Yesterday, we called for the Chinese and Indian governments to put aside their niggling differences and allow their economies to benefit from strengthening bilateral trade. Geo-political disputes, religious differences and protectionist policies have marred recent relations between the world’s two most populous trading partners. Now another source of tension has emerged- Chinese investment in foreign infrastructure projects in the region. Indian officials are riled as they see China potentially threatening India’s “natural influence” with her neighbours. Chinese companies have recently invested in developing port facilities in Pakistan, Bangladesh and Myanmar, and are planning to build railroad lines in Nepal. But, as the New York Times tells us, India only has herself to blame:

“...protectionist sentiments have marred India’s relationships with its neighbours. South Asia has a free-trade agreement, but countries that are part of the pact get few benefits, economists say, because India and its neighbours refuse to lower tariffs on many goods and services to protect their own businesses. By contrast, the countries of Southeast Asia have minimal or no duties on most goods and services that they import from one another.”

Furthermore, Chinese companies are simply more competitive than their stifled Indian competitors, allowing them to win tendered contracts:

“China is winning big projects here and elsewhere in the region because its companies offer lower costs. Chinese companies are also competitive because they have acquired a lot of expertise in building large infrastructure projects in China...”

Indian concerns over growing Chinese influence are predictable, but not sensible. If China is willing to invest in improving regional infrastructure, India should thank them and allow its businesses to capitalise upon this. Free Trade Agreements, such as the India/ASEAN deal, are progress but it took six years to conclude talks and most benefits will not ensue until after 2013. 

Ultimately, trade agreements are a poor substitute for unilateral liberalisation. Protracted negotiating rounds invariably invite exceptions and conditions that undermine their original objectives. Indian officials may resent Chinese firms being more competitive, but this is a consequence of decades of deconstructing barriers to trade by Beijing. Indian businesses need their government to start following suit.