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    Liberalizing India’s Economy Is Critical for Global Stability

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    The COVID-19 pandemic is increasing inequality globally and even advanced economies have not been spared. Before the pandemic began in 2020, inequality was on the rise. Decades of globalization, loose monetary policy and the rise of oligopolies have contributed to this phenomenon. In many ways, globalization has kept inflation down. When Walmart imports Chinese goods, Americans get more for less.

    China can manufacture cheaply because labor costs are low. The Chinese Communist Party (CCP) also runs an authoritarian regime. The regime has repressive land and labor laws with scant regard for human rights. Legally, the CCP owns all the land in China and can appropriate any property it wants. Similarly, workers have little recourse to courts and sometimes work in slave-like conditions.

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    A rising China is challenging the postwar global order. Democracies, including the United States, are finding it difficult to meet the challenge for two reasons. First, loose monetary policies in recent years have brought back the specter of inflation. Second, no economy other than China’s can meet the supply needs of advanced economies. From laptops to toys, most goods are made in China.

    Labor arbitrage has defined globalization from its early years. Companies set up factories where wages tend to be lower. This increases revenues and profits, making consumers and shareholders happy. Given rising inflationary expectations, advanced economies need labor arbitrage to keep costs of goods down. At the same time, these democratic societies want to decouple their supply chain from China.

    With the size of its young workforce, India has a unique opportunity to become the new workshop of the world and emerge as a stabilizing global force in a multipolar world. To grasp this historic opportunity, it has to liberalize its economy wisely.

    The Legacy of the Past

    India could do well to heed the lessons of the past. The Soviet Union, Western Europe and the US emerged as strong economies after World War II by leveraging their manufacturing base. The war economy had led to a relentless focus on infrastructure, mass production and industrialization. In the case of Western Europe, the Marshall Plan helped put shattered economies back on track.

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    Over time, these advanced economies deindustrialized and production started shifting to emerging economies. China’s rapprochement with the US allowed it to enter the postwar Western economic system. Reforms in 1978 were critical to its success. The fall of the Soviet Union in 1991 created a brave new world where companies chased cheap production. China, with its size, scale and speedy centralized decision-making, emerged as the big winner.

    As production moved to China, workers lost jobs in advanced economies and other industries did not emerge to retrain and employ them. The Rust Belt in the US has become a synonym for down-at-heel places left behind by globalization. Even as workers grew poorer, shareholders grew wealthier, exacerbating inequality.

    Today, the United States finds itself in a complicated position with China. On the one hand, the Middle Kingdom steals intellectual property, transgresses international law and challenges the US. On the other hand, it supplies American consumers with cheap goods they need. America’s economic stimulus during the pandemic has, in fact, reinforced the country’s dependency on China. So, Washington cannot hold China’s feet to the fire and penalize its bad behavior. Beijing follows its policy of pinpricks short of outright conflict.

    The US dollar is the reserve currency of the world. Since the days of Alan Greenspan, the Federal Reserve has followed a loose monetary policy. After the 2007-08 financial crisis, the US adopted the Japanese playbook from the 1990s and introduced quantitative easing. In practice, this means buying treasury and even corporate bonds to release money into the economy after interest rates touch zero. Such increased liquidity in the US has led to bloated company valuations and allowed the likes of Amazon or Uber to expand their operations. The cost of capital has been so low that profitability in the short or even medium run matters little.

    Loose monetary policy has enabled the US to counter China’s state-subsidized companies to some degree. Yet both policies have distorted the market. The US can only continue with loose monetary policy as long as inflation is low. Should inflation rise, interest rates would also have to rise. This might trigger a stock market collapse, increase the cost of capital for its companies and weaken the global dominance of the US economy.

