Dolam To Wuhan: India-China Reset

Introduction

     The so called “Reset” in India China relations, has been widely and wrongly reported as a change in Indian strategy towards China. A few analysts also suggest that it is a change in Chinese Strategy towards India. If we define strategy and tactics conventionally, the arguments for either of these hypotheses is unconvincing. [i] To the extent it is a reset, it’s a tactical one extending the next few years, not a strategic one relevant for the next 5-10 years.

  India’s Foreign Policy has changed over the last five years along with its redefinition of itself as an “aspiring leading power”.[ii] There is an effort, since 2014, to define India’s interests more clearly and to pursue them without looking over our shoulder at every step, or to worry how third parties will respond to these policies. This applies to policies such as, (a) A firmer line, diplomatically and militarily, on Terrorism and (b) Building strategic defence capabilities through partnerships, including with USA. There is also an attempt to develop a more symmetric & reciprocal foreign policy with respect to China. This has not been abandoned, but tactics and operational actions must respond to new developments & this includes the reactions of the adversaries and partners. These include the Trade Defence (/war) launched by the Trump Govt against Xi Govt of China and the new risks it has created for FDI investors in China’s export industry, and the reverberations of the Doklam crises.

Symmetry & Reciprocity

         To understand the Xi-Modi informal summit of April 2018, and its implications, one has to step back to 2017 and two sets of events: On 17 April 2017 Dalai Lama visited Tawang and addressed thousands of Bhutanese devotees.[iii]  Chinese called this visit a provocation.[iv] India’s official formal Position on the Dalai Lama has always been clear: Following the millineal traditions of India and the 3/4 century traditions of democratic India, He is an honored Religious figure and is free to carry out his religious activities anywhere in India. It has been obvious for Long that the Communist China doesn’t see it that way, as to them Religious activity (e.g. in Arunachal Pradesh or Tawang) is indistinguishable from political activity. Going further the party and its media organs have arrogated to themselves the right to criticize visits of Indian dignitaries to Arunachal Pradesh.

   The second event followed within two months, likely the time it took the PLA to get approvals and orders from the top leadership & translate them on the ground. On June 16, 2017 Chinese troops with construction vehicles and road-building equipment began extending an existing road which ran roughly North North-East in the disputed Bhutanese Trijunction area of Dolam held by them, south South eastward across a little creek. On 18 June 2017, around 270 Indian troops, with weapons and two bulldozers, entered Dolam to stop the Chinese troops from constructing the road.[v]  The formal Indian position is also clear, that there is a written agreement, under which none of the parties will do anything to change the status quo in the India-Bhutan-China Tri-junction area now commonly referred to as Dolam area.[vi] India also has a long standing mutual security agreement with Bhutan under which it assists Bhutan in protecting its territorial integrity and security. India viewed the extension of the road SSE within the (Bhutanese) territory held by China, as likely to change the “status quo” in the Tri-junction area in favour of China and took action to stop it. The PLA and its leadership were shocked and dismayed by this Indian action, and apparently sought to convey to China’s top leadership as outright aggression by India on China, w/o bringing to its attention the Tri-junction agreement.

    It took two months to resolve the crisis diplomatically.[vii] Throughout this period the organs of the Communist Party of China, such as The Global Times, verbally attacked and abused India, a playing out of what I have termed the Three Wars Strategy ie Legal war, Media War and Psychological War (or PsyOps) . India, it’s government and even the media, in contrast, kept their diplomatic cool and played the issue without rancor or emotion.

   However, there was a period when it looked like the PLA may turn it into a hot war, on the species assumption that it still had, as in 1962, the ability to “teach India a lesson”. Indian forces were very confident that they could ensure China would not gain, in net terms, from a hot war; Further it was in a position of creating enough risk for the PLA that attacking Indian forces in the Northern boundary areas had a positive, even though small, risk of PLA ending up with egg on its face. India’s political leadership was equally clear that it was far more beneficial to all to resolve the issue through diplomacy instead of war.

