Briefing 2: India and the Indo-Pacific

[Prime Minister Narendra Modi arrives at the 20th ASEAN-India Summit in September 2023. Photo by MEAphotogallery, via Flickr (CC BY-NC-ND 2.0)]

The Context

The Indo-Pacific is a tough neighbourhood. India delineates the Indo-Pacific as a region stretching from Africa’s eastern coast to the islands of the South Pacific, based on its strategic power projection perceptions. The region is arguably the globe’s most sensitive and contested zone, viewed from the lens of US-China rivalry. It’s home to some of the world’s largest economies—China, Japan, India, South Korea, Australia and the ten member states of ASEAN. S&P Global estimated the total nominal GDP of the ten ASEAN nations at $3.6 trillion in 2022.

The region is beset with complexity. Consider the following:

1. The economics of the region, its natural resources and geography make it one of the most strategic and vital trade conduits globally.
2. China seeks to annex Taiwan with its overwhelming dominance over global semiconductor networks.
3. Countries like Vietnam, the Philippines, and Indonesia remain vulnerable to Chinese aggression on both the military front and economics.
4. Key US military bases dot the region. China has a naval base at Djibouti at the Horn of Africa and would ostensibly like to turn the South China Sea into a Chinese lake.
5. Middle powers like Japan, South Korea, and Australia struggle to balance their national security and economies amidst the US-China rivalry.
6. Beijing’s revanchism on India’s eastern borders creates instability. India’s massive trade dependence on China is worrying. India lacks significant trade and competitive advantages vis-a-vis ASEAN.

The State of Play

The US-China rivalry calls for challenging choices. As Dr. Deborah Elms, Head of Trade Policy at the Hinrich Foundation, and a speaker at our Masterclass on August 29, put it: “The consequences for their domestic economies (in Southeast Asia) are significant. If they are being asked to make a decision, what they are looking for is more information about why this choice is necessary—why it’s necessary for them, not why it’s necessary for the United States. That’s a challenge. And if there is anything offsetting that can be offered? Because the choice comes with real consequences… When the United States shows up and says, ‘You need to follow us because we’re right,’ and doesn’t do a whole lot afterward—there’s no market access, there’s no trade agreement—remember, economics in Asia rules. This is a very trade-dependent region.” These questions make things problematic for India too.

The challenges, both present and emerging, across the region are complex.

1. Trade dependence upon China, ASEAN’s largest trading partner, is overwhelming. China accounts for well over a quarter of its trade.
2. The impact of newer trade pacts like the Regional Comprehensive Economic Partnership (RCEP) is unclear. Trade between China and the 14 other member countries came to just $1.77 trillion in 2023.
3. Yet, RCEP could help drive FDI and trade with upstream and downstream, value-added spillover effects for member countries across both technology and products, particularly from China’s point of view, leading to new dependencies.
4. There are the rising connector economies like Vietnam which have seen large investment from China, integrating them into crucial global value chains. These countries “have combined appropriately calibrated foreign policies and sufficiently developed economic capabilities to navigate geopolitical rivalry and benefit from geoeconomic fragmentation—which has driven the reconfiguration of global supply chains”, as the Atlantic Council put it. The US has seen through the game, though. It’s recently imposed tariffs on Mexico for steel with Chinese content, though it’s yet to impose similar tariffs on Vietnam.
5. China does face a gradual surge of trade restrictions within the region. Vietnam recently launched an anti-dumping investigation into Chinese hot rolled coil steel, while Indonesia has plans to impose up to 200 percent tariffs on some Chinese products. “A total of 96 trade barrier investigations targeted at China were announced by its trade partners from January to July” this year, SCMP said; at least 74 related to anti-dumping.
6. The Philippines is actively resisting China’s revanchism in the South China Sea. Japan is boosting its military and staging military exercises in the Sea together with the US, as are India and Australia. Taiwan remains a major flashpoint.

India’s Quandary

This June, India’s Economic Survey made a tantalising proposition: “To boost Indian manufacturing and plug India into the global supply chain, it is inevitable that India plugs itself into China’s supply chain. Whether we do so by relying solely on imports or partially through Chinese investments is a choice that India has to make.” It’s not an easy choice for India’s policy makers.

Dr. Amitendu Palit, Senior Research Fellow and Research Lead (trade and economics) at the Institute of South Asian Studies, National University of Singapore, and a speaker for our August 29 Masterclass, explained India’s options succinctly, stating: “The US-China major power rivalry and reciprocal restrictions on bilateral flows of goods, technology, and data, are major drivers of the relocation… India’s FTA engagements should be driven by the objective of integrating closer with economies that are becoming new global hubs and can support India’s quest for etching deeper footprints in strategic supply chains. Linking deeper with these economies through structured FTAs can facilitate India’s efforts to gain prominence in the newly evolving landscape of global production.”

However, India trade pacts question poses several dilemmas.

1. India’s trade deficit vis-à-vis China is burgeoning. It needs to weigh its present, and any future, trade dependence against its defense and border sensitivities.
2. India lacks a significant voice at ASEAN with just 3 percent of the grouping’s total trade as of 2022-23.
3. There’s a question of how the US might view an attempt to augment technology and FDI ties with China, though New Delhi would want to view the scenario from a lens of economic realism.
4. There are difficulties caused by India’s limited integration into global value chains that offer the value-additions sought by potential partners within the ASEAN. The ASEAN Trade in Goods Agreement (ATIGA) renegotiation has been hanging for a long while now.
5. There remain questions about the leverage available to swiftly drive new, effective trade pacts with individual nation-states, given the challenge of balancing economic realism and US-China rivalry.

Today, however, India is not a connector economy. Arguably, FDI into India is more market-seeking than genuinely friend-shoring. India ranks lowest for its economic and political influence among ASEAN dialogue partners, according to the State of Southeast Asia: 2023 Survey Report published by the ASEAN Studies Centre at the ISEAS-Yusof Ishak Institute. How India’s economic structure will impact its strategic power projection and drive trade agreements across the Indo-Pacific in the years to come is still unclear.

Dig Deeper

• What Asia doesn’t need from the US | By Dr Deborah Elms, one of the speakers at the Masterclass
• Trade policy: The way ahead: Re-globalisation has gathered momentum and will impact global trade | By Dr Amitendu Palit, one of the speakers at the Masterclass
• ICYMI: Masterclass Briefing #1: How a fragmented world will impact trade and corporate strategy | By Vivek Y Kelkar

The third and final edition of the Masterclass Briefings will cover the geopolitics and geo-economics of India’s trade determinants with the West, and the Russia factor.

Click here to see the full package