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    To persist with its economic model and simultaneously contain China, the US needs to curb inflation. This is only possible by shifting some if not all production away from China. Mexico, Vietnam and Bangladesh are possible alternatives. Mexico has a major drug, violence and governance problem. Vietnam and Bangladesh benefit from huge Chinese investment. Therefore, they might not be the best hedge for securing supply chains from the Middle Kingdom, especially if the companies manufacturing in these countries are Chinese.

    As a vibrant democracy with a formidable military, India offers the US and the West a unique hedge against China. For geopolitical reasons alone, manufacturing in India makes sense. However, doing business in the country continues to be difficult because of red tape, corruption, erratic policymaking, a colonial bureaucracy with a socialistic culture and more.

    India’s Nehruvian past still hobbles the nation’s economy. The country adopted socialist command-and-control policies using a colonial-era bureaucracy that prevented the economy from achieving high economic growth. Manufacturing suffered the most. To start a factory, any entrepreneur needed multiple licenses that cost time, money and energy. Poor infrastructure made it difficult for manufacturers to compete with their East Asian counterparts. While wages were low in India, the cost of doing business made many manufacturers uncompetitive.

    Acquiring land in India is still a challenge. The experience of the Tata group in Singur revealed both political and legal risks that still exist. Similarly, convoluted labor laws made hiring and firing onerous, rendering companies inflexible and unable to respond quickly to market demand. Liberalization in 1991 improved matters, but the state continues to choke the supply side of the Indian economy.

    In the second half of the 1990s, liberalization lost momentum. Coalition governments supported by strong interest groups stalled reforms. In fact, India drifted back to left-leaning policies starting 2004 and this severely limited economic growth. For instance, many industrial and infrastructure projects were killed by ministers to protect the environment. India’s toxic legacy of Nehruvian socialism persisted in terms of continuing state intervention. The country never meaningfully transitioned from an agricultural to an industrial economy and still suffers from low productivity. This in turn has constrained consumption and slowed down growth.

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    India’s much-heralded information technology sector only grew because it was new. The government did not exactly know what was going on and, as a result, there were fewer regulations to constrain this sector. Fewer regulations meant that the likes of Infosys and Wipro had greater autonomy in decision-making and fewer bribes to pay.

    Reduce Red Tape

    The first thing that India needs is an overhaul of its colonial-era bureaucracy that resolutely strives to occupy the commanding heights of the economy. It foists endless red tape on business, strangles entrepreneurship and takes too long to make most decisions. Government service is seen as lifelong employment. Once people become bureaucrats, they have little incentive to perform. Like their colonial predecessors, they lord over citizens instead of serving them. Rarely do they craft sensible policies. Even when a government comes up with a good policy, bureaucrats implement it poorly when they are not sabotaging it actively. This must change. Bureaucrats must be accountable to citizens. Performance-linked promotions and dismissal for underperformance are long overdue.

    Over the years, politicians have tried to deliver benefits and services to citizens to win reelection. To get around a corrupt, colonial and dysfunctional bureaucracy, they instituted direct benefit transfers for welfare schemes, emulating other emerging economies like Brazil. This move is necessary but not sufficient. India needs sound economic policymaking directed by domain experts in each administrative department.

    Only members of the Indian Administrative Service (IAS) occupy key positions in the finance ministry. Instead, India needs economists, chartered accountants, finance professionals and those with varied skill sets in this ministry. The treasuries of the US, Britain, Germany and almost every advanced economies have this diversity of talent in their upper echelons.

    There is no reason why economic policymaking in 21st-century India should be monopolized by an archaic IAS. The government has made noise about the lateral entry of professionals into policymaking, but tangible results have been few and far between.

    If the bureaucracy holds India back, so does the judiciary. Nearly 37 million cases are pending in the courts. It takes around six years for a case to be resolved in a subordinate court, over three years in the high courts and another three years in the supreme court. A case that goes all the way to the supreme court takes an average of 10 years to resolve. Many cases get stuck for 20 to 30 years or more.

