As India seeks to refashion her trade strategy with due mitigation of global geopolitical conflicts and tensions, Southeast Asia’s importance in the global economy and geopolitical landscape appears to assume particular significance for India.
With a combined economy of $2.5 trillion, the region is a rare bright spot for global growth. Its economic importance is amplified by its vital sea lanes, through which more than half of the world's merchant tonnage and one-third of global maritime traffic transit daily, connecting the Persian Gulf and Indian Ocean to the economic powerhouses of Northeast Asia.
ASEAN’s geopolitical evolution
Geopolitically, ASEAN has outgrown its Cold War roots and its international economic diplomacy strategy has promoted an ASEAN+3 strategy with Japan, South Korea and China, an ASEAN+6 strategy including India, Australia and New Zealand and also a strategy extending into an East Asia Summit including both Russia and the US. ASEAN therefore represents a rare anchor across geopolitical divides.
This is reinforced by the fact, the countries of Southeast Asia have welcomed an engagement from a wide range of external powers to ensure their partnerships are highly diversified. This approach is a deliberate strategy to ward off potential challenges such as overwhelming influence from any single regional power.
Building on India’s long-standing Hindu and Buddhist links with parts of Southeast Asia, ASEAN’s appetite for increased trade and investment with India and the fundamental alignment with India’s strategic autonomy doctrine, the idea of so called Look East policy of the UPA Government updated into the current Government’s Act East policy therefore appear to be promising.
Disruptors of India - ASEAN trade alignment
However, a persistent and widening trade deficit with ASEAN is a symptom of deeper issues. The perceived lopsided nature of the ASEAN-India Trade in Goods Agreement (AITIGA) is rooted in a strategic trust deficit and domestic policy. The slow pace of AITIGA renegotiation compared to the rapid finalization of China-ASEAN agreements has compounded this perception. On average, one-third materials imported by ASEAN economies are imported from China, a share that has nearly tripled between 2005 and 2020.
India’s long-standing economic and strategic relations with Southeast Asian countries has been tested by the region's increasing dependency on China. This dependency creates a shared vulnerability in global supply chains, a risk that India must proactively address. The Regional Comprehensive Economic Partnership (RCEP) was designed to underpin the ASEAN+6 relationship through an FTA. But despite ASEAN’s efforts to retain India in RCEP, India withdrew from RCEP given concerns of dependency on China.
Risk of ASEAN becoming a transshipment point for Chinese merchandise
A more immediate concern, particularly from an Indian perspective, is the risk of trans-shipment. Amid rising US tariffs and China's industrial overcapacity, there is a risk that ASEAN nations could become trans-shipment points for Chinese goods seeking to evade higher levies.
This potential for tariff arbitrage has strained trade relations, prompting India's commerce minister to describe ASEAN as China's B-team, a reflection of a perceived lack of transparency and trust. This issue demonstrates that the so-called "China+1" strategy is not a straightforward decoupling from China but a complex de-risking process. Instead the objective must be to build parallel, resilient supply chains without completely severing deep-seated economic ties with China.
Reimagining India-ASEAN trade
India's potential lies in its capacity to provide high-quality intermediate goods, thereby integrating its own manufacturing strengths into the region's sophisticated production networks. This would transform a competitive relationship into a complementary one.
For example, Vietnam has emerged as a key manufacturing hub for high-tech and luxury goods, with major international firms like Samsung and Apple expanding their production and R&D hubs there. India's exports to Vietnam already include key intermediate products like machinery and equipment, electrical equipment, auto component, pharmaceutical and API, chemicals. This strategic shift from exporting finished goods to providing essential inputs can be replicated in Thailand for the automotive industry, pharmaceuticals and chemicals; and in Indonesia for the EV manufacturing.
The value of such a strategy is that it would help both India and ASEAN countries move up the global value chain (GVCs). Apart from enhancing India’s footprint in GVCs and increasing India’s currently low percentage of global trade, India could also potentially take advantage of lower ASEAN tariff rates relative to those which may be imposed on India in the dynamic geopolitics.
Conclusion
Such a strategy to reinforce India-ASEAN trade would require several pillars backed by revised legal agreements.
First, the India-ASEAN FTA would need to simplify rules of origin, and expand coverage to include services like e commerce. Second, trade facilitation on single window systems and aligning testing standards. Third, consideration would need to be given to the possibility of minilateral agreement between India and select ASEAN partners in pursuit of a joint China+1 strategy that may be more difficult to achieve with the larger grouping of ASEAN. These steps could help promote Indian digital and services trade and give a boost to the business potential of maritime connectivity and logistics with ASEAN.
(Arjun Goswami is Director- Public Policy, Cyril Amarchand Mangaldas.)
Views are personal and do not represent the stand of this publication.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
