INDIA-US Partnership: Asian Challenges & Beyond

Cover

INDIA-US

PARTNERSHIP

Asian Challenges

and Beyond

INDIA-US

PARTNERSHIP

Asian Challenges

and Beyond

EDITED BY

PP SHUKLA

In association with

© Wisdom Tree

First published 2014

All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the prior permission of the author/s and the publisher.

ISBN 978-81-8328-351-9

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Contents

Editor’s Note

The Economic and Political Dynamics of the Asia-Pacific Region

Ambassador PP Shukla

US-India Relations: Are They Still Strategic?

Lisa Curtis

Balance of Power and Indo-US Relations

Ambassador Kanwal Sibal

Forging US-India Strategic Cooperation out of Burma’s Opening

Walter Lohman

Peace and Stability in Afghanistan

Lt Gen (Retd) Ravi Sawhney

The China Factor in Indo-US Relations

Jeff M Smith

India-China Strategic Relations

Brig (Retd) Gurmeet Kanwal

Will China Turn Off Asia’s Tap in Tibet?

Thubten Samphel

Chinese Intelligence: From Party Outfit to Cyber Warriors

Ajit Doval

China’s Military Modernisation: The C4ISR Dimension

Dean Cheng

Chinese Economy: Shifting Permanently to a Lower Gear

V Ananth Nageswaran

Editor’s Note

In 2012, a group of scholars and practitioners of International Relations from the Vivekananda International Foundation (VIF) and the US Heritage Foundation got together in Delhi. Two concerns guided the discussions on both sides. The first question was whether there was indeed a drift or stagnation in the Indo-US relationship, and if so, what needed to be done about it. The second issue was the dynamics of the Asia-Pacific region, and whether this was an area where the two countries could do more together, especially in the face of a rising China. Both sides were clear that they were discussing these issues from the perspective of significant improvement in the relations and understanding that have been established over the years between India and the US. That, even in the worst-case situation, these two countries enjoyed good relations and, indeed, improving understanding.

That there is a slowdown in the bilateral relationship is undeniable. Happily, both sides agree that this is not desirable for either country. What we presented at the discussions were some of the issues that required to be addressed, so as to bring the two countries to closer understanding. From the Indian side, it was emphasised that China and Pakistan represent serious challenges to security. Unfortunately, on these matters, there was not enough recognition on the part of official America. There was, for instance, a clear reluctance on the part of America to take action against Pakistan, particularly on Pakistansponsored terrorism. For India, this becomes doubly worrying as the drawdown of Western forces from Afghanistan begins from 2014, because it appears as if the way is being prepared for Pakistan to resume its rule by proxy all over again.

With China, and this was the primary concern at the discussions, there were similar concerns. There were two different sets of issues here. The first was that the US has given inconsistent signals of where it stands vis-a-vis China. In the past, including in the recent past, that is, under President Barack Obama, there have been indications of a special relationship between the two countries, including references to a Group of Two to manage global affairs between them. Obama also reflected a belief that has been taken very badly in India—that China has a role to play in settling South Asian affairs. On the other part, America has had a very narrow focus on what needs to be done in the Asia-Pacific region by its putative partners—the exclusive focus is on maritime issues in the western Pacific. This completely misses the Indian concern with its land borders, where it is facing a hostile China acting in concert with an equally hostile Pakistan. Official America does not even recognise this problem.

On the American side, the major issue was Iran. Despite a longrunning dialogue at the official level between India and America, it is clear that there is insufficient mutual understanding on this score. To the Indian side, it appeared that India had done quite a lot to accommodate American concerns, such as sharply reducing oil imports; but it was equally clear that this was not enough for America. It would seem that there needs to be more discussion on this issue, and perhaps the change of President in Iran might just provide some leeway on the nuclear issue. Indeed, the early contacts between the US and Iran suggest that there is ground for optimism on this count. India is well positioned to play a bridging role between the two countries, but only if America is willing to countenance such mediation. There is little indication of this at present.