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    India needs to reform its judicial system if its economy is to thrive. Justice is invariably delayed, if not denied, and it also costs an arm and a leg. Not only does it add to transaction costs, but it also undermines business confidence. Virtual courts have already shown the way forward during the pandemic. A higher number of judges using both in-person and online technology could reduce the seemingly unending number of pending cases.

    Create Efficient Markets

    To improve labor productivity and consumption, the government must reduce inflation and improve purchasing power. For decades after independence in 1947, India was united politically but divided economically. Producers in one state could not sell in other states without paying taxes and, in some cases, bribes. In agricultural markets, they could not even sell in other districts. India’s new goods and services tax (GST) might be imperfect, but it has already made a difference. Even during a pandemic, interstate goods movement rose by 20% and menu costs, a term in economics used for the costs of adapting to changing prices or taxes, dropped because tax filings were done online.

    The 2016 Insolvency and Bankruptcy Code has led to major efficiency gains. Now, lenders can recover their debt more speedily. Bankruptcy proceedings are now much simpler even if haircuts remain high. Unsurprisingly, India has risen in the World Bank Doing Business rankings from 130 in 2016 to 63 in 2020.

    As Atul Singh and Manu Sharma explained in an article on Fair Observer in 2018, non-performing assets of Indian banks have led to a financial crisis. The government could do well to adopt some if not all the reforms the authors suggested. Given rising inflationary pressures because of rising oil prices, India’s central bank can no longer cut rates. So, the government has to be creative in tackling its banking issues and free up liquidity for Indian businesses with great potential to grow. Banks burnt by poor lending in the past and fearful of corruption charges as well must discover the judgment and appetite to lend to deserving businesses in a fast-growing economy that needs credit for capital formation.

    A little-noticed need of the Indian economy is to strengthen its own credit rating systems and agencies. Capital flows are aided by accurate corporate and political risk assessment. The US enjoys a global comparative advantage in attracting investments thanks to the big three homegrown agencies: S&P, Moody’s and Fitch. These agencies tend to fall short in their India assessment. The standards they set give American companies an advantage over Indian ones.

    Therefore, both the private sector and the government must strengthen Indian rating agencies such as CRISIL and ICRA. These agencies are improving continuously. They now have access to increased digital high-frequency data, which they can interpret in the domestic context. As a result, Indian agencies can benchmark corporate or sovereign risk better than their American counterparts for domestic markets. A better benchmarking of risk is likely to deepen the bond market and cause a multiplier effect by enabling companies to raise money for increased capital expenditure.

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    For decades, India followed a socialist model of agriculture, doling out large unsustainable subsidies. As Singh and Sharma explained in a separate article, the Soviet model was the inspiration for the Indian one. Indian agriculture denuded groundwater, emptied government coffers and lowered farm productivity. The current reforms allow farmers to grow what they want and sell wherever they want to bypass parasitic middlemen. The new legislation emulates the US farm bills and promises to boost agricultural production, lower inflation and increase exports. This legislation might also lower rural hunger and improve India’s human capital in the long term.

    India has to transition hundreds of millions from agriculture to industry. Currently, 58% of the country’s population is dependent on agriculture and contributes just 20% to gross domestic product (GDP). All advanced and industrialized economies have a much lower percentage of their populations engaged in agriculture. In the US, the figure is 1.3% and in Vietnam, 43% work in agriculture. The last time the US had 50% of its population engaged in agriculture was in 1870.

    Improve Infrastructure

    To facilitate movement from agriculture to industry, India must invest in infrastructure and urbanization. For decades, its infrastructure has been woefully inadequate. Indian cities are known to be chaotic and do not provide basic services to their citizens. Recently, India launched a $1.9-trillion National Infrastructure Pipeline that is engaged in a rollout of road, rail, seaport and airports to connect centers of manufacturing with points of export. This focus on infrastructure has to be consistent and relentless.

