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India seeks to escape an Asian future led by China

A Flurry Of Trade Talks Herald An Economic Realignment Toward The West.

Indian Prime Minister Narendra Modi and British Prime Minister Boris Johnson pose during a session at COP26 in Glasgow, Scotland, on Nov. 2, 2021. CHRIS JACKSON/GETTY IMAGES

Last week’s launch of formal trade talks between India and the United Kingdom, with the declared ambition to ink a smaller deal in the next few months and a comprehensive agreement by the end of the year, is not much of a surprise. After all, Britain has made no secret of its desperate search for any and all partners to keep trade flowing after it walked out on the European Union.

But if one shifts focus to India and its reasons for pursuing a deal with Britain, things suddenly get more interesting. Even if Britain isn’t among India’s biggest trade partners, the start of talks marks nothing less than several major shifts in India’s foreign and economic policies. If Britain is seeking an economic future beyond Europe, India is looking westward to escape the growing prospect of a Chinese-led Asia.

Although India embraced globalization at the turn of the 1990s, there was little domestic support for liberalizing trade. Opposing free trade agreements united the left and the right; even more powerful was the resistance from an Indian capitalist class reluctant to open its captive market for foreign producers.

In the limited political space they thus had, the weak coalition governments ruling India until 2014 managed to negotiate just a small handful of free trade agreements—mostly with Asian partners, such as Japan, South Korea, and the Association of Southeast Asian Nations.

When Indian Prime Minister Narendra Modi led the Bharatiya Janata Party to power in 2014 with a majority in parliament, his government ordered a review of all the free trade deals India had signed. Despite a strongly held view across India that the agreements worked to the disadvantage of Indian industry, Modi continued to participate in the Asia-wide free trade negotiations that would eventually produce the Regional Comprehensive Economic Partnership (RCEP), but he pulled out at the very last moment in 2019.

If New Delhi’s decision generated deep disappointment among its Asian partners, there was also strong domestic criticism of having isolated India in the global trade domain—a sea change compared to the debate over previous decades. Over the last year, Modi has ended India’s blanket opposition to free trade agreements and returned to bilateral free trade talks with several blocs, including the EU and the Gulf Cooperation Council. The shift wasn’t just toward a new attitude on trade but toward a new set of countries: India’s natural economic partners, especially those in the Anglosphere and the West.

Britain has not traditionally been on the list of countries the Indian establishment has been comfortable with. During the Cold War and afterward, Britain’s presumed tilt toward Pakistan chipped away at New Delhi’s goodwill for London. But the Modi government has transcended hesitations and invested political capital in expanding the partnership by focusing on potential areas of convergence. Trade liberalization has emerged as a major priority with Britain.

In walking away from the RCEP in 2019, India signaled its reluctance to be part of an Asian economic integration led by China. The sharpening border conflict with Beijing as well as the fear of the Indian manufacturing sector being wiped out by cheap Chinese imports contributed to the decision. In the spring of 2020, Chinese aggression in eastern Ladakh reinforced India’s decision.

As it turned its back on the East, New Delhi began to look to the West for trade partnerships, and the Anglosphere seemed the most responsive. It’s not just post-Brexit Britain that began to take a fresh look at India. Australia, reeling under the economic coercion imposed by China, also sought to revive moribund trade talks with India.

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New Delhi’s positive approach to trade with Canberra goes hand in hand with a deepening bilateral and multilateral strategic partnership. Australia appointed former Prime Minister Tony Abbott as a special envoy on trade. Abbott has made frequent trips to New Delhi in the last few months, and the two sides are said to be close to signing an interim agreement in the coming weeks.

In the last few weeks, New Delhi has also intensified talks on trade liberalization with a number of countries including Canada and Israel. A trade deal with the United Arab Emirates is said to be ready for signature. All this is small fry compared to the importance of the EU and the United States. Brussels and Washington contribute more than 10 percent each of India’s annual global trade in goods, which totals close to $1 trillion.

Until last year, Brussels was not even interested in engaging New Delhi on trade discussions; that decision stemmed from a failed effort to negotiate a trade deal with India between 2007 and 2013. A major political effort at revitalizing the Indian-EU partnership in the last two years has resulted in a formal political decision in May 2021 to renew the talks. As the two sides prepare for the negotiations, there will be many hurdles to overcome, and no one is denying the difficulty of arriving at an agreement.

The United States, on the other hand, is not negotiating free trade agreements with anyone at this stage but is engaged with India in overcoming multiple trade disputes that peaked during the Trump years. Despite these difficulties, the bilateral goods trade has continued to grow, reaching close to $110 billion in 2021.

While an Indian-U.S. free trade agreement is not in the cards, there is a recognition at both countries’ highest political levels that they need to urgently complement their growing security partnership with “an ambitious, shared vision for the future of the trade relationship,” as a White House statement put it this past September. The Modi government and the Biden administration have revived the joint trade policy forum, and there is a renewed effort to overcome many disputes.

India’s new enthusiasm for trading with the West has not escaped Beijing’s attention. Reviewing India’s new trade activism, the state-controlled Global Times said New Delhi can’t turn its back on commercial engagement with China. It pointed to the growing volume of bilateral trade, which hit $126 billion in 2021 up by nearly 44 percent over 2020 despite continuing military tensions and New Delhi’s policies aiming to reduce economic exposure to Beijing.

But India can’t ignore the fact that its trade remains massively unbalanced. China’s $70 billion bilateral surplus in 2021 is driven by the fact that India exports mostly raw materials to China and imports mostly manufactured goods. Although India can’t immediately lessen its economic dependence on China, it can certainly deepen economic integration with the West. At home, India can also revive its manufacturing sector to reduce imports from China. Over the last year, New Delhi has outlined a series of incentives to promote manufacturing capacity in India, and access to Western machine tools and production technology will play an important role. Some of the early reviews of these policies are positive, but the full impact will be felt only in a few years.

New Delhi’s post-independence inward economic turn, policy of import substitution, and delusions of autarky saw the steady erosion of India’s trade and investment ties with the West. In the economic reform era that began in 1991, the West has returned to leading positions in India’s trade profile. But New Delhi has long struggled to seize the new possibilities with the West, even as China raced ahead to benefit from its growing access to Western capital, markets, and technology.

India’s political energies went into arguing with the West on first principles, seeking to redefine multilateralism and challenging its leadership of the global trading system. Rather than build on economic complementarity with the West, New Delhi turned to economies in the east that were similar to—and competing with—India’s.

India is now trying to reverse this by finding ways to integrate with its Western partners through free trade agreements. It is also interested in building resilient supply chains among trusted political partners. The economic fallout from Chinese-Western political tensions provides a new geopolitical context for India’s economic realignment. Of course, New Delhi is aware that the West can’t easily reverse the deep interdependence with China that has emerged over the last four decades.

The jury is still out on how well India and the West can translate their new geoeconomic convergence into concrete outcomes. For one, India’s trade negotiators are notoriously recalcitrant. In the West, trade bureaucracies have been attached to the mantra of universally open markets; we have yet to see whether they can shift to selective globalization among like-minded countries and take a strategic approach to commercial engagement with India. The Indian-British trade talks will provide some early answers.

Raja Mohanis a columnist at Foreign Policy, a visiting research professor at the National University of Singapore’s Institute of South Asian Studies, and a former member of India’s National Security Advisory Board.