Hedging Against Beijing: How India and Australia Can Lead

China currently accounts for 30 percent of all global manufacturing output, giving the country an unparalleled grip on global supply chains. Over-reliance on China for critical materials and goods has proven strategically shortsighted especially during the Covid-19 pandemic and during periods of geopolitical tensions with Beijing. In the ongoing visit of Australian prime minister Anthony Albanese to India, China will be on top of the agenda. The India-Australia Economic Cooperation and Trade Agreement (IA-ECTA), which entered into force in December 2022, signals broader efforts by middle powers in the Indo-Pacific, who share stakes in the liberal rule-based system to come together, sort through their differences, expand their economic options, and build their collective resilience against Beijing.  

Dependance on China for crucial supply chains has threatened the economic security and sovereignty of countries for two reasons. First, China has historically been willing to weaponize commercial linkages to achieve its geopolitical ambitions. Australia’s overwhelming economic interdependence on China, which accounted for 31 percent of Australian global trade in 2021, has made Canberra particularly vulnerable to Beijing’s coercive measures. In April 2020, following a series of conflicts between Beijing and Canberra, China imposed sweeping punitive trade restrictions on Australia. Second, Covid-19 pandemic-related spillovers have laid bare the risks of concentrating the manufacture of goods such as personal protective equipment (PPE), computer chips, and medicine in one country. The post-pandemic world order calls for a recalibration of global commercial networks.

The IA-ECTA is a step in the right direction.

The IA-ECTA came into force after more than ten years of negotiation, marking what Indian prime minister Narendra Modi called a “watershed moment” for the Australia-India bilateral relationship. It is projected to increase two-way trade value from $31 billion in 2021 to $40-50 billion in the next five years, and its outcome will be critical for the ongoing negotiation of the Australia-India Comprehensive Economic Cooperation Agreement (AI-CECA), which broadens economic ties beyond goods and services exchanges to include addressing intellectual property rights, digital trade, and a freer flow of people.

Under the IA-ECTA, Australia waives tariffs for about 96.4 percent (by value) of Indian exports, and India grants preferential status for Australian goods on 70 percent of its tariff lines. Regarding trade in services, the pact stipulates that Australia, for the first time, officially grants post-study work rights for Indian students studying in Australia and extends another year of visa status for high-performing STEM graduates. Australian and Indian services suppliers will also gain more access and preferential treatment in each other’s market.

Although the IA-ECTA holds great potential for the economic security and prosperity of both Australia and India, challenges persist for both countries.

China’s outsized role in global manufacturing is reflected by its $4.8 trillion output compared to India’s $443 billion and Australia’s $86.15 billion and is predicated on its ability to rapidly scale up manufacturing with low labor costs, modern infrastructure, a large consumer market, and hefty state subsidies. India in 2023 has many of these important factors. With companies seeking alternative manufacturing hub outside of China, India has an opportunity to expand its manufacturing base, increase exports, and attract manufacturers looking to diversify supply chains outside of China. In addition to low labor costs and an improving business environment, government programs such as the Production Linked Incentives (PLI) and the One District One Product Scheme (ODOP) help address supply side challenges. However, they have their own limitations. PLI schemes have shown limited success and the government, cognizant of this, is monitoring the performance of the scheme. Similarly, ODOP focuses on district level specialization and has inherent problems with scale. The government must ease the passage of medium firms to become large, and micro and small firms to become medium, if it is to scale up its manufacturing. Having a stable trade partner in Australia can help by easing demand side concerns.

While scale is India’s Achilles’ heel, a declining population and skills shortage is Australia’s. Australia relies on a robust immigration system to bridge its workforce gap. Australian home affairs minister Clare O’Neil declared that Australia is in “a global war for talent,” but Canberra’s current visa regime has inhibited its goal to attract foreign talent. On the other hand, India is one of the few countries that has a positive growth in skilled talent. The services provision in the IA-ETCA is thus a promising mechanism for Australia to fill in its talent need. A more comprehensive talent exchange program and open immigration will be instrumental in building people-to-people ties and tackling the talents challenge.

The IA-ECTA, at its core, epitomizes the deepening India-Australia relationship and aims at enhancing India and Australia’s economic competitiveness and resilience. However, post-pandemic economic uncertainties and China’s growing assertive behaviors elevate the geo-economic implications of the IA-ECTA beyond the India-Australia bilateral relationship to regional trade at large. More ambitious and effective India-Australia economic cooperation can point a path forward for countries with shared stakes in the liberal international rule-based order. Other partners in the Indo-Pacific, including Japan, Korea, and Southeast Asian countries, can capitalize on such an effort to branch out and develop economic partnerships with countries other than China.

Lam Tran is a program coordinator for Australia Chair at the Center for Strategic and International Studies (CSIS), Washington, DC.

Akshat Singh is a research associate for the Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (CSIS), Washington, DC.