    India could emulate Chinese cities like Chongqing and Shenzhen that could be home to industry and hubs of trade, both domestic and international. Projects like the smart city in Dholera, 80 kilometers from Gujarat’s capital of Ahmedabad, are the way forward. Similarly, the new Production Linked Incentive scheme is the sort of policy India needs. The Tatas are setting up a plant to manufacture lithium-ion batteries under this scheme. Not only could Indian industry meet the needs of a fast-growing market, but it could also be a source of cheap imports for many other countries.

    India must not only focus on metropolises, but also smaller cities and towns where the cost of living is lower. Digitalization of work will allow people to stay in such urban areas. Of course, they will need investment and organization for which India must tap capital and talent not only nationally but internationally. For instance, pension funds in North America and Europe are seeking growth to meet their increasing liabilities. If India could get its act together, investment into Indian markets could be significant.

    A key part of infrastructure that needs reform in a low energy consumption society is the power sector. Gujarat’s growth is underpinned by increased production and improved distribution of electricity. The rest of the country must emulate this westernmost state and Gujarat itself must bring in further reforms. Renewable energy sources such as gas, solar, wind and hydro must grow further. A nationwide energy market would bring in efficiency gains and boost growth.

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    A focus on renewable energy also brings risks and opportunities. Currently, China controls critical metals and rare earths required in electric vehicle and battery manufacturing. Beijing has an effective monopoly over 80% of the world’s cobalt, 50% of lithium, 85% of rare earth oxides and 90% of rare earth metals. A decarbonized future cannot be intrinsically linked to an authoritarian state that has a history of not playing by free market rules.

    India’s $1.1-billion “Deep Ocean Mission” offers a unique opportunity for the country to provide energy security to democratic nations in North America, Europe and elsewhere. As they transition to clean technologies, India can provide a safer, more reliable and benign alternative to an increasingly belligerent China.

    In 2021, India has a historic opportunity to enter a new economic arc. The global conditions could not be more favorable. Advanced economies are looking to decouple from China without triggering inflation. India is the only country with the size and the scale to be an alternative. Its large youth population and rising middle class are powerful tailwinds for high economic growth. Indeed, India owes it not only to its citizens, but also to the rest of the world to get its act together and become a force for global stability at a time of much volatility and uncertainty.

    The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      Does the World Need to Contain China?

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      The rise of China has revived the rhetoric of Cold War-era containment to depict competition between dominant powers, although the state of international relations is fundamentally different. Containment strategy toward China featured prominently in former US President Donald Trump’s policy, and many believe that strategic competition will continue to define the relationship under the Biden administration but in a different form. However, the necessity to contain China is a contested idea both on economic and ethical levels.

      In the first place, it should be understood that the world “includes many different groups with varying degrees of dependence from China,” says Domingo Sugranyes, director of a seminar on ethics and technology at Pablo VI Foundation. Therefore, he adds, “the need for containment will be seen differently if you are looking at textile supply chains, workers’ rights in [Xinjiang], data privacy rules, markets for European cars.”

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      Oscar Ugarteche, a Peruvian professor of economics, believes the emergence of a new superpower competing with other Western countries may be “positive, particularly for the Global South.” That said, we are undeniably witnessing “the emergence of a new distribution of power in which relative weights are shifting away from the United States and its allies, although the absolute political and economic power of these nations is and will remain considerable,” he mentions.

      Some, such as researcher Valerio Bruno, see the rise of China not only in the economic and military domains, but also as an ideological confrontation — “between two Weltanschauungen” — that determines whether the future world order will be defined by liberal or authoritarian ideas. Proponents of a containment policy believe that China does not offer a realistic alternative to the liberal order and that it should be obliged to comply with those rules. How? According to economist Etienne Perrot, it could be through “multilateral agreements and targeted alliances” designed to bring European powers more firmly into the containment effort in the economic and technological domains.