Indian Motivation: Risk Reduction

   In Late February 2018, the foreign secretary requested the cabinet secretary to advise Govt officials not to attend events organized by the Tibetan leadership in exile. Though this was consistent with the distinction that the Govt of India has always made between Religious activities and political activities of the Tibetan exiles based in India, it was rightly seen as a signal to the Chinese leadership that India was ready to diffuse further the confrontational environment that had developed in 2017.

   From India’s perspective there were two important problems seen during the crises that needed to be corrected. One, was the impression, appearing repeatedly, that the top leadership was not fully and objectively briefed by the PLA and /or others on the Indian position on the Tri-junction boundary areas, whence the need for a top level informal summit. The second problem that seemed to emerge, was that the PLA and consequently the Chinese military commission headed by General secretary Xi, seemed incompletely aware of the capabilities of the Indian armed forces, particularly the Indian Air Force, circa 2018. This problem was sought to be addressed among other things by the Gagan Shakti exercise that preceded the “informal summit”.

  The uncertainty created by US sanctions on Russian defense companies and to a lesser extent on Iran, may have also weighed on Indian decision makers.

Chinese Motivation

    There seem to be two possible motivations for China to consider toning down the possibility of conflict, at this time. One is the largely negative reaction to Chinese efforts to expand its territory and territorial control across its entire periphery, stretching from the Himalayan border, through the South China Sea to the East China Sea, with a dawning realization that this is provoking all the effected countries to explore and expand security co-operation among themselves and with the USA & other powers in the Indo-Pacific.  Its reaction to the “Quad” is symptomatic of this concern, not necessarily a fear of the Quad per-se. The second more immediate and clear motivation is the “technology defence” and “trade war” launched by the US administration. By my estimate any direct trade war between USA and China could result in a 2%-point decline in China’s growth at the cost of a maximum 0.5% growth decline for the USA, a 4:1 advantage for the USA viz China.[viii]

    Even if the trade issue is resolved by China, by substituting imports from USA for imports from Rest of the World (ROW) to satisfy the obsession with the bilateral CAD with China, the uncertainty created for export oriented FDI in China will have a permanent negative effect on China. Such investment now has much greater incentive to diversify out of China to India and other Lower Middle-Income countries (LMICs).

   For a while after the possibility of a Xi-Modi summit surfaced in public domain, there was also speculation that a major deal involving India’s NSG membership, working of the UNSC subcommittee on designation of global terrorists and OBOR/CIPEC may be in the offing. This speculation was partly fueled by expansive statements/articles in the Chinese Communist Party controlled media. However Indian spokespersons, directly or indirectly, soon dampened such speculations, and tried to focus it on broader issues and understanding. It soon became clear, that even a restatement of previous agreements and understandings, by a leader who was positioned to lead China for the next couple of decades had a value in itself.

Wuhan Summit

   The informal summit between President Xi and PM Modi was held in Wuhan on April 27-28, 2018.[ix] There were two noteworthy announcements:
(1) On giving “strategic guidance to their respective militaries to strengthen communications in order to build trust and mutual understanding and enhance predictability and effectiveness in the management of border affairs” or in China’s terse words, “strengthen confidence building measures and enhance communication and cooperation to uphold border tranquillity,” Some observers have read a lot into the non-mention of “Strategic guidance in the Chinese version of the summit discussions. This is likely due to the sensitivity of these words for the communist party and its internal institutional management (E.g. the implication that either such guidance from the CMC & its leader was absent earlier or that despite existence of such guidance it was unimplemented is unacceptable to the party leader).

   This is an attempt to fill the gaps in understanding and in communications that were observed during the Dolam crisis, and to extend the border management procedures already operational at the LAC to border areas such as the Trijunction, not traditionally part of the LAC. The underlying objective for India is to minimize the probability of a hot war through accident, mistake, misunderstanding or misjudgment (of our capabilities). Apparently China and its leader are equally interested in this objective at the current juncture, when it its confronted with several challenges on economy, trade, N Korea, Taiwan and South China Sea.