The second concern on the American side was the defence relationship, where there was some sense that the deal for Medium Range Combat Aircraft (MRCA) ought to have gone to them, not to France. On the Indian side, there was a feeling that the selection process had been fair and transparent, and the best offer had won. In any case, the US is now among the largest military suppliers to India and the total value of acquisitions over less than a decade is of the order of USD 9 billion. What is more, purchases will continue to grow in the coming years, and a good indication of this is the recent Joint Declaration on Defence Cooperation, signed during the visit of Prime Minister Manmohan Singh to the US in September 2013.

On the economic side, the Chinese economy and its growing role as lender to America was almost a matter of faith all over the world, including in America itself. This was not the view of the VIF, even if it was not very widely shared. It has gained greater currency now, as the Chinese economy shows signs of slowing down, even by the country’s own statistics, and its structural problems come to the fore. These are themselves coming under scrutiny, as the inconsistencies and implausibility of the data become more glaring.

But on the economic side of the Indo-US relationship, there have been some positive developments. US Vice President Joe Biden was in India in July 2013, and made an important speech in Mumbai to industry representatives. It contained a suggestion that India should become a member of the Trans-Pacific Partnership, which is just getting underway. Countries like Japan have recently signed up for it, as have several other Asian and Latin American countries. India would indeed be well advised to get in on this process at an early stage—it is already some two years into the process of setting it up. For its part, in India, there is some forward movement on the economic reforms, though manifestly under duress. Actually, India does not really need fresh reforms so much as it needs to streamline the process of implementation of existing clearances, and a more transparent system of economic management.

All these ideas and exchanges find reflection in this collection of articles. Most of them are based on presentations done at the meeting. A few have been added later in order to present a more comprehensive picture of the developments in the region. It is hoped that the expert reader will find something of interest in this, and those in decision-making positions will also benefit from the analysis presented in the book.

The Economic and Political

Dynamics of the Asia-Pacific Region

AMBASSADOR PP SHUKLA

The period since the end of the Cold War has seen significant changes in the economic structure of the Asia-Pacific region. This essay will first highlight the nature of these changes and later, it will touch upon a few of the important political aspects of the region.

ECONOMIC DEVELOPMENTS

CENTRE OF GRAVITY SHIFTS FROM JAPAN TO CHINA IN THE 1990S

At the end of the Cold War, in the late 1980s and the early 1990s, the dominant economic presence in Asia was Japan. With a Gross Domestic Product (GDP) of USD 3.02 trillion, it was the second largest economy in the world and the largest in Asia, by a wide margin. More important, its GDP growth did not stagnate after the dramatic collapse of its stock market in 1989; its GDP continued to grow rapidly till 1995—from USD 3 trillion in 1989, it reached USD 5.3 trillion in 1995. The total value of its exports in 1990 was USD 288 billion, larger than the rest of Association of South East Asian Nations (ASEAN) combined. It was only after 1995 that the stagnation set in.

This was also the time that China was beginning its spectacular rise. The starting point was the devaluation of the yuan in early 1994 by forty per cent. At the same time, Japan was coming under sustained US pressure to raise the value of the yen. As a result, the Japanese went along with the US advice and their currency hit one of its highest values ever, rising below eighty yen to the dollar for the first time in history. What this did for the flow of investments is shown in Table 1.

There is a marked rise in the Foreign Direct Investment (FDI) into China and a decline in Japan, which chose to invest in the rest of Asia, especially Thailand. The fall in the value of assets and labour costs in China as a result of the weak yuan, and, in contrast, the rise in asset values and labour costs in Japan, consequent upon the sharp rise of the yen, ensured this result. Equally noteworthy is the effect of this currency realignment on FDI in Southeast Asian countries too. Most of them saw a decline in their FDI in either absolute or relative terms, as more and more of the FDI went into China.

