established the Strategic Asia Program and AccessAsia, the national clearinghouse that tracks specialists and their research on Asia. Dr Ellings has served as consultant to the Office of the Secretary of Defense, Department of State, and other US offices and agencies. Nicholas R. Lardy is a senior fellow at the Peterson Institute for International Economics in Washington DC. He came to the institute in March 2003 from the Brookings Institution, where he was a senior fellow in the Foreign Policy Studies Program from 1995 until

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2003, and served as interim director of the Program in 2001. Prior to his work at Brookings, he served at the University of Washington, where he was the director of the Henry M. Jackson School of International Studies from 1991 to 1995. From 1997 through the spring of 2000, he was also the Frederick Frank Adjunct Professor of International Trade and Finance at the Yale University School of Management. He is an expert on Asia, especially the Chinese economy. Before his directorship, Dr Lardy had been a professor of international studies at the University of Washington since 1985 and an associate professor from 1983 to 1985. He served as chair of the China Program from 1984 to 1989. He was an assistant and associate professor of economics at Yale University from 1975 to 1983. He has written numerous articles and books on the Chinese economy. His most recent book (co-authoed with Morris Goldstein) is The Future of China’s Exchange Rate Policy (2009). Dr Lardy serves on the board of directors and executive committee of the National Committee of US–China Relations; is a member of the Council on Foreign Relations; and is a member of the editorial boards of The China Quarterly, Journal of Asian Business, China Review, and China Economic Review. He received his BA from the University of Wisconsin in 1968 and his PhD from the University of Michigan in 1975, both in economics. Kenneth Lieberthal is senior fellow and director of the John L. Thornton China Center at The Brookings Institution. He is emeritus professor at the University of Michigan, where he was, until June 2009, Arthur F. Thurnau Professor of Political Science, William Davidson Professor of Business Administration, distinguished fellow at the William Davidson Institute, and research associate of the Center for Chinese Studies. He has a BA from Dartmouth College, and two MAs and a PhD in political science from Columbia University. Dr Lieberthal served as special assistant to the president for national security affairs and senior director for Asia on the National Security Council from August 1998 through October 2000. His US government responsibilities encompassed American policy towards all issues involving northeast, east, and southeast Asia. Dr Lieberthal has written and edited 14 books and monographs, including a second revised edition of Governing China: From Revolution Through Reform (2004), and authored about 70 periodical articles and chapters in books, including: ‘How Domestic Forces Shape the

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PRC’s Grand Strategy and Domestic Impact,’ in Ashley Tellis and Michael Wills, Strategic Asia 2007–08 (2007). Dr Lieberthal is on the editorial boards of Asia Policy, China: An International Journal, The China Quarterly, China Economic Review, Foreign Policy Bulletin, Journal of Contemporary China, and Journal of International Business Education. Sudha Mahalingam is an energy economist with over 25 years of professional experience. She is currently member of India’s Petroleum and Natural Gas Regulatory Board entrusted with the responsibility of regulating downstream hydrocarbon sector. She is also a member of India’s National Security Advisory Board which advises the prime minister through the National Security Advisor on security-related issues. In this capacity, she provides policy inputs on India’s energy security to the highest decision-making levels. Prior to her current assignment, Sudha Mahalingam held the prestigious Senior Fellowship at The Centre for Contemporary Studies, Nehru Memorial Museum and Library, New Delhi, India where she contributed to shaping the country’s discourse on energy security. In 2007, she was awarded the first K.Subrahmanyam award for excellence in strategic studies by Institute for Defence Studies and Analyses (IDSA), India’s leading think-tank on strategic studies, in recognition of her contribution to the debate on India’s energy security. During her long career, she has worked for several leading thinktanks and research institutes as well as in mainstream business journalism. Her areas of interest encompass the geopolitical, economic, environmental, and regulatory dimensions of all forms of energy including oil, gas, electricity including nuclear, hydro, and coal as well as midstream and downstream activities like refining, petrochemicals, fertilizers, etc. She has published numerous articles in Indian and international journals and writes regularly in the opinion columns of newspapers. Sudha Mahalingam has represented India in several international conferences in her capacity as an energy expert. She is a star speaker in national conferences on energy-related issues. P.S. Ramakrishnan is emeritus professor and Indian National Science Academy Honorary Senior Scientist at the School of Environmental Sciences, Jawaharlal Nehru University. With a wide range of experience of working in universities and research institutions in

