In post-COVID world, India should bolster trade ties with neighbours

Even though it is plagued with a rare threat that comes once in a hundred years, it is not the end of globalisation yet, as we know it. But, we are definitely seeing the emergence of an alternate narrative that is pushing the world into a more inward looking, restrictive and perhaps protectionist zone.

A feeling of mistrust is palpable and economies across geographies want to tighten borders, not just to protect the health of their citizens, but also to keep their economies intact.

So much so that it should not come as a surprise if nations start looking closer home for growth and sustenance by striking new alliances within regional blocs to increase intraregional ties and trade. The atmosphere in the Indian sub-continent and South East Asia seems ripe for such a scenario with groupings like ASEAN (Association of Southeast Asian Nations), BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) and in a remote way even the SAARC (South Asian Association for Regional Cooperation) being prime candidates for it.

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In a way the move by Prime Minister Narendra Modi who took the initiative of rallying together the SAARC leaders on April 15 to discuss the situation arising from the coronavirus and a joint response to it, is a positive. However, going by past experience it may be premature to conclude this is the beginning of a revival of the eight-nation group for long term success.

South Asian conundrum

The absence of a working relationship between India and Pakistan has ensured that SAARC is a non-starter despite being around since 1985. It is a telling statement that SAARC has not had a leadership summit since 2016 when Pakistan was to host SAARC leaders but India, Afghanistan, Bhutan and Bangladesh pulled out citing Islamabad’s support to terrorism.

The lack of interest goes beyond just differences over terrorism. India’s trade with SAARC accounts for less than 5 per cent while the overall trade among SAARC nations is yet to reach 5 per cent. It is a fact that most South Asian nations have looked to the West for their business and focused more on trading with the US and European Union, while depending on China for the supply of cheaper intermediate inputs. This fits in with a historical trend, a legacy of the colonial era.

As a McKinsey discussion paper notes, the intraregional integration of these countries has been low notwithstanding their historical trade ties with the rest of the world. At just 31 per cent intraregional share of goods, capital, and people of the 12 nations of what it calls Frontier Asia and India, that also includes the seven other SAARC members, is the lowest in Asia. Europe, Middle East, Africa and the US accounted for 45 per cent of their imports and 66 per cent of their exports apart from 66 per cent of FDI inflows.

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McKinsey identifies four distinct groups of economies in Asia based on scale, development, interactions with one another and connectedness with the world. The other three categories are, Advanced Asia, China, and Emerging Asia and Frontier Asia and India. These 12 nations are major producers of services, but are also quickly moving into manufacturing, thanks to their young labour force and markets which are ideal for integration with rest of Asia.

Modi’s Act East policy promising

While SAARC may have come a cropper but in contrast however, the Modi administrations Act East policy, a rejigged version of the Narasimha Rao government’s 1991 Look East Policy which was limited to economic cooperation, is a better articulated approach and shows some promise of India’s potential for intraregional ties.

Act East seeks to forge closer partnerships with regional and multilateral organisations like ASEAN, the ASEAN Regional Forum (ARF) and East Asia Summit (EAS), and regional for a like BIMSTEC, Asia Cooperation Dialogue (ACD), Mekong Ganga Cooperation (MGC) and Indian Ocean Rim Association (IORA).

In particular, BIMSTEC symbolises India’s recognition that it needs to deepen its relationship with its neighbours in the east for strategic and business reasons. In fact it was a revival of sorts for the 20-year-old club when Modi hosted an informal meeting of the heads of the seven-member nations at Goa in late 2016.

BIMSTEC also serves two strategic objectives. While on the one hand it serves as an alternative to the SAARC while keeping Pakistan out of the equation, more importantly it also serves as a strategic foil against Chinese designs on the region.  At one stroke it enables India to engage with all its southern, eastern and northern neighbours on one platform.

Decoupling on steroids

It is well established that China has been looking to decouple from the US economy and establishing a presence in EU, the rest of Asia and the Middle East apart from Africa. Ironically, however countries hitherto dependent on it were themselves looking to decouple from China even before COVID-19 which has proved that concentration of the world’s supply chains is globalisation’s weakest link. Add to it the immense distrust of Chinese intentions and reputation as an undependable economic partner, and you have a strong motivation to look for alternatives.

Japan for instance has set aside a $2 billion fund to help companies shift their linkages with China, while the pandemic has reportedly prompted Britain to re-examine options on digital communications and AI industries linkages with China. Taiwan and Vietnam likewise have started challenging China on exports.

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Furthermore, many nations will now begin looking for complementarities within the neighbourhood to develop and sustain new supply chains. A consequence will be the increased intraregional trade, particularly in Asia, which had been seeing a shift in its trade direction over the past decade. This opens up the doors for India to engage with potential likeminded partners.

At a time when the global economy is destined to contract to unimaginable levels due to the pandemic and a significant chunk of population, particularly in India and rest of South Asia are slated to be pushed into poverty, it is imperative India finds new friends.

What better than to begin looking for them in the neighbourhood first.