http://nationalinterest.org/feature/asias-odd-couple-india-japan-join-forces-14599?page=show
India-Japan ties benefit the United States, even if they take place outside of Washington’s orbit.
December 14, 2015
India and Japan are drawing closer to each other. Senior representatives of both governments have praised each other at high-level visits and have signed a remarkable number of security, trade and investment agreements in a relatively short time. Doubtless, this embrace has its origins in China’s provocative—some might say aggressive—behavior. But, having drawn together for security reasons, the two countries now realize how closer relations will also bring powerful economic and investment advantages. There are, of course, limits to how intertwined India and Japan can become, but the mutual advantages—diplomatic, military, economic and financial—certainly invite an extension of the recent trend.
At the same time, the decline in America’s diplomatic and military profile has intensified Indian and Japanese anxieties. Washington, of course, has spoken endlessly of its “Asia pivot,” which both Japan and India would welcome if it had substance, but there is little sign of that so far. Though the United States possesses overwhelming naval superiority, with a fleet of more than one hundred large surface ships, it is also clear that Washington’s huge obligations elsewhere in the world limit how many of those ships it could commit to Asia at any one time. Comparative trends in naval power have added to the unease. The U.S. fleet has shrunk by more than half since 1990, when it possessed 230 large surface vessels, and seems poised to shrink further. In this turbulent security environment, India and Japan have much to offer each other. Even a loose cooperation between these two countries would blunt Beijing’s military advantage, since Beijing, in confronting one, would have to hold military resources back to cover the possibility of trouble with the other.
China has tailored its recent actions to raise anxieties throughout Asia. Its army has repeatedly challenged India in the Himalayas, while its navy has behaved in a high-handed way in the Indian Ocean, and still more so in the East and South China Seas. Beijing has issued the usual raft of diplomatic equivocations, stating, for instance, that the construction of air fields on disputed islands should trouble no one, that such structures have no aggressive intent but are merely an effort by the People’s Liberation Army to improve working conditions for the rescue workers stationed there.
Strains between China and India are, of course, long-standing. The two countries fought a brief but bitter war along their common Himalayan border in 1962. Though no major action has taken place since, Beijing steadfastly refuses to reach a permanent border settlement and constantly tests the mechanisms put into place to stop small incidents from escalating. New Delhi counts no fewer than six hundred incursions by Chinese troops during the last three years and complains of sometimes lengthy Chinese deployments in Pakistan and, particularly sensitive, in the Pakistan-administered parts of Kashmir. India’s navy counts twenty-two troubling Indian Ocean encounters with Chinese submarines in a recent twelve-month span. Nor does it help that China has been caught stealing classified documents from India’s Eastern Naval Command, that rumors have surfaced about the construction of a Chinese submarine base in the Maldives or that China is developing port facilities in Pakistan, Sri Lanka, Bangladesh and Myanmar. “Everywhere around us, we see an eighteenth-century expansionist mind-set,” Indian prime minister Narendra Modi said in a recent speech. It was understood he was talking about China.
Japan’s Chinese anxieties are of more recent vintage but are no less intense. There is the dispute over the East China Sea islands that the Japanese call the Senkakus and the Chinese call the Diaoyus. Both countries claim them, both from time to time have behaved in provocative ways and both have confronted the other’s naval power around the islands. But if these events dominate the headlines, they are hardly the whole story. In recent years, Chinese warships have navigated unsettlingly close to Japanese shores, including in the Osumi Strait in Japan’s south and the Soya Strait in its north. At least one Chinese nuclear submarine has been recorded in Japanese territorial waters. In the air, Tokyo scrambled its fighter jets against Chinese aircraft in or near Japanese airspace 464 times in the latest annual count and 415 times in the year prior; that number was less than fifty for most years in the decade before 2010. In November 2013, China announced its Air Defense Identification Zone (ADIZ) over the East China Sea. Only a month later, Beijing had mobilized eighty-seven reconnaissance and early-warning aircraft—fighters, too—to the ADIZ’s airspace. All of this is an effort to control sea and air traffic across much of the South and East China Seas. Under what Beijing refers to as “nine-dashed line,” it has all but claimed sovereignty over 90 percent of the South China Sea. Recent remarks by the commander of the U.S. Pacific Fleet captured the common view in Tokyo well: “When one looks at China’s pattern of provocative actions,” he said, “serious questions about Chinese intentions [arise].”