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      In contrast, some observers question the necessity of containment. Kara Tan Bhala, president and founder of Seven Pillars Institute for Global Finance and Ethics, argues that “a deliberate policy of containing another country, and thereby not allowing many to achieve their human potential” may not be morally justified. States should “respect the diversity of systems … while encouraging each other to become ‘better socialists’ and ‘better capitalists’ serving humanity,” says Christoph Stuckelberger, a professor of ethics. On the economic front, Ugarteche says, “the technological competition between the USA and China is positive for all of us as it speeds up innovation and reduces costs and consumer prices.”

      At first glance, the Cold War rhetoric of containment refers to a bipolar world, which is not (yet) the case. Multipolarity seems to be the best guarantee to avoid the world sliding into bipolarity, with a risk of falling once again into a Thucydides’ Trap. In this perspective, the swift assertion of the European Union as a global, active player is urgently needed to leverage a new negotiated equilibrium anchored in a minimal level of mutual commitment on most urgent global challenges. In that sense, the notion of containment may be reformulated in terms of the world’s self-containment, especially, as Edward Dommen says, when we look “at the way the world economy abuses the planet.”

      By Virgile Perret and Paul Dembinski

      Author’s note: From Virus to Vitamin invites experts to comment on issues relevant to finance and the economy in relation to society, ethics and the environment. Below, you will find views from a variety of perspectives, practical experiences and academic disciplines. The topic of this discussion is: Does the world need to contain China and, if so, how?

      “… multilateral agreements and targeted alliances…”

      “Yes. China, by virtue of its human capacities, its natural resources and its organization, is today the dominant power (in terms of purchasing power parity). Opposite, the United States retains a monetary and military advantage, which China seeks to steal from them. Knowing that “power corrupts” (Lord Acton) and that “only power stops power” (Montesquieu), how to contain China without submitting to the USA? Through multilateral agreements and targeted alliances against MNCs [multinational companies] who, in the global market, behave like privateers in the service of their country of origin, sometimes even like pirates without faith or law.”

      Etienne Perrot — Jesuit, economist and editorial board member of the Choisir magazine (Geneva) and adviser to the journal Etudes (Paris)

      “… China does not export its politics.”

      “Is it the world or is it the West? Did the world need to contain Great Britain or Spain or the US in its time? What we are facing is a new superpower emerging that will compete with other Western countries and the result should be positive, particularly for the Global South. “The more, the merrier.” The technological competition between the USA and China is positive for all of us as it speeds up innovation and reduces costs and consumer prices. All else is irrelevant. China does not export its politics.”

      Oscar Ugarteche — visiting professor of economics at various universities

      “…negotiate with a clear understanding of issues at stake…”

      “The ‘world’ is no geopolitical actor; it includes many different groups with varying degrees of dependence from China. The need for containment will be seen differently if you are looking at textile supply chains, workers’ rights in [Xinjiang], data privacy rules, markets for European cars and machinery, monetary balances, Taiwan security and microprocessor supplies, loans to Africa and Latin America, or rare earth resources. … If the question refers to containment from the ‘West’ or, more precisely, the European Union, then the answer is no. We should negotiate with a clear understanding of issues at stake, as in the case of the proposed comprehensive agreement on investment. Above all, we should learn more facts about the incoming largest economic power.”

      Domingo Sugranyes — director of a seminar on ethics and technology at Pablo VI Foundation, past executive vice-chairman of MAPFRE international insurance group

      “One world — diverse systems”

      “How should the role of China be in the world? Three options: 1) China is disconnected from the world, sealed off, as it was to some extent 1949-1979, based on self-reliance and autonomous development; 2) China is fully integrated in the globalized world and follows the Western model of so-called capitalism and democracy as many powers in the West hoped that China, with its Open Door Policy since 1979, would develop; and 3) China is integrated in the world, but with its ‘Chinese characteristics’ of ‘third way’ combining planned and market economy, socialist one-party system with elements of consultative participatory processes and controlled civil society. The ethics of international relations needs to respect the diversity of systems as in option 3, while encouraging each other to become ‘better socialists’ and ‘better capitalists’ serving humanity.