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India and abroad, and working in the interface area of natural and social sciences, he has used knowledge systems (traditional and formal) as powerful tools for ensuring rural community participation based on a value system that they understand. He has been successful in converting his research results into policy and developmental initiatives, working in the broad area of ecology linked with sustainable development. With over 450 research articles and 23 research-based volumes, he has taken research results to the society at large through policy documents, outreach volumes, and audiovisual documentaries. David Shambaugh has been professor of political science and international affairs in the Elliott School of International Affairs at the George Washington University since 1996. He directed the Sigur Center for Asian Studies from 1996 to 1998, and since then directed the China Policy Program in the Elliott School. He has also been a non-resident senior fellow in the Foreign Policy Studies Program, and affiliated fellow in the Center for Northeast Asian Policy Studies since 1997. He previously taught for eight years at the University of London’s School of Oriental and African Studies, where he also served as editor of The China Quarterly (1991–95), and directed the Asia Program of the Woodrow Wilson International Center for Scholars (1986–87). He has been a visiting scholar numerous times in China as well as in Taiwan, Hong Kong, the former Soviet Union, Japan, and Germany. He has received several research and project grants from various private foundations, including Smith Richardson, Ford, Rockefeller, W. Alton Jones, the US National Academy of Sciences, the British Academy, the UK Economic and Social Research Council, and others. He has published widely, having authored or edited 25 books, over 200 articles and chapters in edited books, and many editorials. He is a frequent commentator on Chinese and Asian affairs in the international media, sits on the editorial boards of several scholarly journals, and has served as a consultant to several governments, research institutes, and private corporations. Jasjit Singh, awarded Padma Bhushan for life-time’s contribution to national defence and security, is one of the leading strategic experts in India. He joined the Indian Air Force in 1954, graduating from the Air Force Academy with the Jodhpur Sword of Honour

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in 1956. He has been decorated by the President of India thrice for distinguished service of an exceptional order and gallantry in the face of enemy. He is a graduate of Defence Services Staff College, Wellington. He has held important command and staff appointments in the Air Force, including command of a MiG 21 squadron, director of flight safety, and director of operations at Air Headquarters, retiring from the Air Force in 1988 as an Air Commodore. He was director, Institute for Defence Studies and Analyses (IDSA), New Delhi, India’s premier think-tank on strategic and security issues, for 14 years during 1987–2001. He currently heads an independent think-tank, Centre for Air Power Studies, New Delhi, and is the editor of Air Power. He is the author or contributing editor of nearly three dozen books and has published extensively on strategic and security issues. Air Commodore Singh has lectured regularly at defence and war colleges in India and abroad (US, USSR, China, France, Germany, NATO, and Italy) on strategic and security issues. He is a fellow of the World Academy of Art and Science and a fellow of the Aeronautical Society of India. Vikram Sood is currently Vice President of the Centre for International Relations at Observer Research Foundation, New Delhi. He is also associated with the Centre for Policy Alternatives. He headed India’s external intelligence service, the Research and Analysis Wing, from January 2001 to March 2003. He joined the service in 1972 having been transferred from India’s civil services which he joined in 1966. Since retiring from the Research and Analysis Wing, he has been a regular commentator on international affairs, security, and foreign policy issues. From 2004 to 2008 he contributed a fortnightly column, ‘Perspectives’, to the Hindustan Times and has also been contributing to other journals, newspapers, and magazines including the Indian Defence Review, Force, The Asian Age, Mail Today, The Hindu, The Times of India, Business World and Tehelka. In addition, he is a consulting editor with Indian Defence Review. Ashley J. Tellis is Senior Associate at the Carnegie Endowment for International Peace, specializing in international security, defence, and Asian strategic issues. While on assignment to the US Department of State as Senior Adviser to the Undersecretary of

