The 2008 share of world total inward FDI flows was 6.4% for China and 2.4% for India. In 2008, China became India’s largest trading partner and the bilateral trade between the two countries grew 34% to $51.8bn. It is projected that by 2050, India and China will be the two leading economies in the world.

But while China-India trade grows, constraints are preventing its full potential. Although China and India are connected by land, their current trade mostly passes the Strait of Malacca, a distant marine route that adds time and cost. And although the land routes have been significantly improved with the rebuilding of the Stilwell Road that links China and India via Myanmar and the reopening of the Nathu La Pass for border trade, there are still many problems.

Distrust remains between the two countries following the1962 border war, with some territory still disputed. More recently, India has become wary of China’s co-operation with Pakistan, while the various trade disputes between India and China certainly have not fostered co-operation. Also, India is at a greater risk of developing a trade deficit because it mainly exports resource- or labour-intensive products to China, and mostly imports manufactured goods with high added value from the country.

In October 2009, China and India signed a memorandum of agreement to deal with climate change, signalling an upgrading of Sino-Indian co-operation in the field. Jairam Ramesh, minister of environment and forestry of India, said it was the first time India and China had initiated bilateral co-operation in that way, and it bodes well for the development of Indo-Chinese trade relations.

The China-India trade outlook remains rosy, but it will take time to address constraints and fully realise the economic and trade potential.

Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asia market research and investment/trade promotion services.

E-mail: Lawrence@asiabizstrategy.com