(2) The agreement to do a joint economic project in Afghanistan to “open new areas of cooperation “

     Afghanistan is a country in which China and India have some overlap of interest, namely to keep it from becoming a base for Jehadi Terrorism. Both India and China have some advantages and limitations/constraints in Afghanistan. India has a clear economic & social advantage based on its labor n term relationship with the Afghan Govt & people. It’s major limit is access. China on the other hand can provide security for its projects, through its influence with the Pakistan Army & its terrorist network! A joint project in Afghanistan can minimize each other’s constraints for mutual benefit. It also provides an opportunity to develop a better understanding on cooperation in anti-terror and infrastructure, by working together on an experimental basis.

Neti Neti

      Given the vast amount of misinformation, misunderstanding and baseless speculation, it’s also important to state what this summit was not about and did not do. The summit was not about India-China trade imbalances, economic cooperation in India or River flows. It did not discuss/resolve the issue of China’s veto of India’s NSG membership or our objections to OBOR (the term still used in Chinese). It doesn’t change the time line of China-Pakistan alliance, which has been developing for 30 years, and accelerated a decade ago with the agreement to develop Gwadar into a Chinese logistic naval base disguised as a commercial port.

    The agreement to explore cooperation in Afghanistan is not (repeat not) the first step towards “joining” OBOR. Unlike AIIB or any other formal institution, with rules, regulations and institutional structure, OBOR is whatever China defines it at any given time: Its just a post-hoc collection of projects, motivated by excess capacity in China, attempt to grab the diplomatic initiative from the established powers and a National security strategy disguised as a commercial initiative.[x]

Conclusion

    The Wuhan summit does not change India’s understanding of the medium-long term strategic challenge from China. It merely provides breathing space for us to up our development of border infrastructure, fill basic gaps in defence production such as ammunition and to replace outdated defence equipment. It gives us some breathing space to get our own house in order, in terms of border infrastructure, shortage of and foreign dependence on ammunition, reform of the National security structure (a la DPC) and pending, excruciatingly slow decisions on Security partnerships with the USA & other countries.  

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[i] Difference between Strategy (https://www.merriam-webster.com/dictionary/strategy ) and Tactics (https://www.merriam-webster.com/dictionary/tactics ).

[ii] Virmani, Arvind, “Foreign Policy Under PM Modi, Policy Paper No. WsPP 4/2015, N Delhi, May 2015.  https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxkcmFydmluZHZpcm1hbml8Z3g6M2M2ZWZkMTg3NTU5MWYzMQ . Virmani, India, “India's National Security Doctrine: An Approach”, June 24, 2016 https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxkcmFydmluZHZpcm1hbml8Z3g6MTZjODVjZDg5ZmM2MTJjZA .

[iii] Dalai Lama reaches Tawang - The Hinduwww.thehindu.com › article17866681 )

[iv]  How India should respond to China's response to Dalai Lama visit to Tawang - Business Line, https://www.thehindubusinessline.com › ... )

[v]  https://en.m.wikipedia.org/wiki/2017_China–India_border_standoff .

[vi]  Doklam Standoff-China Violates agreements with India and Bhutan » Indian Defence Review www.indiandefencereview.com › spotlights , Why China's Legal Claims for Doklam Are Weak  https://www.brookings.edu › 2017/08 › c... ).

[vii] Doklam standoff ends as India, China step back - The Hinduwww.thehindu.com › article19577183

[viii]  https://www.facebook.com/arvindvirmani2/posts/944178702416051

[ix] India-China Informal Summit at Wuhan - The Ministry of External Affairswww.mea.gov.in › press-releases › India...

[x]  http://dravirmani.blogspot.in/2016/06/obor-economic-diplomatic-and-strategic.html

OBOR: Economic, Diplomatic and Strategic Dimensions

INTRODUCTION

   OBOR was presented to the world by China in March 2015, as a comprehensive infrastructure & economic development program.[i] Its land component, the new Silk Road, echoes ESCAP's Asian highway, Asian Railway and Asian Economic Corridor Plans from the 1980s and 1990s.[ii] But more importantly it fills in what may be considered missing links, connecting China to the rest of Asia and into Europe.[iii] The naval parts echo what was termed the "String of Pearls" in the Indian Ocean, but extends these Westwards to Europe through the Red Sea and Eastwards to the South China Sea.[iv] Questions and concerns have however been raised about its less defined Strategic aspects, just as they were raised about the "String of Pearls," which was also presented as an economic infrastructure project for development of ports.