ABOUT THE EDITORS AND CONTRIBUTORS

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State for Political Affairs, he was intimately involved in negotiating the civil nuclear agreement with India. Previously he was commissioned into the Foreign Service and served as Senior Adviser to the Ambassador at the US Embassy in New Delhi. He also served on the National Security Council staff as Special Assistant to the President and Senior Director for Strategic Planning and Southwest Asia. Prior to his government service, Dr Tellis was Senior Policy Analyst at the RAND Corporation and a professor of policy analysis at the RAND Graduate School. He is the author of India’s Emerging Nuclear Posture (2001) and co-author of Interpreting China’s Grand Strategy: Past, Present, and Future (2000). He is the Research Director of the Strategic Asia program at NBR and co-editor of its six most recent annual volumes, including this year’s Strategic Asia 2009–10: Economic Meltdown and Geopolitical Stability. In addition to numerous Carnegie and RAND reports, his academic publications have appeared in many edited volumes and journals. He earned his PhD in political science from the University of Chicago. He also holds an MA in political science from the University of Chicago and both BA and MA degrees in economics from the University of Bombay. Dr Tellis is a member of several professional organizations related to defence and international studies including the Council on Foreign Relations, the International Institute of Strategic Studies, the United States Naval Institute and the Navy League of the United States.

FOREWORDS BY Ambassador K. Raghunath graduated in physics and mathematics and joined the Indian Foreign Service in 1962. He served in several of India’s diplomatic missions and become the foreign secretary in the Ministry of External Affairs. Between 2001 and 2004, he was Ambassador of India to Russia. Francine R. Frankel is professor of political science and founding director of the Center for the Advanced Study of India, where she served as director from 1992 to 2006. Her research interests include problems of economic transition, changing power alignments in Asia, and the nuclear non-proliferation regime. A recipient of research grants from the Ford Foundation, Social Science Research Council, Smithsonian Institutions, American Institute of

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Indian Studies, and the American Philosophical Society, Professor Frankel has held research appointments at the Woodrow Wilson Center for International Scholars, Nehru Memorial Museum and Library, New Delhi, Delhi School of Economics, the Institute for Advanced Study (Princeton), and the Center for International Studies, Princeton University. She as authored/edited eight books, including the second edition of India’s Political Economy, 1947–2004 (2005); and was co-editor of The India–China Relationship: What the United States Needs to Know (2004). She is completing a book tentatively titled ‘Different Worlds: Challenges of Establishing an Indo-US Global Partnership’. Professor Frankel is a member of the Council on Foreign Relations and has served on several policy task forces sponsored by the Council and the Asia Society. She has appeared as an expert witness before the US House of Representatives Committee on International Relations. She holds a PhD degree from the University of Chicago.

INDEX absolute sovereignty, 324 acid rain, 72, 304 afforestation programmes, 106 Afghanistan, 118, 121, 122, 144, 243, 245, 256–257, 268 Africa, 45, 82, 162, 164, 165, 206, 243, 282, 322 123 Agreement, 5, 7 Al Qaeda, 265 ASEAN Regional Forum (ARF), 144, 150, 153, 259, 262 Asia, 4, 9, 42 impact of China’s growth on, 53–57 industrial restructuring, 53 international relations in, 137–138 China’s military modernization and regional security balance, 147–150 and emerging normative security community, 150–152 and implications for US– India relations, 152–157 proactive China, 141–142 relationship between the US and China, 142–145 rise of India, 145–147 systemic factors, absence of, 137–138 US-led security system, 138–140 rise of, 250 security issues in, 113–114 shift of global power, and role of, 116–120 structural change in, 316–320

trade and economic integration in, 53–54 Asian–Australian monsoon impact, 109 Asia–Pacific Economic Cooperation (APEC), 54, 144, 205, 233, 262 Asia–Pacific Partnership on Clean Development and Climate, 79 Association of Southeast Asian Nations (ASEAN), 12, 25–34, 36, 51–55, 214, 229, 232, 252, 262, 312 ‘Axis of Evil’, 119 Bangladesh, 16, 55, 220, 251–254, 260, 265, 280, 319, 324 ‘bipolarity’ of Cold War, 115–116 Bohai Sea Clean-Up Campaign, 85 carbon emissions from China, 100 India’s position, 100 Caspian Sea, energy source in, 209 China, 1–4, 9–11, 20–23 arms sales policies, 132 ASEAN–China trade expansion, 35–36 and ASEAN countries ASEAN–China Expert Group, and ASEAN–China FTA, 27–30 ASEAN–China summits, 26 ASEAN tariff preference in China market, 32 China’s exports to ASEAN, 33 early harvest agreement, 26

