Bordering on Danger - A Sino-Indian boundary dispute risks flaring up.

It has often been taken for granted that China and India will rise simultaneously and peacefully in the 21st century. But a recent flare-up challenges that view. Thirty-seven years after the two countries fought a border war and 28 years since they opened settlement negotiations, the entire frontier from Kashmir to Burma remains in question. It would be dangerous to ignore this festering sore any longer.

The dispute stretches back to the British Raj, when colonial official Sir Henry McMahon drew the boundary between India and Tibet at the Shimla Convention in 1913. China has never recognized the McMahon Line, and regards the Indian state of Arunachal Pradesh as part of its Tibetan Autonomous Region.

Lately the border has been arousing more fervent passions than usual. Indian Prime Minister Manmohan Singh visited the state of Arunachal Pradesh earlier this month, irking Beijing and prompting New Delhi to assert "Arunachal Pradesh is an integral part of India." Earlier this year, Beijing attempted to block a $1.3 billion loan to India by the Asian Development Bank, part of which was meant for a watershed project in Arunachal Pradesh. The war of words is likely to escalate as the exiled Tibetan spiritual leader the Dalai Lama plans to visit Arunachal Pradesh next month. Beijing is pressuring India via diplomatic protests and a media campaign to make the Dalai Lama abandon his planned trip.

The causes for the recent deterioration in relations are complex. China perceives India as the weakest link in an evolving anti-China coalition of democratic and maritime powers (the United States, Japan, Australia and India). Viewing India as a pawn in Western designs to encircle and contain China, Chinese leaders worry about the ramifications of India's power particularly in Tibet, a concern fanned by the March 2008 uprisings there...

Chinese “quality” is a very big problem, as owners of new homes that were built with Chinese sheetrock are finding out now, the same way dog owners found out about the quality of Chinese dogfood and human food products.

Part of the reason India doesn’t make a lot of our “cheap stuff” is a lack of natural resources. India has plenty of cheap labor, but they don’t have the same industrial support as Chinese industry does. India has problems feeding and sheltering themselves without putting their people to work making trinkets for America.

China has lots of natural resources, but so little control over quality to such a degree as to be fatal. Much of what comes out of Asia is counterfeit as well, including everything from bootleg CDs and DVDs to knockoffs of the latest fashions and accessories. You name it, and someone in Asia is trying to copy it. The Soviets used to do the same thing...

The reason the Chinese are still considered to be an emerging nation is exactly because of problems like these...

China imports most of the raw materials used for exports. The companies producing for export are generally privately-owned and are constantly fighting off attempts by government officials to get a piece of the action. In India, as in China, as in the rest of the world, the government doesn't feed the people - it's the people who feed themselves (and, unfortunately, the government as well). The Chinese - as with other trading nations like Korea, Taiwan and Japan - manufacture for export in order to get access to essential commodities like crude oil and grain, commodities in which China is not self-sufficient.

Quite apart from Indian red tape that makes the US appear to be a regulatory paradise, foreign manufacturers have traditionally found India to be an inferior locale for manufacturing because its bureaucrats have this long-standing reputation for sticking it to foreign investors. This is exactly why major foreign enterprises located in India are mainly involved in services - nobody wants to plunk down billions of dollars in capital equipment only to have the Indians effectively seize the plant by coming with new rules that make the plant unprofitable. Enron invested $3b in India, only to have to write the plant off. Other investors in capital-intensive industries see this kind of thing, and conclude that they are better off building their plant elsewhere.

How much of India’s anti-business attitude goes back to the Bhophal/Union carbide disaster? Considering the massive death toll I can understand why India is nervous about foreign business.

India's bureaucrats weren't anti-business - they were anti-non-crony-owned businesses, and anti-foreign-business. They're loosening up somewhat, and I've read news stories to the effect that a lot of Indian businesses are opening up in response to this relaxation of government regulation. If trend continues, foreign manufacturers will have India as another good low-cost locale for sourcing in Asia, supplementing China, Cambodia, Vietnam, the Philippines and Indonesia.

As to Bhopal, thanks to Indian laws governing foreign investment, Union Carbide was the silent majority partner. Its Indian minority partner ran the plant:

Then the judges decided that a company can be on the hook for the misdeeds of another company of which it owns a piece. Union Carbide owns only half of its Indian affiliate; the other half is held by Indian nationals. These other investors, of course, are not being sued by the contingency-fee crowd.
Union Carbide, incidentally, is under attack for letting its Indian managers go unsupervised. But although the authorities allowed Union Carbide to keep nominal 51 per cent control, American experts quoted in the Times say that "majority ownership did not imply control.' In fact, the law of the land was specifically aimed at discouraging the sort of oversight that was needed. We have all heard the rhetoric about the evils of a branch-plant economy, about how hometown decisions are made by faraway executives. The Bhopal plant avoided all that. It was designed in India and staffed entirely by Indians, both of which procedures were legally obligatory unless Union Carbide could demonstrate to the satisfaction of Indian authorities that local resources were unavailable. Safety planning "was by law largely in the hands of the subsidiary's Indian staff,' the Times says (italics added). Domestic content has its price.