      Christoph Stuckelberger — professor of ethics, founder and president of Globethics.net foundation in Geneva, visiting professor in Nigeria, China, Russia and the UK

      “…we are witnessing the emergence of a new distribution of power…”

      “The danger of conflict arises when there is no longer a consensus regarding the real power situation of the major parties — in this case, Russia as well as China and the United States. Conflict can become real when the parties, acting on significantly different subjective visions of the objective situation, come into collision. The purpose of conflict will be to demonstrate what the real power relationships have become and to establish some new consensus. Avoidance of conflict requires peaceful development of such a consensus, for which prerequisites will be acceptance by previously dominant countries that we are witnessing the emergence of a new distribution of power in which relative weights are shifting away from the United States and its allies, although the absolute political and economic power of these nations is and will remain considerable.”

      Andrew Cornford — counselor at Observatoire de la Finance, past staff member of the United Nations Conference on Trade and Development (UNCTAD), with special responsibility for financial regulation and international trade in financial services

      “…foster friendly and mutually fruitful relations…”

      “Does the world need to contain China? The USA? Itself? To contain oneself is always good advice, and if we look at the way the world economy abuses the planet, the world ought indeed to contain itself. However, to struggle to contain another party normally provokes a hostile reaction, and things go from bad to worse. Better to converse with it and thus to foster friendly and mutually fruitful relations. Trade is a form of that kind of conversation. As Adam Smith said, “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society … universal opulence.”

      Edward Dommen — specialist in economic ethics, former university professor and researcher at UNCTAD and president of Geneva’s Ecumenical Workshop in Theology.

      “…climate change will do more to change China…”

      “Containing China may be too big a task, and not all the world necessarily agrees on this goal. Indeed, it’s questionable if a deliberate policy of containing another country, and thereby not allowing many to achieve their human potential, is morally justified. Certainly, we should robustly oppose her monstrous conduct in Xinjiang, Tibet and Hong Kong and counter the Chinese Communist Party’s unacceptable behavior, for example, in trade and IP [intellectual property] in a targeted manner. But the demographics of an aging and gender skewed population, and the devastating effects of climate change will do more to change China than any containment strategy. One final thought: Should the world have contained the US when it destroyed indigenous peoples or practiced slavery?

      Kara Tan Bhala — president and founder of Seven Pillars Institute for Global Finance and Ethics

      “…two comprehensively different conceptions of the world…”

      “As Xi Jinping continues to steer the Middle Kingdom out of its historical isolation, avoiding challenging the United States for the position of world leader will be difficult, given China’s demographics and economic status. These two Weltanschauungen, two comprehensively different conceptions of the world, sooner or later will present the international community with a choice. Xi is well aware that the Biden administration can finally change course for the US and its allies, forging a united and progressive front after years of populist, nativist and authoritarian politics. Perhaps this element can help understand Xi’s assertiveness at the last World Economic Forum better than the recent economic successes. After all, political and civil rights are China’s Achilles’ heel.”

      Valerio Bruno — researcher in politics and senior research fellow at the Centre for Analysis of the Radical Right (CARR).

      “…obliging China to follow the rules…”

      “Present international relations cannot be correctly interpreted in the Cold War terms. The current confrontation between the United States and China is not Cold War 2.0 — it has a different nature. A historicist attempts to adapt the strategy of containment to post-Cold War realities are doomed to failure. The heterogeneous world is not able to be either an opponent or a proponent of the People’s Republic of China; only the consolidated West can be such an actor. China is a revisionist power. [It] criticizes the liberal world order but does not offer a realistic alternative. The most effective way to minimize Beijing’s destructive influence is to improve a rule-based order, and therefore a liberal order, by obliging China to follow those rules.

