By S. Majumder, Adviser, Japan External Trade Organization ( JETRO), New Delhi
This article analyses how ASEAN emerged volatile to US-China trade war and COVID 19 pandemic, and why they warrant changes in India’s Act East policy. It analyzes how ASEAN is tending towards the Chinese trade trap in RCEP after its volatility to the US-China trade war and COVID scaled higher than South Asia and Northeast Asia. The article suggested that to this end India should revisit the Act East policy.
OPINION: It was the Chinese BRI ( Belt Road Initiative), which turned the debt trap for some developing nations. Sri Lanka and Pakistan are the cases in point. Now, it is RCEP, which tends to be a Chinese trade trap for ASEAN. Ever since ASEAN signed FTA with China, the trade balance of ASEAN turned volatile. Export growth dwindled and imports surged. ASEAN entered FTA with China in 2010. At that time, ASEAN export to China accounted for 10 percent of its world trade. In 2019, it accounted for 14.2. In import, China’s share in ASEAN world import was 12.9 percent in 2010. It sparked to 21.9 percent in 2019. ASEAN witnessed a ten-time spike in adverse trade imbalance with China in 2019 – from the US $ 10 billion in 2010 to the US $ 102 billion
Eventually, it has a cascading impact on India- ASEAN trade. India witnessed a downfall in export to ASEAN and an increase in imports from ASEAN. India entered FTA with ASEAN in 2012. India’s exports declined by 4.4 percent from 2012-13 to 2019-20 and imports surged by 29.2 percent during the same period. It manifests that there was no other reason, but China’s backdoor entry to India through ASEAN-China FTA, which catalyzed the import surge from ASEAN.
Given the two consecutive global turmoil, the development landscape has changed. World trade, including Asia, entered economic transformation in the wake of the US-China trade war and the COVID 19 pandemic. US-China trade war slowed down the world’s GDP growth from 3.5 percent in 2016-18 to 2.7 percent in 2019 and COVID 19 is expected to push the world economy into recession in 2020, according to Brookings Institute.
Both affected ASEAN and dragged the block into vulnerability. Nevertheless, the magnitude of vulnerability differs in respect of the turmoil. Its vulnerability to the US-China trade war was much less than other Asian groups, such as South Asia ( India, Bangladesh, Nepal, Pakistan, and Sri Lanka) and Northeast Asia (China, Hong Kong, Mongolia, South Korea, and Taiwan). During the US-China trade war, FDI from the USA surged in ASEAN as a China +1 strategy. MNCs from the USA decided to shift some of their manufacturing units from China to ASEAN. Thailand, Indonesia, Singapore, and Vietnam became the target countries for US investors.
Diagonally opposite, ASEAN vulnerability to COVID 19 was more than South Asia and Northeast Asia. In terms of the forecast for GDP growth for 2020, negative growth for Thailand, Singapore, Malaysia, and Cambodia was expected to be sharpened. At the group level, the vulnerability of ASEAN was expected severe. In combined effects of both the US-China trade war and COVID 19, ASEAN vulnerability was projected more than South Asia and Northeast Asia, according to the study.
This deciphers that ASEAN has reached an inflection point that requires fundamental changes in its economic landscape. ASEAN is a block of small nations. It is an export-based economy. It is an export hub for MNS. Bereft of domestic demand because of demographic disadvantage, ASEAN growth harps on exports
The USA is the second biggest export destination of ASEAN, after China. Some observers pointed ASEAN to be the potential gainer of the US-China trade war. It paves the way owing to the US shifting investment from China to the block. Eventually, it catalyzes a springboard for ASEAN export surge to the USA, instead of getting decimated by trade tension. Vietnam is a case in point. Its export to the USA increased by 27 percent between 2018 and 2019. Similarly, other ASEAN nations became gainer to export to the USA, however, marginally, such as Thailand, Malaysia, and Singapore.
India’s withdrawal from RCEF will have an overarching impact on Act East policy. The main goal was to improve ties with ASEAN and East Asian nations. With exiting from RCEP, India’s Act East policy should be viewed from various angles, particularly when the double impact of unabated US-China trade war and COVID 19 pandemic looms large.
Observers pointed out that India needs to be concerned over China’s flexing economic muscles through BRI ( Belt Road Initiative), which led several nations to dip into the Chinese debt trap. Sri Lanka is a case in point. With RCEF and BRI on hold, China is in a better position to exert its influences in ASEAN, which is already inflicted by a double whammy of trade tensions and pandemics.
Vietnam emerged as a central point of concern for India after eclipsed by China’s expansionism in the South China Sea and its trade dependence on China. Incidentally, both Vietnam and India are victims of Chinese aggression in the South China sea. The recent bilateral relation evoked a far-reaching impact on India’s Act East policy, from the lenses of trade parameters. Half of the international trade of India passes through the South China sea. Even though China is an important economic partner of Vietnam, on people-to-people relations, Vietnam is closer to India, according to a survey.
After China’s hegemony in the supply chain is on slid and the political tiff between China and India intensified, India is on a big hunt for an alternative supply chain. The government identified around 330 items of imports from China, which are to be procured from alternative sources. They included mostly telecommunication equipment, cell phones, electrical apparatus, integrated circuits, and drug intermediates. However, the report was silent on alternative sources.
Some trade experts advocated Vietnam as a potent challenge for an alternative source to China. The rationale behind this is Vietnam emerged as one of the major sources of imports of electronic and electrical items. Vietnam is the third biggest import source for Indian electronic and electrical items, after China and Germany. Practically, if imports of the biggest items in this group are taken into consideration, such as telecom equipment, including cellular phones and parts, Vietnam is the second biggest source of imports for India. Hence, a substantial part of import dependence on China can be reduced, with the diversification of imports from Vietnam.
Also read: Should India decouple from China and vie for Vietnam in supply chain engagement?
Given the ASEAN succumbing to the Chinese flexing muscles in RCEP, in addition to volatility to US-China trade war and COVID pandemic, which is more than South Asia and North-East Asia, observers opined that rejoining RCEP did not bode well. India has FTAs with almost all major partners of ASEAN and ASEAN as a group.
About the author: S. Majumder, Advisor, Japan External Trade Organization (JETRO), New Delhi (under the Ministry of Economy, Trade and Industry, Government of Japan) for over four decades in the research department. He is a regular contributor to national media and foreign online media, such as Eurasia Review, USA, and One News, UK.
(The views expressed in the article are personal of the author and do not necessarily reflect the point of view of the Asian Community News Network.)
