Strategic option of Quad to boost trade ties

ONE of the consequences of the pandemic and the resultant lockdown was the disruption in supply chains. These are the sinews that powered several market economies and integrated China at the core. The strategic apprehensions of China in the South China Sea and other areas accentuated the challenges. Dependence on a single source for supply chains was no more a realistic attitude. This aspect was enhanced by the US-China trade war, which suggested the importance of strategic options for diversification.

However, for most countries, their companies were reluctant to disengage from a lucrative economy like that of China. The strategic option of decoupling from China soon tempered the ambitions of companies which had already invested there. Diversifying from China, with a ‘China plus one’ strategy, was complemented by a search for new markets from where sourcing and market access as an alternative to China could develop.

The role of regional free trade arrangements (FTAs) became important. It was perhaps coincidental that both the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP) completed their negotiations prior to the pandemic. This gave several countries the institutional framework of preferred access to countries which produce efficiently. They were seen as alternatives to China. Vietnam was perhaps the biggest beneficiary due to its small domestic market, efficient production systems and its courageous steps towards FTAs. Not only did Vietnam stay the RCEP course along with other ASEAN members, but it also joined the TPP and entered into an FTA with the EU. Most other Asian countries did not take such steps towards becoming among the prime movers of the ‘China plus one’ diversification.

Japan started a system of government subsidies for securing its supply chains, including by shifting critical industries out of China. Its $2.2 billion programme persuaded Japanese companies to return to producing critical elements within Japan itself. A sum of $200 million was kept as incentive for the ‘China plus one’ strategy, focusing on ASEAN; later India, Sri Lanka and Bangladesh were added to the programme. Thus, Japan assumed the leadership in the Indo-Pacific region for new trading arrangements, as its own strategic counter to the Chinese role in the region. Japan retains the edge with larger overall commitment to the development of ASEAN infrastructure, for instance, than China with its Belt and Road Initiative (BRI).

Despite India’s late withdrawal from the RCEP, its intent to engage with the region in terms of trade and investment is visible from the effort to review the working of the India-ASEAN FTA and the Comprehensive Economic Partnership Agreement (CEPA) with Japan. India is keen not to be left out of the post-Covid economic developments in the region and to use the strategic option of the Quad and the similarity of views on the Indo-Pacific to engage with Japan, Australia and France. The India-Japan-Australia (IJA) trilateral and India-Australia-France (IAF) trilateral arrangements are efforts to find strategic alternatives to the economic imperatives in the region.

The IJA trilateral for Supply Chain Resilience Initiative (SCRI) is ahead of the India-Australia-France initiative. Japan has signalled its intent to increase its investment in India, through which the latter could be integrated into wider regional and global value chains and thus become an alternative to China. The focus is on enhancing investment by Japanese companies already in India who are encouraged to enhance their export profiles. When Shinzo Abe was the PM, further Japanese investment was envisaged, but with the change of guard and the current introversion of Japanese business, this process is moving slowly. NTT has announced a $2-billion FDI in data centres over the next four years. Suzuki will invest Rs 3,800 crore in a new car plant and with Toshiba and Denso, Rs 1,150 crore in a lithium battery plant as well. Japan is the major motivator for India to be a fulsome partner in the region and despite India’s absence from RCEP and TPP, it remains committed to engaging India robustly with a strategic intent.

The Quad-based SCRI strategy needs to find effective complementarities among the three partners. Japan seeks diversification; Australia seeks trusted relationships to develop partnerships and India looks to find ways to stay in tune with the new economic developments.

The Japan-Australia relationship has Australia providing food, energy and mineral resources and engaging in financial services. Japan is Australia’s largest trading partner since the 1970s. Their trade is worth about $86 billion, with trade in services around $7 billion. Japanese FDI into Australia is $225 billion, while Australia has invested $125 billion in Japan. FDI now goes beyond natural resources to cover financial services, infrastructure, information and communication technology (ICT), property, and agri-business. This generates employment in Australia too.

India’s Australia trade is to the tune of $30 billion — the two-way FDI is another $30 billion. The lack of a bilateral FTA manifests itself in the unresolved problems between the two nations on economic issues. These are now sought to be overcome by means of better strategic understanding through the Quad and the SCRI. With Japan, India has a trade of less than $20 billion. Japanese FDI into India is about $30 billion.

While Japan has been a steadfast partner, Australia needs to establish its credentials of trust by providing market access, FDI and fair approaches rather than continue to pry open the Indian market with little in return. The complementarities need to be aggressively identified. Much greater B2B relationships will make the SCRI workable and it’s time to move it to the business level from policy discussions.

Japan is keen to involve ASEAN, with whom it has regional value chains (RVCs), in the SCRI. The harmonisation with ASEAN standards and the review of the India-ASEAN FTA on goods can contribute to bringing ASEAN into this venture. But for now, India needs to be wary that the benefits of such RVCs don’t just pass on to ASEAN. Here, India must be the main beneficiary of new investment and supported competitiveness. This will add heft to the post-pandemic policies announced by the government.

India seeks FDI focusing on manufacturing and its involvement in Japanese global value chains (GVCs). Japan prefers digital economy as an opportunity for the Japanese industry, with its financial prowess and access to global markets, to match India’s IT core. If India will be part of Japanese-led value chains, Japanese companies will enhance the quality of their FDI and raise technology levels for competitiveness beyond the Indian market. If Australia joins this, a win-win possibility emerges.