Commentary: Why China and India Need the US

During Secretary of State Clinton’s visits to Bejiing and Delhi earlier this month, discussions around closer economic and political collaboration formed a key part of the core summit agenda. Despite the popular view that the US is being overtaken by the BRICs and by China in particular, it is clear that the fates of both India and China are tied to the US. There are four major factors that are common dependencies for both China and India – export dependency, job creation, FDI, and high tech/skill imports - and two others that are significant and specific. The US has far more leverage than it gives itself credit since today it still represents over 20% of global productivity, almost 30% of global equity market capitalisation and over 40% of the global military spending. Below, we list a number of the key reasons why each of India and China are and will continue to be dependent on an economically strong and politically engaged United States.


In a mid-2011 poll of global opinion, Pew Research Center’s Global Attitudes Project reported that, “In most countries for which there are trends, the view that China will overtake the U.S. has increased substantially over the past two years … At least some of this changed view of the global balance of power may reflect the fact that the U.S. is increasingly seen as trailing China economically ... In addition to concerns about China’s economic prominence, many in Western Europe and elsewhere react negatively to the idea of China as a military superpower. Majorities in most of the nations surveyed say it would be a bad thing if China became as powerful militarily as the U.S.” China’s economic development model has left its fate tightly intertwined with the United States, just as its foreign policy engagement model has left it in a position where the US has a key role to play in the resolution of nearly every major foreign policy issue facing the country today.

Economically, China’s export and investment led development model has required the implementation of a number of policies including a high domestic savings rate, a current account surplus keeping down wages, a closed capital account, high rates of domestic investment, promotion of export focused industries and the suppression of domestic demand. The US has been the key international economic and finance partner in supporting China’s growth model for the past two decades. Firstly, the US has been and remains today the most significant market for Chinese manufactured goods, absorbing 20% of China’s total exports, equal to 5% of China’s annual GDP. Secondly, the US’ willingness to run a significant ongoing trade deficit with China has been critical to allowing China to keep the value of its currency down and its costs competitive, thereby ensuring the continuity of its growth model. China runs a significant trade deficit with the rest of the world – without US demand for Chinese products, the country would be faced with a rapidly appreciating currency and declining international competitiveness. Thirdly, due to its export success, China has amassed the world’s largest reserve of foreign currency, with over 60% of its reserves held in US Dollars. No other currency has the liquidity or depth to absorb investments the size of China’s current account surplus. Today with over US$1.8 trillion US Dollar denominated reserves, China’s vested interest in the continued strength of the Dollar is almost as strong as the US’: a 5% drop in the RMB/USD exchange rate would wipe almost US$100bn off the value of China’s Dollar reserves. Fourthly, at the opposite end of US-China trade, the US is the third largest exporter to China, with nearly US$100bn of goods and services being imported from the US every year. More importantly than the sheer volume, the nature of the goods sourced from the US are highly strategic and include things like semiconductors and advanced capital equipment which China requires to support the development of next generation strategic industries. Fifth, the US has also been a key investor in China, providing the country with targeted capital and expertise to grow strategic industries. The current level of US FDI capital stock in China is US$60bn, or nearly 10% of the total FDI invested in China to date. Although the US’s share of FDI into China has been decreasing in recent years, the focus on IP intensive industries such as pharmaceuticals and high technology remains highly strategic to China. Finally, the US is a key driver of employment in China, with 39m people employed directly or indirectly manufacturing products for the US market or for US companies in China, representing nearly 5% of China’s total workforce. Further, although US-driven jobs run the full spectrum of skill-sets, from waste removal to new drug discovery, on average these jobs tend to be high value, focused on skilled or at least partially skilled, including jobs in manufacturing, consumer electronics, chemicals, etc. In this regard, the US’ China corporate presence and export demand have been a key driver of high value employment and wealth creation in China.

Geopolitically, China’s foreign policy strategy of focusing on sovereignty at the expense of multi-lateral engagement has left it without a single strategic ally of significance in the world, while having created strategic competitors and multiple unresolved issues off its eastern seaboard and on its south-western borders. For example, China has on-going territorial disputes with ten countries (not including Taiwan) none of which, bar North Korea, can be seen as strategic partners. The United States on the other hand is a core economic, political and/or defence partner of numerous countries in Pacific Rim and South Asia, including Japan, South Korea, Taiwan and Pakistan. Therefore at this stage, the country has placed a big bet on the over-weight importance of global economic success over global political success.


“Please remember, when the foreign investment was not there we did not eat lizard ... Therefore, we are not in that desperate situation …” said the Finance Minister of India, Pranab Mukherjee, during a debate on the Finance Bill in the Indian Parliament . We estimate that India likely needs average annual foreign investment of c.US$80-90bn over the next 5 years in order to finance 6-8% real GDP growth given the shortfall of domestically-based investment. So, India today, as befitting a country that is poorer and less developed than China, is less dependent on American trade than it is on American investment and capital. Whereas the US for China is critical to keeping the country’s economic motor running, the US’s role in India is closer akin to being a key fuel in the launch of the next phase of the country’s journey. Also, given India’s geographic position and proximity to global “hotspots”, US foreign policy has a significant impact on Indian security.