Behind this aggressiveness, and no doubt making it that much more unsettling to New Delhi and Tokyo, is Beijing’s impressive military upgrade. Japan’s ministry of defense points out that China’s defense budget has grown forty-fold over the past quarter century and three-and-a-half fold in just the last ten years. Neither Japan nor India has kept pace. China’s air force is now twice the size of India’s. Though at the turn of the century, India and China had rough naval parity, today China’s navy can deploy some forty large surface ships against India’s twenty-three. Though Japan still has rough naval parity with China, with thirty-nine large surface ships, it is well aware that in 2000, it had twice China’s number. It only adds to Tokyo’s and New Delhi’s feelings of vulnerability that Taiwan’s fleet has also shrunk during this time from thirty-two to twenty-five large vessels. The Times of India reports that Beijing needs only two days to mobilize on the Chinese-Indian border, while New Delhi, hampered by a lack of transport infrastructure of all sorts, would require at least a week to do so. As well, in thirty days China could place thirty divisions, about 450,000 troops, at the border, three times what India could muster in a much longer time frame.
Compounding Asian uneasiness is China’s historic tendency to take advantage of any withdrawal or relaxation by a major power. As Satoru Nagao of Gakushuin University in Tokyo has noted, it was after the United States withdrew from Vietnam in the mid-1970s that Beijing occupied the Paracel Islands; after Russia withdrew from Vietnam that Beijing moved on the Spratly Islands in 1988; and after the United States left the Subic Bay base in the Philippines in 1992 that Beijing occupied Mischief Reef, which both Vietnam and the Philippines claim. To be sure, this simple listing of actions and their timing can hardly substitute for a thorough analysis of Asia’s evolving power balance, but it is indicative and surely reflects the feeling in Tokyo, New Delhi and elsewhere in Asia, especially as the United States ceases to project the high diplomatic and military profile it once did.
Closer cooperation between these two powerful countries astride China would go a long way in neutralizing any aggressive moves Beijing might wish to make in the region. Implicitly acknowledging this potential, India has already begun to fill the geographic gap between it and Japan by offering military support throughout Southeast Asia. Prime Minister Modi recently spoke of his intention to turn the “Look East” policy begun in the 1990s into an “Act East” policy. So far, New Delhi has arranged for Indian armed forces to train Thai, Vietnamese, Malaysian and Indonesian military personnel, including fighter pilots and submarine crews. Meanwhile, Singapore is using Indian military bases for its own training. Matters have gone far enough on this front to draw a threatening response from Beijing. China’s Communist Party-run Global Times has pointedly warned India that it improves ties with Japan “at its own peril,” publishing an article shortly after a meeting between the two nation’s prime ministers stating that strategic cooperation with Japan “can only bring trouble to India.”
Formal agreements between Tokyo and New Delhi have stressed both ideological and material support for security cooperation. Their 2006 Strategic and Global Partnership Agreement and their 2008 Joint Declaration on Security Cooperation both emphasize how the two countries stand as Asia’s major proponents of “democracy, open society, human rights, and the rule of law.” They acknowledge a “common interest in the safety of sea lines of communications,” and, not insignificantly, a common desire to “reform the United Nations, including the expansion of [its] Security Council.” They also itemize specific ways in which each will support the other, including arrangements for regularly scheduled port calls, joint exercises and naval and coast- guard exchanges, as well as sharing technical expertise. In clear recognition of Japan’s technological advantages, as well as the opportunity opened by Japan’s not-coincidental decision to ease its rules on weapons exports, India has taken steps to purchase Japan’s Soryu-class diesel-electric submarines. India’s navy already possesses fifteen submarines but acknowledges that Japan’s product is far superior. India’s navy has made further plans to buy twelve Japanese-designed, Japanese-built US-2 amphibious search-and-rescue planes. Cooperation has gone so far that the two countries are exploring ways to manufacture the planes jointly.