The Bhopal plant avoided all that. It was designed in India and staffed entirely by Indians, both of which procedures were legally obligatory unless Union Carbide could demonstrate to the satisfaction of Indian authorities that local resources were unavailable. Safety planning "was by law largely in the hands of the subsidiary's Indian staff,' the Times says (italics added). Domestic content has its price.

I really doubt if UC allowed Indians to design their plants.Anyway, that was the early 80's. Today, you could maybe see Suzuki's example. Their Indian subsidiary Maruti Suzuki had the Indian Govt. as a controlling and majority partner. Yet the Indian Govt not only sold the controlling stake in the company to Suzuki but has now exited the company totally. At a handsome profit, of course.

foreign manufacturers have traditionally found India to be an inferior locale for manufacturing because its bureaucrats have this long-standing reputation for sticking it to foreign investors. This is exactly why major foreign enterprises located in India are mainly involved in services - nobody wants to plunk down billions of dollars in capital equipment only to have the Indians effectively seize the plant by coming with new rules that make the plant unprofitable. Enron invested $3b in India, only to have to write the plant off. Other investors in capital-intensive industries see this kind of thing, and conclude that they are better off building their plant elsewhere.

As far as the Enron saga goes, the facts are that no one was ready to buy Enron's power at Rs 4+ per unit when the market rate was around Rs 2.40 . Simple economics doomed the plant. Even today, new plants being setup sell power at sub Rs. 3 levels. It was corruption - as evidenced by the $65 million that Enron showed in its books as an "education fee" - that allowed the initial deal to go through. Once it was challenged, the plant was doomed.

There are droves of foreign companies setting up plants in India. Ask ABB, Siemens, Bombardier, Toyota (which plans on achieving the same sales in India as in China),Hyundai, Nokia, Dell and literally thousands of others. The Indian facility is projected to become Nokias largest, ahead of the Chinese facility

The aforementioned Maruti Suzuki saved the parent company from posting a loss last year, possibly the only Japanese auto company to do so.

I really doubt if UC allowed Indians to design their plants.

Plant design isn't really the issue. Fail safes only work when workers don't circumvent them. Hiring the right people for sensitive positions means scrutinizing their backgrounds for both the right qualifications and a lack of troubling details - something that is difficult to do when - like Union Carbide - you don't even control hiring (which, in places like India and China, are strongly influenced by kickbacks and nepotism). Lackadaisical attitudes towards safety procedures and routine maintenance are why accidents occur. American corporations have industrial accidents here, and we control hiring, supervision and firing. Imagine the difficulties when we don't even control that.

There are droves of foreign companies setting up plants in India.

That's correct. 2008 foreign direct investment (FDI) for India was reputedly $27b, compared to China's $92b. What stands out, however, is the huge difference in growth rates. In 2005, FDI in India was over $5b, whereas China's FDI was $73b. In those 3 short years, India's FDI went up 5x, whereas China's only went up 1.3x. If India continues to woo foreign investors by lowering barriers to capital investment, FDI there should grow in leaps and bounds, given India's low labor costs in relation to the developed countries.

There is no magic here. Countries that don't bind investors hand and foot and have reasonable infrastructure (good ports, reliable power and water, good road networks, et al) will get more investment. The trick is for the host government to use the tax revenues from foreign investments to continuously upgrade infrastructure, and not to take foreign investors for granted by coming up with new rules that cripple them. Last year, the Chinese government decided it only wanted so-called high tech investments (typically electronics assembly plants) in the coastal areas, and then backed off when the scale of the downturn became evident.

For Beijing, a hardline approach to India could backfire and drive India and its other Asian neighbors into stronger opposition to China and deeper alignment with Washington and Tokyo. The pursuit of aggressive foreign adventures would destroy the benign "peaceful rise" image that China is so assiduously striving to achieve. A conflict will cost India dearly in terms of economic developmental objectives and political ambition of emerging as a great power in a multipolar Asia.

Both China and India are nuclear powers, and they are big players in international trade as well. It would be crazy for China to go to war with India. India has a very good army and would put up a formidable fight, and God knows how this mess would end. Though the writer believes that Washington could exert diplomatic pressure on both sides to reach a settlement, I think that the Obama administration is weak and couldn't achieve much in this arena. So in that regard, I agree with the writer that it is in the benefit of both countries to settle their differences peacefully.

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