ECONOMIC Aspects

     The economic development part is driven and supported by massive overcapacity in China's manufacturing and construction industries and zero or negative returns to domestic investment (on the margin). Thus the opportunity cost of funds is low enough to allow low profit, high economic risk, investment in foreign infrastructure that could support its quest for future raw materials supplies and open its markets to sale of manufactured goods; a modern version of the Prebisch-Singer hypothesis of trade between the colonial "Center" and the colonized  "Periphery".  As current account surpluses are a basic feature of the existing "party capitalism" model of development, a moderate reduction of foreign exchange reserves through capital outflows, still leaves substantial net foreign exchange assets to finance the foreign exchange costs of these investments.  As much of the foreign investment in OBOR will be done by Chinese companies, Chinese labor and Chinese materials, the foreign exchange component is a small fraction of the total cost of these projects. The primary purpose of AIIB is therefore not to supply foreign exchange funds to OBOR projects, but to herald the arrival of China on the global financial stage and to act as the foundation for its global financial diplomacy.

   The land based infrastructure (road, rail, pipelines, digital backbone) aims to connect China to all parts of the Eurasian continent and to the Seas & Oceans surrounding Asia. The countries that such infrastructure passes through (rail, road, pipeline, fiber optic cables) or is located in (port, airport, industrial estate) have to provide the land on which it is built. They may also have to take on debt to pay for part of the real/full cost of this infrastructure. It is uncertain whether the economic benefits they will receive will exceed the costs they incur in terms of land, debts to China etc. I know an economic expert who has been hired by a Central Asian country to evaluate the benefits of a China proposed rail line that will cross its territory, and he was hard put to think of the benefits to this country which may become feasible (e.g. new exports). OBOR countries have to be extremely careful in evaluating the benefits and costs to them of any infrastructure built by China. The cost of permanently transferring land to Chinese Companies and/or taking on debt on behalf of projects, could prove very onerous to host countries in the medium-long term. 

      If the infrastructure is genuinely economic & not strategic, every country in the World should be able to use it once built, as this improves its economic viability, given sunk cost. So third countries, including India, have nothing additional to gain from "joining" the OBOR which will be built by Chinese Construction/ infrastructure companies. All Commercial  companies, including Indian ones, have the option of using the infrastructure (roads, railway, ports, airports, industrial estates) if it reduces costs and improves profitability.

     The AIIB is unlikely to be the primary source of funding for the OBOR, which from available numbers, requires funds of an order way beyond the capacity of the AIIB. As the bulk of financing will be domestic currency financing needed by Chinese construction companies, all that the AIIB can do is to provide the fraction of funds needed in the form of foreign exchange. More importantly, the AIIB is(in my view), needed to provide an international stamp of respectability to OBOR projects. This is suggested among other things, by the timing of the announcement of AIIB so soon after the formation of the New Development Bank (NDB) also referred to as the BRICS bank. The agreement to form the NDB was signed in Brazil in July 2014, after years of discussion.[v] China signed an MOU with 24 countries in October 2014 for the formation of the AIIB, five months after the unveiling of the new silk road and three months after the agreement to form the NDB.[vi]

    A Chinese scholar was recently asked about his estimate of the economic risks and returns to China of OBOR projects. His answer as reported without attribution, was that he didn't expect repayment of 80% of loans to CPEC projects, while repayment on other OBOR project loans would be between 30% and 50%. This implies, (a) That the rate of return on 80% of CPE projects and 60 to 70% is negative. It is not too far-fetched to assume that the rest of the benefits to China would be non-economic, i.e. Diplomatic and Strategic. Even in the projects with a positive rate of return, the economic and social return to the host country, accounting for the contribution of land, oil/mineral resources and natural resources like harbours & dam sites, is likely to be negative. 

