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Asean discovers India

Asean discovers India
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First Published: Sun, Mar 21 2010. 09 37 PM IST
Updated: Sun, Mar 21 2010. 09 37 PM IST
It’s hardly news that China is the key driver of South-East Asia’s economic growth. But it may surprise many to learn that the region’s trade with India is actually increasing faster, albeit from a much lower base. The trend suggests that within a few years India could replace China as the main source of export growth.
The top six economies within the Association of Southeast Asian Nations (Asean)—Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam (Asean-6)—did a total of $208 billion in trade with China, whereas their trade with India only reached $43.7 billion. However, it’s notable that for the past two years, Asean’s trade surplus with India was actually larger than its surplus with China.
Asean’s exports to India has picked up considerably since 2000—exports had reached $24.9 billion by 2009, more than six times the 2000 level, rising at a compounded annual growth rate of 23% over the period. This is driven by India’s growing demand for commodities such as petroleum products and palm oil, as well selected capital goods, which implies that much of Asean’s exports are going to support India’s domestic consumption.
This contrasts with Asean exports to China, approximately half of which are used for domestic consumption and the rest for processing and re-exports. Given India’s shortage of natural resources and the fact that its manufacturing sector will take years to develop, this trend should continue for many years.
What is causing this shift in Asean’s trade dynamics within Asia? For China, years of capital investment by local and foreign investors means that it is now capable of producing a much broader range of products than five-seven years ago. As a result, China’s dependence on parts and components from around Asean and North-East Asia is gradually declining.
At the same time, Chinese exports are also making significant headway into Asean. From 2006-09, Chinese exports to Asean-6 grew at an average annual rate of 14%, while its imports from Asean grew only by 5.7%. Hence, the combination of import substitution by China and its expanding exports into Asean has led to the contraction in Asean’s trade surplus.
This shifting balance of trade has important implications for Asia. First, over the coming years, India’s economy and its policies will play an increasingly important role in South-East Asia, as Asean economies seek to diversify their growth drivers. While manufacturers in Thailand, Malaysia and Indonesia are worried about competition from China, South Asia may offer new opportunities as India develops its manufacturing industries. Further expansion of the India-Asean free trade agreement will facilitate this development.
Second, competition from Chinese exporters in the Asean region is on the rise, especially in labour-intensive manufacturing industries. This has already triggered some concerns from Asean manufacturers over the implementation of the China-Asean free trade agreement, which came into force on 1 January. As a result, Asean central banks will be increasingly watchful over the region’s exchange-rate competitiveness compared with China, particularly since it has chosen to virtually peg its currency to the dollar since the onset of the financial crisis.
Third, the ever-expanding trade ties between China, India and Asean will put South-East Asia back on the radar screens of the major economic powers. After all, Asean has a combined economy of $1.5 trillion, equivalent to the economic might of Brazil, Russia or India, and a population of 580 million, double that of the US.
The Wall Street Journal
Edited excerpts. Tai Hui is the regional head of research for South-East Asia at Standard Chartered Bank. Comments are welcome at
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First Published: Sun, Mar 21 2010. 09 37 PM IST
More Topics: Asean | China | India | Trade | Economy |