      Yuriy Temirov — associate professor, dean of the Faculty of History and International Relations at Vasyl Stus Donetsk National University in Ukraine

      *[A version of this article was originally published by From Virus to Vitamin and Agefi.]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More

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      India and China: A Time for Diplomacy, Not Confrontation

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      Chinese and Indian forces have pulled back from their confrontation in the Himalayas, but the tensions that set off the deadly encounter this past June — the first on the China–India border since 1975 — are not going away. Indeed, a poisonous combination of local disputes, regional antagonisms and colonial history could pose a serious danger to peace in Asia.

      In part, the problem is Britain’s colonial legacy. The “border” in dispute is an arbitrary line drawn across terrain that doesn’t lend itself to clear boundaries. The architect, Henry McMahon, drew it to maximize British control of a region that was in play during the 19th-century “Great Game” between England and Russia for control of Central Asia. Local concerns were irrelevant.

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      The treaty was signed between Tibet and Britain in 1914. Although India accepts the 550-mile McMahon Line as the border between India and China, the Chinese have never recognized the boundary. Mortimer Durand, Britain’s lead colonial officer in India, drew a similar “border” in 1893 between Pakistan (India’s “Northern Territories” at the time) and Afghanistan that Kabul has never accepted, and which is still the source of friction between the two countries. Colonialism may be gone, but its effects still linger.

      Although the target for the McMahon Line was Russia, it has always been a sore spot for China, not only because Beijing’s protests were ignored, but also because the Chinese saw it as a potential security risk for its western provinces. England had already humiliated China in the two Opium Wars as well as by seizing Shanghai and Hong Kong. If it could lop off Tibet — which China sees as part of its empire — so might another country… like India.

      A Threat to China?

      Indeed, when Indian Prime Minister Narendra Modi unilaterally revoked Article 370 of the Indian Constitution and absorbed Jammu and Kashmir in 2019, the Chinese saw the grab as a threat to the security of Tibet and its restive western province of Xinjiang. The area in which the recent fighting took place, the Galwan Valley, is close to a road linking Tibet with Xinjiang.

      The nearby Aksai Chin, which China seized from India in the 1962 border war, not only controls the Tibet-Xinjiang highway, but also the area through which China is building an oil pipeline. The Chinese see the pipeline — which will go from the Pakistani port of Gwadar to Kashgar in Xinjiang — as a way to bypass key choke points in the Indian Ocean controlled by the US Navy.

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      The $62-billion project is part of the China-Pakistan Economic Corridor, a piece of the huge Belt and Road Initiative to build infrastructure and increase trade between South Asia, Central Asia, the Middle East, Europe, and China.

      China moves 80% of its oil by sea and is increasingly nervous about a budding naval alliance between the United States and Beijing’s regional rivals, India and Japan. In the yearly Malabar exercises, the three powers’ war-game closes the Malacca Straits through which virtually all of China’s oil passes. The Pakistan-China pipeline oil will be more expensive than tanker supplied oil — one estimate is five times more — but it will be secure from the US.

      In 2019, however, Indian Home Minister Amit Shah pledged to take back Aksai Chin from China, thus exposing the pipeline to potential Indian interdiction.

      From China’s point of view the bleak landscape of rock, ice and very little oxygen is central to its strategy of securing access to energy supplies. The region is also part of what is called the world’s “third pole,” the vast snowfields and glaciers that supply the water for 11 countries in the region, including India and China. Together, these two countries make up a third of the world’s population but have access to only 10% of the globe’s water supplies. By 2030, half of India’s population — 700 million people — will lack adequate drinking water.

      The “pole” is the source of 10 major rivers, most of them fed by the more than 14,000 thousand glaciers that dot the Himalayas and the Hindu Kush. By 2100, two-thirds of those glaciers will be gone, the victims of climate change. China largely controls the “pole.” It may be stony and cold, but it is the lifeblood to 11 countries in the region.

