Google's threat: China may lose edge to India
14 Jan 2010,

NEW DELHI: Ever since Barack Obama replaced George Bush, US foreign policy has been drifting away from India and towards China and Pakistan.That drift could be reversed if Google pulls out of China because of Chinese government hacking into its sites to target human rights activists.

Cynics say that US foreign policy and business pay only lip service to human rights or democracy. It is true that if Google exits China, US-China relations will not be wrecked, and US corporates will not switch all their investment from China to India. But, make no mistake, it will hit a nerve in a Democratic administration sensitive to its human rights constituency. And foreign investors in China will start worrying that their own commercial secrets and intellectual property could be at risk because of officially-blessed hacking.

Former president Bush used his limited political capital to push through the historic nuclear deal with India. Although India is far behind China in economic and military terms today, Bush pushed for a special relationship with India as a long-term democratic partner that could counter China in Asia.

Since Obama took over, the mood in Washington has changed palpably. During his recent visit to China, Obama praised Beijing and downplayed old criticisms of China’s human rights violations and currency manipulation. This fuelled US media speculation about a new G-2 consisting of just the US and China, and reversed the Bush attempt to promote India at China’s expense.

Notwithstanding the nuclear deal, Obama has severely restricted US export licensing for dual-use technology to India.

He does not wish to sell India equipment for nuclear enrichment or reprocessing. An agreement on spent fuel was expected to be signed when Manmohan Singh visited Washington, but could not be finalised.

Obama and Hillary Clinton have bought Pakistan’s argument that Indian activities in Afghanistan should be minimised to assuage Pakistani concerns in Baluchistan. Unlike Bush, Obama and Clinton agreed with Pakistan that Kashmir was part of the Taliban-Al Qaeda issue, and sought to appoint Richard Holbrooke as special envoy to India as well as Pakistan and Afghanistan, a move India eventually stymied.

However, these changes are less fundamental than an immediate reaction to two crises: the economic crisis at home and the worsening situation in Afghanistan. Much of the US shift towards China is attributable to US economic weakness during the Great Recession, that appears to have ended recently. China has, for years, been buying US gilts, and holds over a trillion dollars of US securities in its forex reserves. If China dumps these on the market, the dollar will crash. However, in 2009 the main buyers of US gilts have been the Fed and other US banks getting Fed finance, with China’s fresh purchases being minimal. A crashing dollar will mean a crash in the value of China’s forex reserves, so it cannot credibly threaten to dump its US gilts.

With the end of the recession, Obama can shift from the defensive to the offensive on China, and change the emphasis from economic co-operation to human rights. Such a shift will require a topical peg. Google’s exit from China could provide just that. US corporations are not bleeding-heart liberals that spend sleepless nights worrying about human rights. They can be utterly cynical. On hearing Google might exit China, the Nasdaq saw the share price of Baidu, Google’s main competitor in China, shoot up 6.8%, while Google dropped 1.1%.

However, once the recession ends, these corporates will once again be harried by politicians and civil society to display corporate social responsibility, and at the margin this will diminish their enthusiasm to invest in China, especially for export. Besides, everybody knows that the old global imbalances — created when China used an undervalued currency to create huge export surpluses — were a cause for the Great Recession, and must be avoided in coming years. US corporations know they must diversify out of China to other investment destinations, and India is an obvious alternative.

No radical changes will occur overnight. But if indeed it is established that China has been hacking into Google to target human rights activists, US foreign policy and business will tilt away from China to India. What’s bad for Google may be good for India.