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growing interdependence between, 52–53 growth of ASEAN exports to China, 31–32 growth of trade between, 27, 51–52 relations between, 25–27 Chinese firm investment abroad, 20–21 cooperative diplomacy of, 141–142 economic reforms in, 20 economic rise of, 42–51, 70 future impacts of, 63–65 energy diplomacy, 202 and energy issues Chinese petroleum companies, 165 dependence on imported energy, 160–161 energy imports role in country’s economy, 162–163 go-out strategy, 163–167 investments in non-carbon fuel development, 159 mercantilist energy policy, 167–169 oil demand and imports, 161 oil demand growth, 158– 159 supply–demand gap, 161, 162 US–China relations, 169– 175 environmental challenges faced by, 70–72 access to clean water, 73 air pollution, 72 approach to environmental protection, 74–75 climate change, 75–80, 102– 103

illegal timber trade, 80–83 impact of, 74 land degradation, 73 marine pollution, 84–87 regional and global implications of, 75–76 water pollution, 73–74 foreign firms investment, 20 foreign policy, energy-related, 202 with Africa, 206 in Caspian/Central Asia, 202–204 with India, 206–207 with Latin America, 204–205 with Russia, 204 goods produced by foreign affiliates, 21, 22 grand strategy, 124, 125 impact of collapse of, 65 and India economic growth, impact of, 63–65 India’s trade pattern with, 7–59 military modernization, 128–131, 147–150, 156 aerospace power, advances in, 132–133 shifting balance of military power, 131–132 and US–India relationship, 155–156 nuclear weapons assistance to Pakistan, 131–132 nuclear weapons technology, 128–129 and Pakistan, economic and security links betwen, 56 peaceful development policy, 194–195 problems and challenges for, 65–69 quest for energy security, 193– 195

INDEX

and equity oil strategy, 211– 213 growing share of imports, 196–198 hydrocarbon-led energy demand, 195–196 nuclear power, use of, 198– 199 oil demand, 196 and realignments in energy markets, 208–209 and relations with India, 213–218 renewable energy, development of, 199 reorganization of petroleum industry, 200–202 rise as major global trader implications for the United States, 36–37 and Indian manufacturing sector, 37–41 rise by forming ‘flexible coalitions’, 55–56 rise of military power and future implications, 123–125 China’s grand strategy and use of force, 125–127 military doctrine and strategy, 127–128 role in Asian production networks, 22–23 Sino–American relations, 142– 145 steps for environmental protection, 87–89 trade deficits, 51 trade performance, 23–25 trade surpluses, 51, 55 trade with Central Asia, 34–35 trade with SAARC countries, 55 WTO deal and, 65 China–ASEAN FTA (ACFTA), 26, 52

339

China Council for International Cooperation on Environment and Development (CCICED), 94 China National Offshore Oil Corporation (CNOOC), 163, 168, 200 China National Petroleum Corporation (CNPC), 163, 168, 200 China Petrochemical Corporation (Sinopec), 163, 168, 200 China’s National Defence 2004, 130 China’s People’s Liberation Army (PLA), 148–150 Chinese–Indian strategic relations, geography factor in, 293–294 Chinese logging companies, 81 clean development mechanism (CDM), 77, 78 climate change, 75–80 CNOOC–Unocal episode, 166, 168, 169 Collective Security Treaty Organization (CSTO), 263 Comprehensive Economic Cooperation Agreement (CECA), 54 Concert of Europe, 153 concert of powers model, 153 ‘Develop the West’ policy, China, 198, 201 dysfunctional state, 252 East Asia Summit (EAS), 312, 313 Energy and US–China relations geopolitical issues in China’s military modernization, 174 energy ties to ‘problem’ states, 173–174 geopolitical tensions in Northeast Asia, 174 new player in global energy geopolitics, 175

