With two gigantic Free Trade Agreements (FTAs) entering into effect on New Year?s Day?China- Asean and India-Asean?Asia?s economic interlinking has taken off. Asia has for long been divided into self-contained sub-regions like South Asia, West Asia,
Central Asia, Southeast Asia and East Asia. Barring the institution of the East Asia Summit (EAS), there was no formal pan-Asian or continental project that tied key Asian states into a network of mutually beneficial relations.
Now, Asean?s two path-breaking FTAs with Asia?s second (soon to be first) largest economy, China, and third largest economy, India, enmesh the fortunes of South Asia, Southeast Asia and East Asia into a mosaic. Together with the currency swap agreements among South Korea, Japan and China, these FTAs signal a definite turn towards Asian countries viewing each other as valuable partners, markets and investors.
For decades, the target of reference for Asia?s leading economies was the West. The credit card-swiping American consumer and high-paying Western client firms were the end points for most exporters of goods and services in Asia. But the financial meltdown since 2008 has reconfigured these horizons and brought home the imperative for Asian producers to diversify their export markets.
The Asean-China FTA is driven by this logic. While negotiations on constructing this pact between China and 10 Asean members had been initiated as far back as 2002, they were stalled by legitimate fears in Southeast Asian countries about being swamped by massively subsidised Chinese products. But the great crash of 2008, followed by the Chinese government?s massive stimulus spending package, made Southeast Asia realise that its exporters had a huge market next door.
Cambodia illustrates this shift. Despite being an old ally of Beijing, Phnom Penh nursed justified apprehensions about becoming commercially disadvantaged if it had to dismantle tariffs on agricultural commodities. Thailand?s farm sector too objected to predatory Chinese agricultural exports of garlic, lychees, oranges and apples capturing the domestic market via the FTA.
But the financial crisis overrode these naysayers because of sudden loss of Western markets for Southeast Asian exporters. Cambodia?s commerce minister told Xinhua on the eve of the FTA?s operationalisation last week that his country ?has a lot of agricultural products to export and right now China may have more money than the US to buy the goods?. Asean?s other less advanced economies are also expecting an infusion of Chinese investment under the aegis of the FTA, which would help build their manufacturing bases.
Southeast Asia?s search for alternative sources of capital and markets in the wake of the depressed condition of Western economies was a catalyst for the FTA to finally sail through. Asean?s Secretary General clearly indicated this was the case by remarking that the FTA, which covers a total population of 1.9 billion with a combined GDP of $6 trillion, would ?help economies recover from the financial crisis?.
In comparison to the China- Asean FTA, the India-Asean FTA encompasses a market of around 1.8 billion people with a combined GDP of over $2 trillion. Only Malaysia, Thailand and Singapore will implement the FTA with India in the first phase, making it a smaller venture as compared to the megalithic China-Asean pact that could eventually surpass the European Union and give Nafta a run for its money.
The reasons for the India- Asean FTA being a poor cousin of the China-Asean agreement are obvious. India is not a major manufacturer or exporter of goods on the scale of China and it enters into this exchange with Asean with a great deal of trepidation about being outclassed by Southeast Asia?s Tiger Cub exporters.
A senior Indian official familiar with the FTA negotiations was quoted in the media as saying that, ?Asean will gain substantially from the market access and Asean?s exports to India will increase substantially, but our exports will be modest?. Indian producers of tea, coffee, fish, coconut, cashew and spices are especially nervous that they would be drowned by competition from Malaysian, Thai and Singaporean exports.
While China looks set to reverse its negative trade balance with Asean via its FTA, India could end up exacerbating its negative trade balance with Asean through its FTA. Interestingly, Indian exporters of fruits, vegetables and grains are not only on the defensive about New Delhi?s pact with Asean but also over Beijing?s FTA with Asean, which is beyond their control.
In the latter case, Indian producers had been hoping to make some inroads into the Chinese market and will now face an unwelcome scenario of 10-12% Chinese tariffs on Indian goods while their Asean substitutes enjoy minimal 0.1% duties.
Why did India press ahead with its FTA with Asean despite this economic sting? The reason is geo-strategic. Several Southeast Asian countries are wary of being Shanghaied into a Chinese dominion that leaves them at the mercy of the renminbi and the Chinese People?s Liberation Army. Against the backdrop of a declining US, Southeast Asia needs a counter-balance to the Chinese empire.
India knows this and is making a strategic investment in this sub-region to project its own ambition of being an equal to China that can offset Beijing in its own backyard just as China cuts and thrusts into South Asia. The India-Asean FTA is a strategic reassurance whose diplomatic gains outweigh the economic costs. In fact, even the China- Asean FTA has underlying political underpinnings because Beijing seeks through trade to assuage wary Southeast Asia about China?s so-called peaceful rise.
The irony of both the FTAs is that they are likely to integrate Asia economically without mitigating the predestined strategic competition between China and India. Peace in Asia remains a chimera but business hardly needs to wait for it.
The author is associate professor of world politics at the OP Jindal Global University