Economically, the relationship between India and the US is skewed towards a dependency of the former on the latter. Firstly, the US is the primary provider of foreign direct investment in India, accounting for over one third of the foreign direct investment received over the past five years. Given the shortage of domestic capital for investment and the resulting higher dependence on FDI in India vs. China, this means that the impact of US FDI in India (measured as a % of GDP) is nearly as large as the total impact of FDI in China. Secondly, as a direct result of its FDI investments, the US is the largest foreign job creator in India, creating its pro-rata share of the over 250,000 jobs created through FDI in 2011, many of them in in high value and high sectors. Although India has a larger employment issue focusing on low end underemployed rural labour, its higher education system is churning out graduates faster than the domestic economy can absorb them on its own and US job creation in India provides a powerful counterweight to the traditional “brain-drain” that has affected the country’s high end labour pool. Thirdly, the US continues to be a key import partner to India. Although only the fourth largest in absolute volume, over two third of US imports to India by value are high-end, technologically intensive manufactured goods like IT hardware, medical devices and engineering equipment. As India continues to develop its own high technology and knowledge intensive industries it will need to continue to rely on US technology over the short-to medium term to support its own development. Fourthly, the US is also clearly the most important export partner for India, as the largest importer of services and a top three importer of Indian goods. While India’s exports to many other countries revolve around natural resources and commodity products the US is the primary importer of IT services, pharmaceuticals and the other goods and services of the India Story to date. Fifthly, direct investment and trade aside, US capital is a key driver of Indian capital market liquidity, one of the core foundations upon which India’s success has been built. At the last count, US investors represented over one-third of registered foreign institutional investors (“FII”) in India. The incremental liquidity provided by FIIs in Indian equity markets makes them a key driver of stock market performance, with inflows pushing the SENSEX up and outflows leading to declines. Finally, India today is one of the world’s largest producers of food, and currently a net exporter with US$6bn of food exports in 2011. Although food production is expected to continue to rise in India throughout the decade, demand will outgrow supply and India is expected to be net importer of food by 2020, particularly in cereals. This will create a significant dependency on the US, the world’s largest exporter of foodstuffs in general and cereals in particular, as well as on US companies, the top three of which control 90% of the world’s cereal trading.

Politically, India’s fate is tightly coupled to the US. The country’s largest security threat, Pakistan, is a strategic or at least military ally of the United States. Its presence in Afghanistan and the presence of NATO supply routes through Pakistan have an impact on India’s foreign policy and its response to terrorist threats emanating from its northwestern neighbour. Further, India imports 80% of its oil needs, mainly from the Middle East, including Iran. US actions and policy decisions in the region can have a significant impact on India’s oil supply and security, as the recent 11% reduction in oil imports from Iran (at the US’ request) demonstrates.

Stepping back, the rise of China is often painted in terms of the fall of America in the popular media. The truth is that China’s rise is dependent on American goodwill and investment. If American policy makers see their fall in China’s rise than clearly this will lead to an adjustment of policy which will slowly but inexorably lead the two to competition and conflict, albeit non-military, than collaboration. If China sees its ascendancy as necessary and this being at the expense of American positioning in the world, than clearly this will led to China playing out a win-lose game with America, which also will lead to competition and conflict. India has already been openly named as a strategic partner by the US . The benefits of this are India’s to lose given the emerging and on-going competitive dynamic between America and China. India can of course make policy that that makes the benefits unlikely. The positive perspective is the recognition of interdependency between the three nations and the forging of deeper economic ties and geo-political collaborations. This requires a stronger will on the part of the US and China, in particular, to better calibrate each other better in major policy areas from trade to territorial disputes.


1.    See appendix for definitions and sources

2.    Japan: Diaoyu Islands, Okinotorishima;  South Korea:  Ieodo Island,  India: Aksai Chin, Arunachal Pradesh, Jammu and Kashmir, Shaksgam Valley;  Pakistan: Jammu and Kasmir;  Bhutan: Kula Kangri, Bhutanese Tibetan enclaves;  Vietnam: Macclesfield Bank, Paracel Islands, Spratly Islands;  Philippines: Macclesfield Bank, Scarborough Shoal, Spratly Islands;  Brunei: Spratly Islands;  Malaysia: Spratly Islands;  North Korea: Tumen River

3.    Deccan Herald,  21 May 2012

4.    President Obama’s May 2010 National Security Strategy

5.    On the General Anti-Avoidance Rules: (i) Foreign funds turned net sellers of Indian stocks in April, the first month of withdrawals in 2012, deterred by proposed changes in tax rules in the fourth-largest equity market in Asia outside Japan. Offshore investors sold a net $102.6 million of local equities last month, data compiled by the market regulator yesterday showed. Reported by Bloomberg, 3 May 2012. (ii) US Treasury Secretary Timothy F. Geithner raised the issue of proposed tax changes in India with Finance Minister Pranab. The concern reported was that “certain tax provisions in India’s fiscal year 2013 budget have raised significant concern amongst U.S. industry and dampened enthusiasm about India’s investment climate,” according to an emailed statement from Treasury spokeswoman Kara Alaimo.  Reported by Bloomberg 20 April 2012.