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market issues China’s impact on oil markets and price, 169–170 global governance of oil, 172 taking oil ‘off the market’, 170–172 Energy nationalism, 174 Energy Policy Act of 2005, US, 210 Enterprise for ASEAN Initiative (EAI), 230 environmental pollution and protection China, role in, 70–72, 75–89, 91–92 United States, role of, 89–91 Environmental Protection Industry (EPI), 94 Failed States Index, India’s neighbours in, 252 Free trade area (FTA), 26–30, 35, 36, 52, 54, 56, 57, 59, 233, 260, 262, 276 Generation IV International Forum (GIF), 198 Global Witness, INGO, 81 Goldman Sachs’ projections of 2003 for BRIC countries, 63 go-out strategy, China, 15, 163–167 Guam, significance of, 140 Gulf Cooperation Council (GCC) oil, US dependence on, 210 Harkat ul Jihad ul Islami (HuJI), 265 hedged engagement, 142 HFC-23 emissions, 78 ‘hub and spokes’ model, 138 Hyde Act, 5, 314 India, 1–11, 137, 178, 183, 190, 213, 218, 221, 249, 260, 270, 291, 293, 298, 310, 322

challenge from China nuclear and missile capabilities, 129 and China, security relations, 259–260 (see also Sino–Indian relations) China and Russia in Central Asia, 263–264 China in India’s neighbourhood, 260–261 China’s multilateral approaches in Asia, 262 China–United States dynamics, 262–263 defence modernization, need of, 132 defence planning to combat China air power, 133 economic performance and Asian geopolitics, 310–312 hedging strategies by, 297 impact of China’s surge on, 60–62 oil needs and strategies China as India’s main competitor, 176, 207–208, 218 disadvantage from China’s energy strategy, 177–178 reliance on imports, 175–176 and polycentric world order, 133–134 proactive diplomacy in East Asia, 146–147 regional security interests and Afghanistan, 256–257 China and, 259–264 future perspective, 266–269 Iran and, 257–258 overview of world, 249–250 and Pakistan, 254–256 and Southeast Asia, 258–259 terrorism sponsored by neighbours, 264–266

INDEX

troubled neighbourhood, 251–254 relationship with the United States and China, 135–136 strategic priority, 135 India and China, environmental problems and measures, 93–95, 111–112, 320–322 changing water landscape, 95– 98 depleting water resources, 96 manipulating river flow, 98 degrading ecosystems and depleting biodiversity, 100–103 forestry management practices, 105–108 industrial pollution control, 103 natural resource management, 103–104 NGO-based environmental movement, 110–111 sustainable agriculture practices, 108–109 urbanization of landscape, 99– 100 water management, 104–105 India baiting, 251 Indian–Chinese cooperation in oil sector Asian gas grid and oil market, need of, 181–183, 213–218 in bidding for equity oil, 178– 179 energy-related technologies, cooperation in, 180–181 joint commitment to bilateral cooperation, 179–180 joint projects, 180 limitations and problems in, 183–185 United States and, 190–192 Indian Ocean, 234–239, 283–286

341

Indian Ocean Rim-Association for Regional Cooperation (IOR-ARC), 238 Indo–ASEAN FTA, 233 Intermediate-Range Nuclear Forces (INF) Treaty, 124 International Atomic Energy Agency (IAEA), 5, 7, 123, 207 International Energy Agency (IEA), 93, 94, 100, 162, 172, 201, 213 international issues, United States and China cooperative efforts Afghanistan, 144 Asian issues, 144 counter-terrorism, 144 Iran’s nuclear programme, 144 North Korea’s nuclear programme, 144 Taiwan, 144–145 UN peacekeeping operations, 144 international non-governmental organizations (INGOs), 71 International Union of Forestry Research Organization (IUFRO), 106 Iran, 8–9, 123, 144, 164, 173, 180, 183, 212, 243–244, 257–258, 265, 266 Iraq, 119, 121, 122, 172, 241, 258 Israel, 114, 240, 242, 265, 317 Japan, 42, 47, 50, 53, 81, 90, 116, 142, 147, 155, 164, 174, 249, 259, 285, 288, 293, 297, 299 economic relations with India, 54 trade with China, 53 Japan–India Global Partnership, 293, 297 jihadi terrorism, 122, 254, 265