To be sure, India can only go so far in its approach to Japan. Its long heritage of nonalignment and nationalism has left a powerful faction in New Delhi wary of Japanese ties, not the least because of Japan’s strong ties to the United States. The Indian government also worries about jeopardizing its economic relations with China. It may fret about the dependence implied by its large and growing bilateral trade deficit with China, but it also recognizes that it needs the trade. It is then testimony to the extent of security pressure on New Delhi, and the lure of a Japanese link, that despite such reservations it has made its defense positioning crystal clear by inviting Japan to participate in its Malabar naval exercises with the United States. In September, the first U.S.-India-Japan Trilateral Ministerial dialogue took place. Perhaps even more telling is India’s willingness to structure its security arrangements similarly to those of Japan and the United States, in particular with a high-level Security Consultative Committee in which Tokyo’s and New Delhi’s foreign and defense ministers meet at least annually to guide joint policy.
While prompted by security matters, this India-Japan embrace has gained strength by emphasizing the huge economic and financial benefits of closer ties. These lie in the remarkable complementarity of the two countries’ economies. Japan is capital rich, technologically advanced and has a highly trained (if expensive) workforce. India lacks the financial capital necessary for its own development, has an inexpensive, plentiful but poorly trained workforce and, despite some headlines, is technologically backward through most of its economy. Because each country is a mirror image of the other in every aspect of economics and investment, close economic relations should allow each to supplement the other’s weakness while leveraging its strength, to the benefit of growth prospects and wealth creation in both places.
Even a cursory review of comparative economic conditions makes these matters apparent. The relative distribution of occupations in particular speaks to radically different levels of development. In Japan, more than 70 percent of the population earns its living in services, more than 26 percent in industry and less than 3 percent in agriculture. In India, almost half the population works in agriculture, 20 percent in industry and only 31 percent in services. The average Indian worker has less than 5 percent of the productive equipment and technology at his or her disposal that the average Japanese worker has. The average wage in India is barely over one-eighth Japan’s. Literacy in Japan verges on 100 percent and the average worker has about ten years of formal education. Literacy in India is just 74 percent, and the average worker has barely over five years of formal schooling. Such circumstances suit each country for very different economic focuses, making the advantages of trade compelling.
Japan’s educational, technological and capital superiority suit it best for the production of high-value, sophisticated goods and services. Any effort to produce lower-value, labor-intensive products for itself wastes those advantages, while Japan’s high wage scale makes it uncompetitive anyway. Instead, Japan would do best to export part of its high-value products and import simpler, lower-value items. India’s economy is ideally suited to act as counterparty on both sides. Low-value, labor-intensive products minimize the handicap imposed by that economy’s lack of capital, its technological backwardness and the low levels of education and training generally in its workforce, while its plentiful, low-wage workforce actually gives India a competitive edge in this area. And indeed, this is the direction in which India’s economy has moved. An overwhelming share of India’s industrial workforce produces textiles and clothing, the quintessential labor-intensive, low-value products. Despite some headlines, only a small fraction of Indian exports are higher-tech goods and services, and even these, according to industry sources, lean toward the less sophisticated side of the scale. The Indian government acknowledges the situation, characterizing its own export strategy as aimed at employment for the unskilled and semiskilled.
Both countries gain in the exchange. It gives India a way to employ its plentiful youthful, if poorly trained, working population in the ways it can best compete, the only way it can produce effectively. The economy can then use the resulting income from the export of what it does well to buy the sophisticated products from Japan that it cannot produce for itself, at least not effectively. Since the exchange should also bring India access to the world’s best business and production practices as well as a flow of Japanese investments in support of trade, the arrangement will lay the foundations for the next steps in the country’s economic development.