DIPLOMATIC Aspects

  The OBOR is however, much more than a connectivity cum economic  program, it is also a comprehensive diplomatic initiative of a rising China.  It is a an instrument of China's diplomatic objective of ensuring that Asia and the World recognize China as a Great Power.  According to the Virmani(2004) Index of Power Potential (VIPP), China became a "potential great power" about  seven years ago, with its economic power exceeding 25% of that of the USA.^[vii]  Its relative economic power has grown rapidly since then to reach 42% in 2015, as per this index VIPP.  The OROP is viewed by the party leadership as an umbrella program for interaction with every country in Asia and the surrounding Seas.

The diplomatic initiative can be seen at three levels: Intellectual, Political and Financial:

(1) Intellectual: OBOR provides a framework for interaction with Academics, Think Tanks and Media, interested in economic development, infrastructure investment and trade & economic relations. This can facilitate movement in both directions; Chinese financed visits of foreign interlocutors to Chinese institutions and invitations for Chinese academics to these countries.

(2) Political: OBOR provides a framework for interaction with the political establishment, including government ministers, of each country. As in the case with intellectuals and academics, the Chinese can facilitate the visits of foreign politicians to China for the purpose of discussing OBOR. It provides a very useful cover for Chinese experts to explain their national position on every issue, including the South China Sea, Japan and USA.

(3) Financial: Every government minister is looking for funds to relieve budget constraints and finance pet projects. OBOR provides a framework for Chinese officials (Party, Govt) concerned with Chinese economy to interact with their counterparts in potential host countries, on their projects, programs and economic development objectives. At some stage it also involves the highest political authorities such as the Finance Minister and the Prime Minister/President of the country, allowing China's views on any subject of their choosing to be heard respectfully.

    Announcements of large financial projects and Programs attract widespread attention of all segments of society, even without any hard economic & financial analysis to determine viability. The personal contacts built during discussions can also be used to finance individual pro-China leaders, politicians & others, as allegedly happened in some S E Asian countries.

STRATEGIC Aspects

   The general strategic objective of OBOR is to  increase China's influence in the countries covered, to reduce US influence in these countries, and to pre-empt any potential increase in influence of US or its allies (existing or future). More concretely, the goal is to establish a strategic presence in these countries, including through sale of military equipment.  The strategic dimension of OBOR has two clear components. The continental and the maritime:

(1) Continental: This takes the name of the old silk road's disparate tracks across Central Asia, and applies the name to a "Hub and Spoke"  system of highways and railways radiating from China at its Center or Hub.  Given that oil pipelines and fiber optic info-ways did not exist at the time of the silk road, this is obviously a modern and valid add-on to traditional highways.  Given China's dependence on imported energy, the oil and gas pipelines are particularly important for diversifying both sources and supply routes for energy. The immediate strategic objectives are, (a) To  secure Central Asian and other neighboring Islamic States (Pakistan, Afghanistan, Iran)  from becoming a base for Xinjiang Liberation Movements, and (b) A revival of the old "Great Game", to develop land routes from continental Asia (China) to the Indian Ocean (through the Bay of Bengal, Arabian Sea and Gulf of Iran).

(2) Maritime: As "silk" is associated with China and the "Silk road" with connectivity, the Maritime dimension has disingenuously been called "Maritime Silk Road".^[viii] The "maritime silk road", clearly represents an evolution of what many called the "String of Pearls strategy".  All analysts writing on the "String of Pearls" agreed, that what had been done and planned so far was primarily economic.  However, those who were most suspicious about the "String of Pearls" warned that it was not merely possible but likely that these Pearls would be transformed into strategic bases, once the economic part was developed. The "Maritime Silk road" concept and the new security strategy[ix] has brought this potential development right into the present.  The strategic maritime dimension of OBOR is to develop a string of logistics basis in the Indian Ocean region, with likely conversion in future, of a few of them into naval bases. From China's perspective, the most desirable geographical locations for naval bases are those at the intersection of the "Maritime silk road" and the "New silk road" i.e.  those Ports that can be connected by overland route to China.[x]

