Trading with the Good China.

The last time China invaded India, even the Himalayas didn't prove much of a barrier. Red Army troops poured across mountain passes in 1962, occupying a huge swath of Indian territory--some of which China still holds--and stopping only when their utter dominance was clear. Ever since then New Delhi has eyed its behemoth neighbor warily, even implying that its nuclear arsenal was meant to counter the communist threat from the north.

Until now the capitalist menace seemed less worrisome. For years India's trade barriers proved much more effective than its natural ones: a thicket of licensing and inspection requirements, tariffs and import quotas easily held the world's goods at bay. The policies kept Indian industries fat and happy. It also filled the country with antiquated products--like the infamous Ambassador sedan, still modeled after the 1950s Morris Oxford--made in antiquated ways.

China, though, has crossed this barricade even more easily than it did the Himalayan peaks. As part of its accession to the World Trade Organization, New Delhi must eliminate quantitative restrictions on consumer goods by April 1. Already in the past eight months, as other barriers have been lifted, a tide of dirt-cheap imports from the People's Republic has inundated India: batteries, fans, plastic slippers, even rice. The onslaught may ultimately transform domestic manufacturers more thoroughly than years of halfhearted reforms ever could. And for now, the real winners are long-suffering Indian consumers, whose buying power has expanded exponentially. In places like New Delhi's Ghaffar market, buyers are elbowing one another aside to grab portable stereos, video-CD players, lamps, locks and toys as soon as they hit the shelves. "Customers are so happy," says Rajesh Bansal, who runs a variety store in Ghaffar. "My profits are up, and I feel good that many poorer Indians who could never think of buying things like watches and toys can do so now."

Ironically, many of India's trade barriers were set up to counter a perceived threat from the West. (At one point in the late 1970s an overzealous federal minister threw Coca-Cola and IBM out of the country, famously declaring that India would not be subject to "Coca- colonization.") But since restrictions on 700 products ranging from chemicals and drugs to areca nuts and an array of other consumer goods were eliminated last April, the country that has exploited the changes most has been China. India's Chinese imports totaled $1.3 billion last year, nearly double the figure from five years ago.

Most important, Chinese companies are exporting lower-end products than Western firms are--and pricing them cheaper even than their Indian equivalents. That has opened up possibilities for the bulk of Indian consumers, who are too poor to afford the Nokia mobile phones and Body Shop oils on sale in glitzy Mumbai (Bombay) malls. A Chinese-made wristwatch sold at Ghaffar costs $1.60, compared with $5.40 for a nearly identical watch made in India. Not surprisingly, the Chinese watch is much more popular. What is surprising, say shop owners, is that the Chinese products are also often of higher quality than their Indian counterparts. Chinese fans, for instance, sell for half the price of Indian fans, and come with inverters that prevent them from shutting down during a power surge--a common occurrence in India. Domestic fan makers never had the foresight to install the devices.

After years of exporting to the rest of the world, Chinese manufacturers have grown far larger, smarter and more efficient than their cosseted Indian counterparts. One Chinese TV manufacturer, Changhong, has the capacity to build more sets annually (12 million) than the entire Indian television industry can manage (7 million). In one eight-hour shift ...