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Opinion

Worsening China-India clash would be bad move for both economies

Pair should put aside fatal border dispute and concentrate on mutual trade

| India
India's soldiers stand guard at a checkpoint at Gagangeer on June 17: The first priority is avoiding military conflict.   © Reuters

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

It is fitting that last week's brawl between India and China, leaving 20 Indian soldiers dead and an unknown number of Chinese, was on the roof of the world -- high in the Himalayas where they share a border on the Tibetan plateau. Fitting because it is the height of geopolitical folly for the pair to clash, imperiling two economies that should be joining forces instead.

For decades, economists yearned for the world's most populous nations to collaborate as much as they compete. India's founding prime minister, Jawaharlal Nehru, called New Delhi and Beijing "brothers." In the years since, investors have buzzed about "Chindia" or a "dragon-elephant tango."

Hopes soared, for a time, that Indian Prime Minister Narendra Modi and Chinese President Xi Jinping, both self-described reformers, might see Nehru's vision through. Expectations were especially high in April 2018, when Modi and Xi met in Wuhan for a "heart-to-heart" dialogue.

Intervening events refocused both leaders on domestic challenges. The arrival of Donald Trump on the geopolitical scene has not helped either. The U.S. president's China trade war, and intense lobbying, resulted in an unmistakable Indian swing toward Washington. In 2019, the U.S. replaced China as India's top trading partner.

Since then, the coronavirus has completely upended the global financial system. Wuhan is now known less as the site of the Modi-Xi good-will meeting than ground zero for COVID-19. And India and China, like most nations, have turned inward to protect growth.

The sudden flare-up of border tensions is the last thing Asia's first and third biggest economies need. The two giants do nearly $90 billion of trade per year. Now, talk of boycotts and tariffs has eclipsed efforts to curb an Indian trade deficit with China that totaled nearly $47 billion in the 10 months to February 2020.

Reduced mutual trade would exacerbate troubles in both nations. Chinese growth tumbled 6.8% between January and March, the first contraction since at least the early 1990s. Fitch Ratings, which last week adopted a negative outlook on India's debt, thinks the country will contract 5% this fiscal year. New Delhi sits just one step above junk.

Though central banks in China and India have room to ease, weak business confidence is sure to constrain borrowing and lending. At the same time, the global scene is devoid of growth engines to save the day. The U.S., Japan and Europe are all in deepening recessions.

China and India should be redoubling efforts to fill the void with greater cooperation. The first priority is avoiding military conflict. Reports of the deaths of soldiers are bad enough. Rhetoric since from top Chinese and Indian officials suggests tensions may continue to rise.

All we can hope is that calm heads prevail. Modi, for example, faces enough challenges from COVID-19 to tensions with Pakistan and Nepal. And Xi hardly wants a border war "as he is simultaneously trying to prove that China would make a good global leader," Eurasia analysts Akhil Bery and Kelsey Broderick wrote in a June 18 report.

The geopolitical risk consultancy assigns 60% odds that Beijing and New Delhi arrive at a diplomatic resolution. It puts the risk of broader armed conflict at 10%. Whatever happens, though, India's populist prime minister is likely to shift away from China toward the U.S. and other like-minded democracies. That pivot will generate considerable turmoil for supply chains.

Modi is likely to shift away from China toward the U.S. and other like-minded democracies.   © AP

India should go the other way. History shows that the more trade nations do, the less they come to blows militarily. Why not rejoin the Regional Comprehensive Economic Partnership? In late 2019, Modi left the giant trade grouping that included China, Japan, South Korea, Southeast Asia, Australia and New Zealand.

Bilateral complementarity also matters. China is keen to help its under-industrialized western hinterlands catch up with booming coastal cities. Modi and Xi might consider creating special-enterprise zones, areas jointly operated and staffed by workers from both nations.

India wants to increase its share of manufacturing and to improve its infrastructure, while China wants a more entrepreneurial model to create wealth from the ground up, not just by state-owned giants. Beijing excels at the former, while New Delhi does better at the latter. Why not share notes on strategy and resources? Planning could start with a single phone call.

Admittedly, this is a tough lift for two proud nationalists. Things are complicated further by a Trump White House coaxing India its way. A second Trump term, it is worth nothing, would be barely more in Modi's interest than Xi's.

But today's tensions are an opportunity to give a closer China-India relationship a chance. Xi's giant Belt and Road Initiative did more to shackle smaller nations with debt and pollution than burnish Beijing's soft power. India seems a better bet for China's outbound investment and a chance to get things right, regionally speaking.

Modi should go easier on foreign investment curbs, particularly where China is concerned. There is scope for Chinese and Indian information technology, e-commerce and pharmaceutical sectors to cooperate as much as they compete -- just as Asia's two nascent superpowers should.

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