CONCLUSION

  The post World War II, Marshall Plan was explicitly designed to help the revival of devastated European allies and to complement the makeover of Germany in its own image. This paid good social, economic and diplomatic dividends to the USA. However it was complemented by creation of NATO & other military blocks explicitly designed for Strategic purpose. Eventually each complemented the other, even though they may not initially have been part of an integrated economic, diplomatic and national security strategy.[xi]

   OBOR is presented to the world by China, as an infrastructure & economic development program. It is in reality an umbrella for a comprehensive but evolving, Economic, Diplomatic & Security strategy.[xii] It is part of a "Middle Kingdom Doctrine" (authors characterization) that seeks to make China the Central power in Asia: A (soon to become) Super Power that dominates Asia and its surrounding Seas and Oceans & exercises varying degrees of "suzerainty" over peripheral areas (including less well off parts of East Europe).[xiii] One strategic implication of this doctrine is to reduce and eventually eliminate US strategic power and influence in Asia and the surrounding seas.
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A version of this article appeared in the Salute Magazine, July-August 2016:  http://www.salute.co.in/one-belt-one-road-obor-economic-diplomatic-and-strategic-dimensions/

Footnotes:-

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[i]  http://news.xinhuanet.com/english/china/2015-03/28/c_134105858.htm .  In May 2015, we heard about it personally from Chinese scholars, one of who frankly admitted that even scholars like him were not aware of it a 3-4 months earlier, when they were asked to start work on fleshing out the concept of OBOR. 

[ii]  http://www.unescap.org/our-work/transport/asian-highway, http://www.unescap.org/our-work/transport/trans-asian-railway, https://en.wikipedia.org/wiki/Asian_Highway_Network ,  https://en.wikipedia.org/wiki/Trans-Asian_Railway

[iii] The new silk road was unveiled in May 2014 (not in 2013 as now claimed by some: A tentative mention of an idea by a leader is very different from a reasonably worked out Government initiative). https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwjd37PR3ODMAhVEFZQKHadmDfcQFgghMAE&url=http%3A%2F%2Fthediplomat.com%2F2014%2F11%2Fthe-new-silk-road-chinas-marshall-plan%2F&usg=AFQjCNESJKb91Dup4gkiXit38EjW7eNmEA http://thediplomat.com/2014/05/chinas-new-silk-road-vision-revealed/

[iv]  https://en.wikipedia.org/wiki/String_of_Pearls_%28Indian_Ocean%29 , http://thediplomat.com/2015/12/is-chinas-maritime-silk-road-a-military-strategy/, http://csis.org/files/publication/140624_issuesinsights_vol14no7.pdf

[v] I was personally involved in some of these discussions, as Executive director at the IMF, Washington DC, from November 2009 to October 2012, charged with overseeing financial discussions among the BRICS. During this period there was no hint that an AIIB may be formed at the initiative of China.

[vi] https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2  

[vii] See references at https://sites.google.com/site/drarvindvirmani/india-great-power .

[viii] The inclusion of "road" in the designation of a maritime initiative is puzzling to all but those who think every word that CCP leaders use is a nugget of philosophy.

[ix] https://muse.jhu.edu/article/611561/pdf , http://www.chinadaily.com.cn/china/2015-05/26/content_20820628.htm ;

[x] This explains China's keenness to develop ports in Pakistan, Bangladesh and Myanmar. But it also suggests that China may be willing to complement the development of a naval base at Gwadar, Pakistan (CPEC), by participating in development of connectivity to Chabhar port in Iran.

[xi] Chinese Admiral Sun apparently admitted that OBOR has strategic dimension at Singapore Strategic Dialogue 2016: https://twitter.com/d_jaishankar/status/739277268237746177

[xii] Chinese scholars indicated to us (about 20 people), all of them have been instructed to work on OBOR & come up with something (presumably every think tank" in China),

[xiii] According to the VIPP index, China will become a "potential Super Power" at the end of this decade.