The politics of “congagement”

Both China and India have been active in regional trade negotiations in the past decade. Their interest in regional agreements coincides with the stalemate of the WTO’s Doha Development Round. At the same time, the rise of Asia in general appears to have brought forth competition between its two champions. In any case, economic ties and trade cooperation in East Asia have been growing steadily.

A new regional order is emerging due to the decline of American influence. This decline has led to a growing sense of a vacuum both in terms of security and economic affairs. China and India are trying to fill such gaps, whether by aggressive territorial claims or actively pursuing trade agreements. Washington is not giving up though, as is evident in President Barack Obama’s recently re-emphasised interest in a Trans-Pacific Partnership involving nations on the eastern and western shores of the Pacific.

As the USA and the EU face their own domestic economic woes, howeer, India and China have to diversify trade relations and reduce their dependency on western markets. For this reason too they are engaging Asian governments. Closer interaction with the 10 nations of ASEAN (the Association of South East Asian Nations) has been at the core of such efforts. Both China and Inida have signed Free Trade Agreements (FTAs) with this regional organisation.

China’s approach towards regionalism has been driven by its own economic growth, the shift of power in the global world order and its own domestic concerns. For India, the need to boost its own economic growth and the desire to assert itself on the global stage are crucial motivations. All summed up, China’s and India’s trade deals show a diversification of trade relations, with the attention shifting from the US and Europe to emerging markets. The global financial crisis, which has affected the USA and the EU in particular, has played a huge part in making this happen. Both countries’ foreign policies, however, can only be fully understood in the context of inner-Asian power relations. The two rising giants, moreover, do not only have a history of competition; in global settings like the WTO or the G20, they also have a track record of cooperation.

Beijing’s interests

China is acting increasingly assertive. This is evident in territorial disputes in the South China See as well as in its support for setting up ports and navel bases in the Indian Ocean. China, moreover, is also involved in undersea resource extraction in the Indian Ocean. China is thus testing its relationships with various members of ASEAN and India.

At the same time, CAFTA (the China-ASEAN Free Trade Agreement) has become the third largest FTA in the world, behind the EU and NAFTA (the North American Free Trade Area). Bilateral trade between ASEAN and China reached $ 293 billion in 2010. The aspiration is to reach a trade volume of $ 500 billion by 2015 and to strengthen regional supply chains within a single China-ASEAN market. In Chinese eyes, CAFTA is complemented by the ASEAN Plus Three framework, which also includes Japan and South Korea and is meant to become a Free Trade Area of the Asia-Pacific (FTAAP) in the future.

CAFTA negotiations began in 2001 and triggered a rapid “domino effect” of FTAs being signed or initiated in Asia (Baldwin and Carpenter 2010). China has since concluded FTAs with Pakistan, Chile, New Zealand, Singapore and Peru. These deals have proven highly lucrative for China. Bilateral trade between China and Singapore soared to $ 74.5 billion in 2010, while the Chinese-Chile FTA gives the People’s Republic access to raw materials from Latin America.

China is under pressure from the US to revaluate its currency, the Yuan. Washington is threatening to impose tariffs and thus start a trade war. Beijing wants to diversify its trade relations in order to maintain its current model of export-driven economic growth without succumbing to US pressure. CAFTA is big enough to serve as a bloc that can resist external shocks.

While China has reaped significant economic gains from its bilateral FTAs, its foreign policy motives are relevant too. As initiator of the CAFTA, China benefits from the agreement in political terms since CAFTA is likely to dilute American influence in the region (Sheng 2003). Through CAFTA, moreover, China can build trust with its neighbours even though it is simultaneously expanding its armed forces. Seen in this light, China’s FTA policy appears to be driven by a desire to expand the Chinese sphere of influence. Indeed, FTAs are not merely economic arrangements, they are tools for regional diplomacy too. At first glance, China’s diplomacy looks contradictory. By flexing its military muscle in the South China Sea, Beijing is provoking its neighbours. In contrast, intensification of trade relations is an expression of the desire to improve relations with the very same neighbours. Considered from the viewpoint of national interests, China’s military and trade policies are indeed complementary. Both serve to maximise the People’s Republic’s gains and influence.

As Lord Palmerstone, a former British prime minister, famously noted, nations have neither permanent allies nor permanent enemies. They have permanent interests. China’s diplomacy is interest-driven, and attempts to predict the country’s future actions in trade and foreign affairs must take this into account.

