When the whole world is awash with Chinese exports, it is no wonder that mainland commodities should sweep across the Himalaya into the world's second-largest market for manufactured goods: India. The looming trade war between China and India is beginning to resemble a fight to the finish between a ferocious T Rex and a vegetarian Brontosaurus. And Nepal is caught in the middle.

These are the days of the WTO, borders for trade are disappearing, traditional protectionist tendencies are eroding, it's a worldwide free market. Some well-known Indian companies are beginning to import the cheaper Chinese consumer goods, stick their own brand names and sell them in the domestic market-significantly improving their margins. In the next few years, Chinese products are likely to make significant inroads into the Indian market. Even well-known brands like LG and Samsung, which have just started penetrating the Great Indian Middle Class, are likely to be displaced by the cheaper newcomers. These "white goods"-particularly television sets, music systems and refrigerators from China-are both qualitatively competitive and as cost effective as the items imported into or assembled in India.

In the past month, there has been a flashflood of coverage in the Indian media about the threat posed by Chinese goods and how they have penetrated the domestic Indian market: either illegally dumped by the Chinese, who it is alleged subsidise manufacturing; imported by Indian companies; or smuggled in through Nepal. Although the press reports started with the smuggling through Nepal, the long and difficult supply route across the Tibetan plateau and the Himalaya limits the volume of this traffic. The real worry stems from speculation about why Chinese goods are so cheap in the first place, not just in India but also in Europe and the Americas. Trade and industry circles have even imputed political and ideological engineering of prices by China.

It is clear three economic and policy variables on the part of China have let to the present situation:
. Over the last ten years the Chinese did some intensive, behind-the-scenes homework to enter the WTO where cost-effectiveness is the main mantra. This preparation was mainly based on running small- and medium-sized industries as efficiently as possible.
. A large number of Special Economic Zones were set up primarily catering to mass exports. For this, the Chinese government provided an array of services, including a very liberal line of credit, dynamic infrastructure and export facilitation measures.
. Chinese labour laws were made both flexible and friendly.
In other words, unlike in India, Pakistan and Nepal, the Chinese injected reforms at all levels of activity and management. The result was dramatic: tremendous gains in economies of scale reflected in the versatility of Chinese goods in price, quality and variety. Batteries, calculators and other electronic items made in China are now even sold by weight-such is the astonishing economies of scale and cost-effectiveness of Chinese manufacturing.

In some measure, India's reaction to the influx of Chinese goods by using harsh counter-measures and non-tariff barriers, including anti-dumping laws, only indicates the hollowness of economic reforms in India and the stubborn resistance of Indian business to shed its well-entrenched and protected inefficiencies. But let us remember that it is not only the protected and patronised Indian industry that is spending sleepless nights: all major European countries are bearing the brunt of the same Chinese export invasion fever along with Southeast Asia and the United States. It will be interesting to see how this global drama unfolds, as China and India are required to abide by WTO norms in the coming years.

In India, cheap, attractive and easily available Chinese goods are raising hackles in the corridors of the Indian finance ministry. Indian press reports blame smuggling through Nepal, Bangladesh and the Indian northeast. Government sources for their part blame Indian importers who they say bring in the stuff illegally. The economic liberalisation of the early 1990s was focussed on opening up trade, and import duties were brought down from 150 percent to the present 35 percent. Other barriers in the import of goods were removed and under the direction and supervision of the WTO these import duties and barriers will be further reduced within the next five years. So why the fuss?

The reason is that cheap Chinese goods have dealt a severe blow to small- and medium-scale manufacturers, the Indian "cottage industry". Chinese goods have always been popular in India: most consumers know they are cheap and the quality is not bad. But once the Chinese goods came in, lock-makers of Aligarh went out of business, sales of Indian bicycles plummeted, and HMT watches have all but disappeared. This is the reason for the backlash. And given the state of relations with China, questions of economic security are accompanied by questions of internal security. If consumer goods are being smuggled, can arms and ammunition be far behind? Has foreign surveillance and spying also increased? Is smuggling related to the violence and terrorism in the northeast and Kashmir? This is the reason for the deluge of alarmist coverage on television and in the print media.

In Delhi markets like Karol Bagh, Chinese goods are displayed alongside goods manufactured in Japan, America and Britain. Why isn't anyone worried about those imports? Is it because Chinese goods are cheap, or is it because of Indian foreign policy, or is it a security concern? Everyone in India seems to have their own interpretation.

Nepal has traditionally been seen in India as the chief conduit for Chinese smuggled goods into India. This is because of Nepal's historic relations with China, the open border between Nepal and India, the importance of Nepal in India's security context and the special trade policies between the two. Nepali goods can be imported into India without import taxes. This one-way special treatment has led to tremendous growth in the exports of goods from Nepal to India. In 1995/96 India imported goods worth Rs 3.68 billion from Nepal. By 1998/99 it had swelled to Rs 12.53 billion. Now come allegations that Nepal is misusing this facility and exporting to India goods manufactured in other countries but to which "Made In Nepal" labels are attached.

If these goods are being exported to India illegally then the question arises as to who is doing it? Who is misusing this treaty: businessmen, federations or the government? The burden of labelling goods correctly has been given to the national federation, and there may be a lack of understanding about the definition of manufacturing, or in the policies. But can national issues be handled in such a carefree and careless manner? In the hope that ordinary people will get some benefit, Nepal hankered for 40 years for the 1996 trade treaty. Now, the actions of a few Nepali or Indian businessmen is jeopardising economic relations between the two countries.

In plain economics, where there is demand, supply flows. There is a great demand for Chinese goods in India, so they flow into India-mainly because the same goods are not produced in India as cheaply. For how long can India halt the entry of cheap Chinese goods? Nepal might seal its borders, but Chinese products could continue to come through Burma, or through Bhutan or through Chittagong. How can free import policies, and import policies with barriers work in tandem?
Geography will not let it work, public demand will not let it work and inefficiencies of cottage industries will not let it work. Indian policy-makers will have to understand this. Relations between India and Nepal hinge on this understanding.

(Mahendra P. Lama is Associate Professor at the School of International Studies, Jawaharlal Nehru University, New Delhi.)