Emerging Global Trade Themes: Five Takeaways from the India Trilateral Forum

December 17, 2018
Hemal Shah
7 min read
The world’s two largest economies – the United States and China – are currently locked in a multifaceted dispute over the future of industrial development and global trade that is disrupting supply-chain interdependencies and undermining global trade rules.

Partners of the United States have been caught in the crossfire. Will this contest result in the emergence of two distinct trade regimes or a more balanced structure? This post focuses on five related takeaways from the discussions at the 15th iteration of the India Trilateral Forum, which was held in Stockholm on November 28-29, 2018.

China is no longer the elephant in the room

The Trump administration’s approach to Chinese trade practices has certainly changed the general rhetoric on trade, not only in capitals around the world but in policy communities as well. For many years trade distortion by China was talked about as almost an accepted reality; this year, participants spent more time discussing distinct ideas to address its unfair trade practices.

As the world’s fastest-growing large economy and robust democracy, India is a natural bulwark. However, it is not fully integrated into the global supply chains yet unlike the EU and other economies. While this may protect India from the repercussions of the U.S.-Chinese trade war, it should not wait for competition or coercion from China to overhaul its own trade posture. The time for India to integrate into the global system and restructure its trade partnerships is now.

The United States and the EU would benefit indirectly from India’s participation in trade agreements, with or without their own participation, simply as a result of India’s robust economy and democratic institutions. Specifically, the Regional Comprehensive Economic Partnership (RCEP) would raise trade standards by potentially instituting stronger intellectual property rights and reduced tariffs. However, while bringing tariffs down would be helpful for like-minded partners who trade with India through RCEP, it would render Indian exporters uncompetitive against Chinese ones. Instead of blocking or containing China, India could focus on strategic bilateral and trilateral free trade deals or informal reduction of trade barriers, selectively with like-minded partners, to reduce their dependence on China.

A lot will depend on India’s economic and leadership capital

India is estimated to grow at 7.3 percent in 2018, with a projected growth of 7.4 percent in 2019. Its economy is likely to surpass that of the United Kingdom as the world’s fifth-largest in 2019. With more than half of its 1.3 billion people below the age of 25, India is uniquely positioned to capitalize on its impending demographic dividend. Its economic heft in the global growth engine matters and cannot be ignored.

The policy of Prime Minister Narendra Modi’s government on demonetization and introduction of the goods and services tax, along with falling oil prices has contributed to a slight economic downturn. In May 2019, India will hold its next national election and participants discussed potential voter preferences that would chart out the country’s future for the next five years. One panelist argued that the middle class is likely to vote on the successful rollout of initiatives like the universal healthcare scheme, construction, access to public toilets, and affordability of cooking gas. The spread of misinformation on social media platforms could also affect the elections. Most participants agreed that, despite his failure to live up to his 2014 campaign promises, voters are more likely to judge Modi based on their “lived” experience, which has been positive overall for the burgeoning middle class.

The U.S.-Indian relationship should stand the test of time

As a panelist noted, the only time China pays attention to India is when Washington smiles at New Delhi. A strong U.S.-Indian relationship bound, in part, by trade emerged as a matter of important consequence, potentially to offset over-reliance on trade with China. Currently, the United States and India are negotiating a trade deal encompassing the removal of tariffs and price ceilings on a of goods. India cares deeply about agricultural products and easier movement of skilled professionals between borders as part of its quest to simplify trade in services. While the countries continue to feud on matters of intellectual property protection, India is taking steps in the right direction, with the spotlight shifting to the anti-innovation dynamic emerging from some countries.

A robust U.S.-Indian trade deal could bind the world’s oldest and largest democracies closer. It would enhance India’s ability as the democratic economic counterweight in Asia with the United States as a key partner. Both countries and other like-minded ones could adopt a strategy of balancing without containment by trading on freer and fairer terms with each other, particularly as the United States aims to renegotiate trade deals with all its important partners. There remains bipartisan support in Congress about addressing China’s unfair trade practices, but also full support for increasing trade with India. Referring to Washington’s reassessment of India as a beneficiary under the Generalized System of Preferences on the pretext of market access barriers, one panelist called for a path forward with a vision of dynamic trade as opposed to static trade.

The emerging strategy of the EU in the Indo-Pacific

The forum began with an immediate consensus that the Eurasian supercontinent is real. While the EU has always enjoyed ties with the United States, it shares an entire border with Asia and therefore a growing stake in the geo-economic calculus as it relates to the Indo-Pacific. While the EU’s role in the Indo-Pacific is not a new concept, it would benefit from further strategic convergence. Experts agreed that it was important for the EU to work particularly with India to build institutions toward a rules-based order vis-à-vis the changing postures of China and Russia in the region.

To reinforce the idea of a strategic partnership, the European Commission released a new study on the “Elements for an EU Strategy on India,” on November 20. Realizing the untapped potential of the trade and investment relationship is a key element of this strategy: “Considering the size of the two economies, these figures fall short of the potential of two-way trade between the EU and India. The EU and India should pursue a proactive approach to enhance their trade and investment relations.” One of the participants noted that comparing trade between India and the EU with that between India and ASEAN would be a good benchmark and way forward to bolster regional trade partnerships.

Potential to strengthen trade through regional connectivity

The forum also discussed the implications of China’s strategy to draw the distant neighborhood closer to its orbit through the Belt and Road Initiative (BRI). The BRI underscores global trade and commerce on Beijing’s terms by demonstrating the scale and scope of its promises, with potential funding for infrastructure projects spanning more than 60 countries. Participants discussed the interaction between sovereignty and debt traps, particularly pointing to the case of Sri Lanka, and argued for a counterstrategy.

Policymakers should pay serious attention to strengthening regional connectivity between South and Southeast Asia in the context of the BRI. Currently, the roads under construction are unable to withstand any robust trade by land and existing roads need serious upgrades. As for maritime connectivity, both the United States and the EU could help develop India into a major logistics hub in the Indian Ocean region – a passage for 40 percent of global trade. Japan is already at the forefront of this. In fact, the U.S. government is also working closely with the private sector to catalyze commercial investments in the Indo-Pacific region. It was encouraging to note that the EU now also has a renewed focus on its Indo-Pacific strategy; meanwhile, the United Kingdom is already making concrete post-Brexit plans to bolster its geo-economic presence in the region.

Overall, speakers and discussants agreed that, while it cannot be ignored, China cannot be contained either. Strategic trade partnerships could inject the right balance without containment. Policymakers will also have to work hard to make a case for trade deals as a means to create jobs and build support for them at home. Realistically, if the United States and the EU saw India as a fulcrum to their Indo-Pacific strategy, they would also need to internalize that for the next decade India will not adopt a binary position on China. This reinforces the argument for building support for a stronger India. All agreed that sanctions for cathartic purposes should be avoided – there is no politically palatable quid pro quo. Eventually, policymakers and thought leaders need to graduate from defending shared interests to shared values – a big area of convergence for building institutions, bolstering trade, and boosting shared norms.

Hemal Shah focuses on trade policy covering India and emerging markets based in Washington, D.C. She was a scholar with the German Marshall Fund’s Young Strategists Forum in 2017.