The Indo-Pacific economy: inextricable Chinese ties and Indian challenges

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India should increase economic investment and regional integration initiatives in the Indo-Pacific if it is to compete with Chinese influence in the region

This is the 127e series article – The Chronicles of China.

Read the articles here.


The Indo-Pacific region offers enormous economic opportunities, both in product and factor markets, as the region comprises approximately up to 38 countries, home to 65% or 4.3 billion of the world’s population and represents 63 % of world GDP. In fact, over 50 percent of global maritime trade takes place in this region. One of the major developments in the Indo-Pacific has been an increased vigor of intra-regional partnerships within the countries of the Indo-Pacific, but also with extra-regional actors to compensate for the intensification of the presence of China.

There is no doubt that Beijing has strengthened its economic ties with Indo-Pacific nations over the years. Countries like Australia, South Korea and Japan have a trade surplus over China, while India and Singapore have a trade deficit. In addition to enjoying a trade surplus, Australia, South Korea and Japan have China as their main trading partners, and exports to China contribute significantly to their own economies. Therefore, despite the political hiccups, it is extremely important that these countries maintain economic harmony with Beijing, so that there is no consequent decline in Chinese demand for their commodities.

One of the major developments in the Indo-Pacific has been increased vigor in intra-regional partnerships within Indo-Pacific countries, but also with extra-regional actors to compensate for the increased presence. from China.

China has always had a high volume of trade with the main countries of the Indo-Pacific, and it is increasing; as the following figure shows, the trend has been positive over the past fifteen years. There have been very few cases of a decline in this trend – that of 2007-08 could be attributed to the global financial crisis, which gradually recovered in 2010.

Figure 1: Volume of China’s trade with the main Indo-Pacific countries (In billion USD)

Source: Own author, data from World Integrated Trade Solution (WITS), World Bank

China’s inextricable ties with most of the Indo-Pacific can be attributed to its key position in regional value chains. This is one of the most important factors preventing countries in this region from fully diversifying their trade and investment to other countries in the West, by hijacking China. For example, Australian agricultural products rely heavily on Global Value Chains (GVCs), where a large portion of imports originate from China. In fact, technologically advanced countries such as Japan and South Korea depend on China for the manufacture of high-tech components required as inputs in the production of smartphones by companies such as Apple, Xiaomi, Lenovo and Huawei – these components are mainly assembled in China and then supplied to other nations.

While China leads the world in terms of outward foreign direct investment (FDI), so does the Indo-Pacific. The inward and outward FDI flows between China and the countries of Southeast Asia are much larger than the flows between India and the countries of the region. Over the years, China has expanded its economic and political networks through the advancement of its ambitious Belt and Road Initiative (BRI). The BRI, which is often supposed to worsen the long-term debt situation of recipient countries, has been a major problem in developing and underdeveloped countries in Southeast Asia and sub-Saharan Africa.

China’s inextricable ties with most of the Indo-Pacific can be attributed to its key position in regional value chains.

Growing geopolitical and geoeconomic rivalry with China is one of the main factors propelling India’s pivot towards the Indo-Pacific. Allegations about Beijing’s problematic handling of the pandemic, the military standoff between India and China in recent years, the imposition of an 80% tariff on Australian barley and, more importantly Still, pandemic-induced supply chain disruptions from China have triggered alterations in economic dynamics among the Indo-Pacific nations. Even the Association of Southeast Asian Nations (ASEAN), which has historically chosen to remain reserved on the subject of the Indo-Pacific, in 2019 launched the ASEAN Perspectives on the Indo-Pacific. Pacific, signaling his intention to take note of the dynamics unfolding in his own backyard.

As a major economy and regional player, India has made efforts to intensify its role in trade and connectivity in the Indo-Pacific. According to the Confederation of Indian Industries (CII) study in 2020, India’s trade with the 20 selected Indo-Pacific economies has increased eight times since 2001. While India’s combined trade with these savings was $ 33 billion in 2001, it increased to US $ 262 billion in 2020. However, for a multitude of reasons, India’s economic engagement and leadership in the Indo-Pacific remains limited. . These include the homogeneity of the service sector, which is centered on the IT industries; the delay in FDI flows between India and the countries of Southeast Asia; the lack of large multinational companies in India that could fit into various parts of regional supply chains.

The BRI, which is often supposed to worsen the long-term debt situation of recipient countries, has been a major problem in developing and underdeveloped countries in Southeast Asia and sub-Saharan Africa.

India’s economic performance in the region is barely sufficient to counter the growing Chinese influence. As India presents the centrality of ASEAN as a central element of its Indo-Pacific strategy and attempts to forge a closer economic and strategic partnership with ASEAN member states, India’s trade volume with ASEAN is far from that of China, as shown in the following figure. Over the past 12 years, China has remained ASEAN’s largest trading partner, and this year ASEAN overtook the European Union to become China’s largest trading bloc.

Figure 2: China-ASEAN Trade vs. India-ASEAN Trade, 2020-2021 (USD Billion)

Source: Own by author, data from China International Import Expo and Ministry of Trade and Industry, Government of India

Strengthening India’s economic ties with ASEAN is of particular importance for improving India’s economic stature in Southeast Asia and throughout the Indo-Pacific, as the economic influence on Southeast Asia is helping China to realize its position in the region. While China’s aggressive rise remains the primary strategic and security concern of Southeast Asian countries, the benefits of prosperous trade with Beijing make most Southeast Asian countries think twice. before making a decision that could annoy Beijing. Even other countries, which are at the forefront of anti-Beijing coalitions such as Australia, Japan and South Korea, also fall into the same category. While these countries view China as a critical threat to their security and territorial integrity, trade ties make these countries economically dependent on China.

While China’s aggressive rise remains the primary strategic and security concern of Southeast Asian countries, the benefits of prosperous trade with Beijing make most Southeast Asian countries think twice. before making a decision that could annoy Beijing.

Therefore, to gain strategic importance in the Indo-Pacific space, it is imperative that India strengthens its own economic capacity and intensifies its regional integration efforts. As the Indian economy is still unable to compete with technologically advanced economies like South Korea and Taiwan, joining any trade deal can prevent domestic industries from collapsing due to the influx of imports. cheaper from other countries under trade agreements. . Given this, the challenge for India is to find the right balance between the two.


(The author thanks Jelvin Jose of the Central University of Pondicherry, for his contributions to the research on this essay.)


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