Looking east

India’s relations with its trade partners are similarly driven by both economic and political motives. India embarked upon its Look East Policy (LEP) in 1991. The idea was to strengthen ties with East and Southeast Asian countries and the region at large. LEP has not only been viewed as India’s bid for greater regional standing, but also as a way to counter Chinese influence. Given the dismal progress of the WTO’s Doha Round, moreover, it made sense for India to move on beyond multilateral engagement.

Despite being a late entrant in the game, India has managed to sign several FTAs in Asia with partners, including the one with ASEAN and others with individual nations like Japan, South Korea, Malaysia and Thailand. Like China, India too has developed stronger links to Latin America thanks to preferential trade agreements (PTAs) with Chile and MERCOSUR (the regional organisation of Brazil, Argentina, Uruguay and Paraguay). PTAs are typically less comprehensive than FTAs, but generally designed to grow into full-blown FTAs eventually.

The Indian government knows that it needs allies beyond the USA and the UK and that its relations in its immediate neighbourhood are difficult – especially the one with Pakistan. Trade relations between India and Pakistan have recently improved, driven probably by Pakistan’s desire to jump start a faltering economy. Closer economic ties may lead to better political relations, which would be beneficial, not at least in the sense of making war less likely in South Asia.

Beyond “Just do it!”

As a rising power, India is working on consolidating its position in the entire region. It did not need President Obama’s exhortation last year to not just “look east”, but actively “engage the east”. His statement was certainly encouraging however. No doubt, India and the US share an interest in containing China’s influence. While India’s rush towards FTA’s made political sense, however, it was long viewed with scepticism because it seemed to lack a clear economic strategy. India was looking east in what resembled something of a Nike Strategy: “Just do it!” More recently, however, it has become evident that India’s economic pacts with Asian partners are increasingly striving to be exhaustive in terms of coverage of sectors and scope for trade.

India is keen to make its agreements go beyond the trade in goods to the exchange of services, investments and labour. This widens the scope of FTAs and allows deeper integration of India’s domestic markets with those in the region. Doing so is essential to counter or match China’s growth in the region.

Today, economic affairs tend to trump politics. India’s engagement of ASEAN may offer an opportunity for deeper integration with Southeast Asia. The ASEAN-India Free Trade Area has a combined population of 1.8 billion and a GDP of $ 2.75 trillion is one of the largest in the world. However, India’s total trade with ASEAN is a mere 2.5 % of ASEAN’s total trade volume. China’s is 11.6 % as per 2010 ASEAN statistics.

India obviously has quite a bit of catching up to do. The country’s engagement with ASEAN as an entity is essential, but Delhi has realised that individual ties with ASEAN members will help to achieve more trade and thus gain an edge over China. To this end, India has a chance to build upon its comparative advantage in services, of which ASEAN is a net importer. In this sector, China is not as strong a competitor.

Unlike the other emerging giant, moreover, India is excluded from emerging institutions like CAFTA, ASEAN Plus Three and APEC (Asia Pacific Economic Cooperation, a forum for nations on the Pacific’s shores). Accordingly, India’s participation in the East Asia Summit (EAS) right from the beginning in 2005 was a significant success for LEP. The EAS unites the ASEAN countries with Japan, China, South Korea, Australia and New Zealand. India was accepted into the EAS despite objections from China, which insisted on the ASEAN Plus Three setting.

That India prevailed certainly reflects the interest of other Asian nations to counterbalance the influence of the People’s Republic. Stronger ties to these nations, of course, also serve some of India’s long standing foreign policy objectives, such as gathering support for a permanent seat in the UN Security Council.

Congagement

The convergence of economic and politic interests has resulted in a proliferation of trade agreements in Asia. These agreements are driving the process of regional integration. As rising powers seek to expand their spheres of interest, smaller powers stand to gain from this renewed competition between India and China.

The “congagement” – the simultaneous containment and engagement – between the two powers is likely to shape the future of the EAS and other regional institutions (Muni 2006). Challenges on the way to closer integration include lacking political will and geopolitical considerations. The future of East Asian trade relations depends very much on national interests of the two Asian giants, and how they go about pursuing these interests. It is comforting, moreover, that China and India, two seemingly natural antagonists, share the experience of cooperating with one another in global forums. For instance, they have assumed an identical stance on issues such as climate change and trade.