The second important development was the Asian financial crisis that followed in 1997. It reinforced the FDI trends outlined above, and China emerged with still higher rates of FDI, while Japan remained a net exporter of capital. Among Southeast Asian countries, Singapore alone managed to maintain FDI levels, while all the other major economies suffered a decline.

The effect of this change in investment patterns in Asia was reflected in the changed patterns of trade that followed and was shaped over the two decades or so following the end of the Cold War. Table 2, also from ADB reports, shows the change over the period 1990 to 2007, the last normal year just before the global financial collapse. It brings out clearly that China switched roles with Japan as the principal Asian exporter to the US and the European Union (EU). Alone among all the major Asian economies, its relative exposure to these two markets went up significantly—nearly doubling to the EU and more than doubling to the US (in terms of percentages of total exports). All the other economies, with the partial exception of Indonesia and Malaysia, showed exactly the opposite trend.

In these countries, the share of Asia in their exports went up while that of the EU declined; in most cases the relative weight of the US also declined, including for countries like Japan and Australia. The rise in exports to the rest of Asia is confirmation of the export of intermediate goods to China which where finished and reexported from China to the rest of the world. Many Asian companies set up finishing assembly lines in China to save on costs. India provides a partial exception, in that its exports to the US showed a marginal increase.

It would be important to add the picture of import patterns as well. This shows that for China alone, Asia dropped in importance as a source of imports; for all the other countries covered here, Asia grew in importance—meaning, of course, imports from China came to be increasingly important for these countries. Another noteworthy point is that for China, in 1990, the three main areas in Table 3—Asia, Europe and North America—accounted for close to ninety per cent of its total imports; by 2007, this figure was down to sixty-five per cent, as it sought raw materials in other parts of the world to meet its industrial needs.

To sum up, the period after the Cold War saw a marked shift in the pattern of investment and trade, which placed China at the centre of the money flows (capital and trade flows) linking Asia with the rest of the world, especially Europe and North America. In a sense, the pre-Cold War pattern of economic interaction in Asia, which had Japan at the centre, was displaced by one that brought China into that role. The entry of China into the World Trade Organisation (WTO) in 2001 was an added factor that boosted both FDI and its trade exchanges—and again, the US was one of the principal promoters of this development.

Most of the data in Table 2&3 are percentages—only the FDI figures are actual magnitudes. When we bring in the actual figures for all these activities, we see also the explosive growth that actually took place. The investment figures for China alone show a 400 per cent increase between 1995 and 2007. Trade figures show a similar explosive growth. Between 1990 and 2007, global trade, dominated as it was by Asia and the Organisation for Economic Cooperation and Development (OECD) countries area, grew by 300 per cent and the global GDP grew just fifty per cent over this period.

THE ‘TRIFFIN DILEMMA’ AND THE DOLLAR

These figures bring in the so-called ‘Triffin dilemma’: That the currency required for financing trade will become debased over time, since the country that issues this currency must run current account deficits, and hence the value of that currency must steadily depreciate. This has been the story of the US dollar and of the US economy. Financing the demand for trade was, thus, a major challenge—and one that the US Federal Reserve took the lead in meeting, though the European and even Chinese central banks also contributed.

Source: www.nowandfutures.com

This led to very high rates of monetary expansion in the US, rates that were certainly higher than the GDP growth rates would have justified. Under normal circumstances, one of the results of this would have been inflation, but this period saw, instead, a rapid rise in asset values, particularly equities and real estate. In addition, there has also been a consumer boom, fed again by easy money. In the chart above, it is important to point out that the figures for M3 after 2006 are derived from other data, because the Federal Reserve stopped publishing these figures from early 2006, the time that a new chairman took over.

But there is another significant aspect that needs to be highlighted. Federal Reserve data on M3 goes back to at least 1959, and it also shows M3 figures after removing M2 values (non-M2 M3). This, in effect, gives a broad indication of the role of foreign money in the overall money supply in the US economy. The data show that this value—non-M2 M3 as it is