      Back in Time

      The recent standoff has a history. In 2017, Indian and Chinese troops faced-off in Doklam — Dongland to China — the area where Tibet, Bhutan and Sikkim come together. There were fistfights and lots of pushing and shoving, but casualties consisted of black eyes and bloody noses. But the 73-day confrontation apparently shocked the Chinese. “For China, the Doklam stand-off raised fundamental questions regarding the nature of India’s threat,” says Yun Sun, a senior fellow at the Stimson Center in Washington.

      Doklam happened just as relations with the Trump administration were headed south, although tensions between Washington and Beijing date back to the 1998-99 Taiwan crisis. At that time, President Bill Clinton sent two aircraft carrier battle groups to the area, one of which traversed the Taiwan Straits between the island and the mainland. The incident humiliated China, which re-tooled its military and built up its navy in the aftermath.

      In 2003, President George W. Bush wooed India to join Japan, South Korea and Australia in a regional alliance aimed at “containing” China. The initiative was only partly successful, but it alarmed China. Beijing saw the Obama administration’s “Asia pivot” and the current tensions with the Trump administration as part of the same strategy. If one adds to this the US anti-missile systems in South Korea, the deployment of 1,500 Marines to Australia and the buildup of American bases in Guam and Wake, it is easy to see why the Chinese would conclude that Washington had it out for them.

      China has responded aggressively, seizing and fortifying disputed islands and reefs, and claiming virtually all of the South China Sea as home waters. It has rammed and sunk Vietnamese fishing vessels, bullied Malaysian oil rigs and routinely violated Taiwan’s airspace.

      China has also strengthened relations with neighbors that India formally dominated, including Sri Lanka, Bangladesh, Nepal and the Maldives, initiatives which India resents. In short, there are some delicate diplomatic issues in the region, ones whose solutions are ill-served by military posturing or arms races.

      The dust-up in the Galwan Valley was partly an extension of China’s growing assertiveness in Asia. But the Modi government has also been extremely provocative, particularly in its illegal seizure of Jammu and Kashmir. In the Galwan incident, the Indians were building an airfield and a bridge near the Chinese border that would have allowed Indian armor and modern aircraft to potentially threaten Chinese forces.

      Dangerous Thoughts

      There is a current in the Indian military that would like to erase the drubbing India took in its 1962 border war with China. The thinking is that the current Indian military is far stronger and better armed than it was 58 years ago, and it has more experience than the Chinese People’s Liberation Army. The last time the Chinese army went to war was its ill-fated invasion of Vietnam in 1979.

      Embed from Getty Images

      But that is dangerous thinking. India’s “experience” consists mainly of terrorizing Kashmiri civilians and an occasional firefight with lightly-armed insurgents. In 1962, India’s and China’s economies were similar in size. Today, China’s economy is five times larger and its military budget four times greater.

      China is clearly concerned that it might face a two-front war: India to its south, the US and its allies to the west. That is not a comfortable position, and one that presents dangers to the entire region. Pushing a nuclear-armed country into a corner is never a good idea.

      The Chinese need to accept some of the blame for the current tensions. Beijing has bullied smaller countries in the region and refused to accept the World Court’s ruling on its illegal occupation of a Philippine reef. Its heavy-handed approach to Hong Kong and Taiwan, and its oppressive treatment of its Uighur Muslim minority in Xinjiang, is winning it no friends, regionally and internationally.

      There is no evidence that the US, India and China want a war, one whose effect on the international economy would make COVID-19 look like a mild head cold. But since all three powers are nuclear-armed, there is always the possibility — even if remote — of things getting out of hand.

      In reality, all three countries desperately need one another if the world is to confront the existential dangers of climate change, nuclear war and pandemics. It is a time for diplomacy and cooperation, not confrontation.

      *[This article was originally published by FPIF.]

      The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy. More