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Kyoto Protocol, 77 Latin America, 204–205 Lebanon War, 122 Liberation Tigers of Tamil Eelam (LTTE), 253 Look East policy, 146, 231, 282, 288, 299, 312 madrasa culture, 254–255 marine pollution, 84–87 Military doctrine and strategy China, 127–128 India, 128 Pakistan, 128 multipolar world order, 134 National Intelligence Council (NIC) report, on rise of Asia, 113 National Manufacturing Competitiveness Council (NMCC), 58 Natural Resources Defense Council (NRDC), 90 neocolonialism, 322–324 Nepal, 21, 253, 254, 260–261 Next Steps in Strategic Partnership (NSSP), 300 non-intervention, principle of, 324– 326 North Atlantic Treaty Organization (NATO), 249–250 Nuclear Suppliers Group (NSG), 5–7, 207, 308 nuclear weapons, 118, 121 ONGC Videsh Limited (OVL), 176, 203 Organisation for Economic Cooperation and Development (OECD), 42 Organization of Petroleum Exporting Countries (OPEC), 169, 211

Pakistan, 3, 4, 16, 55, 56, 121, 127, 128, 177, 182, 251, 254–256, 261, 265 nuclear weapons technology from China, 131–132 polycentric world order, 134 Purchasing Power Parity (PPP), 43 qualified domestic investor (QDII) China, 21

institutional programme,

Regional Cooperation Agreement on Combating Piracy and Armed Robbery against Ships in Asia (ReCAAP), 233 Renewable Energy Promotion Law, China, 199 rise of China and India, 326–327 Russia, 82, 134, 164, 184, 202, 204, 208, 210, 246, 257, 262–264, 292 Saudi Arabia, 164, 165, 212, 243, 257 sea lines of communication (SLOCs), 178, 229, 301, 302 security challenges, before US and India, 120–123 Shanghai Cooperation Organization (SCO), 34–35, 150, 175, 202–203, 263, 293 Shanghai Five. See Shanghai Cooperation Organization (SCO) shifting agriculture, 109 Sino–Indian relations, 3–4, 9–11 building positive relationship, 275–276 bilateral trade relationship, 276 boundary dispute, effort to resolve, 278–279

INDEX

political differences, resolution of, 277 strategic partnership, 279 development of, 146–147 historic overview of post-1962 years, 274–275 pre-1962 years, 272–274 implications for triangular relationship with US, 286–290 security dilemma and cooperative security, tension between, 279–286 Six Party Talks, 144, 150, 225, 293, 296 South Asian Association for Regional Cooperation (SAARC), 55, 56, 64, 150, 262, 280 South Korea, 42, 54, 118, 139, 213 Sri Lanka, 177, 253, 260, 324 Strait of Malacca, 229 strategic triangle, 307 string of pearls strategy, 177, 284 Sunda Strait, 229 terrorism, 264–266 timber trade, illegal, 81–82 trade and investment framework agreements (TIFA), 230 Traditional ecological knowledge (TEK), 104, 108, 109 Traditional forest knowledge (TFK), 106 United States, 1–2, 4, 6, 8 alliance system, in Asia, 138– 139 energy security perspectives after 9/11, 210–211 on India–Iran relations, 8–9 oil strategy vis-à-vis China, 185– 187 issue of trust, 187–188

343

multilateral initiatives for energy cooperation, 188–190 relationship with China, 2–3, 142–145 security challenges before, 120– 123 security partnerships, 139–140 United States–India Nuclear Agreement, 293, 297 UN Security Council, 8, 123, 144, 190, 212, 302 US and Indian interests, in India’s extended neighbourhood, 221– 223 Central Asia, 244, 247 Indian objectives, 245–246 Indian strategies, 246–247 US objectives in, 244–245 US strategies, 245 China objectives towards, 223–224 strategies towards, 225–227 Indian Ocean, 234–235, 239 Indian objectives, 236–237 Indian strategies, 237–238 US objectives, 235–236 US strategies, 236 Southeast Asia, 227–228, 234 Indian objectives, 231–232 Indian strategies, 232–233 US objectives, 228–230 US strategies, 230–231 West Asia, 239 Indian objectives, 241–242 US and Indian strategies, 242–244 US objectives, 239–241 US–China–India trilateral relationship, 155 US–India strategic cooperation, 1, 4–6, 18, 307–309 America’s global interests and, 301

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hurdles in building, 7–8 Indian interests and limits of, 298–301 joint cooperation, 301–304 unpredictable China and, 1–2, 295–298 shared political values between India and US, 313–316 US-led security system, in Asia, 138–140

vertical specialization, 22 world events, influence of core strategic triangle on, 113–114 world power, structure of, 292–293 world’s energy ‘demand heartland’, 119 World Wildlife Fund (WWF), 80, 84