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ASEAN Vulnerability To Chinese Trade Trap: India Should Revisit Act East Policy – Analysis

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Since ASEAN signed a FTA with China, trade balance of ASEAN has turned volatile. Export growth dwindled and import surged. ASEAN entered the 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 ten time spike in  adverse trade imbalance with China in 2019 – from US $ 10 billion in 2010 to US $ 102 billion

Eventually, it has cascading impact on India-ASEAN trade. India witnessed a downfall in export to ASEAN and 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 import 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, development landscape has changed. World trade, including Asia, entered economic transformation in the wake of US-China trade war and COVID 19 pandemic. US-China trade war slowed down 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 in 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 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 US-China trade war, FDI from USA surged in ASEAN as a  China +1 strategy. MNCs from 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 forecast for GDP growth for 2020, negative growth for Thailand, Singapore, Malaysia and Cambodia were expected to be sharpened. At group level, the vulnerability of ASEAN was expected severe. In combined effects of both 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 base economy. It is an export hub for MNS. Bereft of domestic demand because of demographic disadvantage,  ASEAN growth harps on exports

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  US shifting investment from China to the block. Eventually, it catalyzes a springboard for ASEAN export surge to USA, instead of getting decimated by  trade tension. Vietnam is a case in point.  Its export to USA increased by 27 percent in between 2018 and 2019. Similarly, other ASEAN nations became gainer to export to USA, however, marginally, such as Thailand, Malaysia and Singapore.

India’s withdrawal from RCEF will have 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 dipped into Chinese debt trap. Sri Lanka is a case in point. With RCEF and BRI in the hold , China is in a better position to exert its influences in ASEAN, which is already inflicted by double whammy of trade tensions and pandemic.

Vietnam emerged a central point of concern for India, after eclipsed by China’s expansionism in South China sea and its trade dependence on China. Incidentally, both Vietnam and India are victims of Chinese aggression in 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 international trade of India passes through South China sea. Even though China  is an important economic partner of Vietnam, on people-to-people relation , Vietnam is closer to India, according to a survey.

After China’s hegemony in supply chain is on slid and political tiff between China and India  intensified, India is on a big hunt for alternative supply chain . 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 drugs intermediates. However, the report was silent on alternative sources. 

Some trade experts advocated Vietnam a potent challenge for alternative source to China. The rational 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 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.

Given the ASEAN succumbing to the Chinese flexing muscles in RCEF , 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 RCEF did not bode well. India has FTAs with almost all major partners of ASEAN and ASEAN as a group.

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Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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