Bollywood faces barriers to entry.

India and China Should Let Trade Do the Talking

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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Relations between China and India -- the world's two most populous countries, neighbors and rivals -- have long been prickly. But when China's President Xi Jinping travels to Gujarat and New Delhi this week for his first bilateral meeting with India's Prime Minister Narendra Modi, he will have a unique window of opportunity, with some help from Modi of course, to change the dynamic of that relationship decisively.

Much will depend on what kind of a personal connection develops between the two men, both in their early 60s. On paper, they have much in common. While Xi is China's first leader born after the 1949 revolution, Modi is India's first prime minister born after independence in 1947. They represent not just generational but substantive change, having staked their credibility on enacting huge, difficult reforms. Both are relatively new to their offices (Modi was only inaugurated at the end of May), and still boast an enviable amount of political capital at home.

No matter how well they get along, there's little chance the two men will solve the decades-old border dispute that led their nations into war in 1962. Instead they should focus their efforts where a little political will could make a real difference: the $65 billion in bilateral trade between them.

Even given the fact that China is the more dominant economic power, the trade relationship with India is badly skewed. India's trade deficit with China has grown steadily from less than $1 billion in 2000-01 to $36.2 billion in 2013-14. That accounts for a full quarter of India's total trade deficit.

China's contribution to financing that deficit is negligible. Its total investment in India between 2000 and 2014 is in the range of just $400 million. And the annual figure has been declining -- from $88 million in 2008 to just $27 million in 2013. By comparison, China invested $14 billion in the U.S.that same year.

One reason for the yawning trade deficit is that a majority of China's exports to India are manufactured goods while most of India's exports to China are primary goods such as iron ore and other minerals, which have little value added. That isn't necessarily surprising. China has a strong manufacturing base and India does not.

At the same time, though, India has legitimate concerns about Chinese non-tariff barriers that block market access for goods in which India has a comparative advantage such as pharmaceuticals and meat. Similar obstacles confront the Indian services industry. Tough visa rules, for instance, make it harder for IT professionals to execute service contracts on the mainland. India's entertainment industry, particularly television, has had trouble penetrating a lucrative market which is a surprisingly big consumer of Indian soap operas. In 2012, Zee TV became the first Indian channel to be granted broadcast rights in China, after a six-year wait. Both countries would stand to gain if China lowered such barriers.

To spur investment, India needs to clear its own roadblocks. Paranoia about Chinese spying has unnecessarily complicated greater Chinese investment in India's telecoms sector, as Huawei and ZTE have discovered in recent years. Despite a desperate need to improve power and roads -- sectors where Chinese money and expertise should be welcome -- India continues to limit the import of Chinese labor. According to some reports, Xi may offer to pump anywhere between $100 billion and $300 into Indian manufacturing and infrastructure projects when he visits. That shows how unexploited the economic relationship between the two countries has been thus far.

Just as importantly, deeper economic engagement could help cool geopolitical tensions. While the European Union hasn't exactly been a role model for effective multilateral cooperation in recent years, it continues to illustrate how deep economic integration can make borders less relevant. If they can get trade and investment conditions right, Modi and Xi should find more intractable challenges easier to solve.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net