The exchange allows Japan to use its resources most effectively to generate the most income and wastes none on an uncompetitive effort at low-value, unsophisticated production. Japan gains still more because the kind of specialization permitted by trade helps it cope with its acute demographic pressures. Increasing longevity in Japan has produced a historically unprecedented overhang of dependent retirees, and years of low birth rates mean that Japan now faces a shrinking working-age population. By 2030, Japan will have less than two people of working age for each dependent retiree. However indirectly, those workers will need to produce enough for more than half a retiree each, in addition to their own material wants, those of their personal dependents and the economy’s investment needs. It is a pressured situation even for the most productive economy, one that makes it imperative for Japan to use its scarce labor as efficiently and effectively as possible.
It was with all these strengths, weaknesses and opportunities in mind that New Delhi and Tokyo in 2011 negotiated their Comprehensive Economic Partnership Agreement. It laid the groundwork for this beneficial exchange by reducing trade barriers, clarifying tax law and stipulating regulations on labor, investments and pensions—all measures that facilitate trade and encourage investment. From the start, the agreement recognized the direction in which economic circumstances would take trade, all but codifying the indicated division of production. It looks for India to export mostly petroleum products, iron ore, textiles, gems and jewelry, marine products, oils, meals, ferroalloys, generic chemicals and rare-earth minerals. All are simple, labor-intensive goods. The agreement expects Japan to export machinery, transportation equipment, finished iron and steel products, electronics, machine tools and organic as well as specialty chemicals. All are high-value, technology- and capital-intensive products.
To ensure that the relationship serves the next steps in India’s development, New Delhi has insisted that the agreement explicitly serve the country’s investment agenda. Consistent with the India Planning Commission’s goal to increase the economy’s gross capital formation to near 40 percent of gross domestic product by 2017, New Delhi negotiated Japanese commitments to invest heavily in India. Japan has acquiesced not only to create good will and promote the diplomatic-economic relationship it wants, but because these development efforts increase India’s attractiveness as a trading partner. Accordingly, Japan, on signing the agreement, promised to double its official development aid to India over the succeeding five years, with a special emphasis on India’s railways. To fulfill its obligation, Japan even made an exception for India when, in response to the 2011 tsunami, it cut off all other official aid. Within a short time after the agreement was signed, India qualified as the biggest recipient of Japanese aid. More recently, Japanese prime minister Shinzo Abe reaffirmed the investment commitment, pledging the equivalent of more than $30 billion in new private and public investment in India over the next five years, hinting in the process at the transfer of Japan’s Shinkansen bullet train technology. Indian prime minister Modi responded with a commitment to cut red tape in the country’s investment regulations and for the first time allowing 100 percent foreign ownership, even in railways, which New Delhi has long considered a strategic asset.
All this is clearly just the beginning, too. Until security concerns brought these two nations together, trade and investment remained underdeveloped, no doubt due to India’s powerful heritage of nonalignment and the lack of historical or linguistic ties between the countries or even much of an expat community of one living in the other. Even after the agreement was signed, each absorbed less than 3 percent of the other’s total exports. Though overseas investment by Japanese industry is massive by any standard and equals fully 25 percent of the Japanese economy, only 2 percent of this money flowed to India, less than what was directed at China, Thailand or South Korea. But now that security considerations have brought New Delhi and Tokyo together and revealed the economic and investment advantages, bilateral trade has exploded, growing by more than 15 percent a year during the last five years. Japan’s Bank for International Cooperation, after ignoring India for decades, ranks it as the number one long-term destination for Japanese investment, public and private.
There is a clear likelihood that the relationship between these two countries will grow. On the security front, it could become a major part of Washington’s effort against Chinese hegemony. In time, it could even substitute for direct U.S. efforts as a counterweight to China. For now, though, a strengthened Indian-Japanese relationship is a benefit to the United States, even if it is taking place increasingly outside of Washington’s orbit.
Milton Ezrati is an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and until recently was senior economist and market strategist for Lord, Abbett & Co. His most recent book, Thirty Tomorrows, appeared in 2014.
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