The India-Australia trade relationship: an attempt to counter China?

India and Australia signed a bilateral association in 2009, and it has been almost a year since their relationship was elevated to a Comprehensive Strategic Partnership. Growing concerns about China’s military assertiveness in the Indo-Pacific region have strengthened bilateral ties between India and Australia. This association is not limited to talks but has resulted in key projects to strengthen technology diplomacy between the two countries. In addition, the strategy also emphasizes the Mutual Logistics Support Agreement (MLSA) to enhance global defense operations. The development of the India-Australia partnership has been rapid in recent times and is expected to strengthen in the coming years.

Looking back

India and Australia are both key poles in the Indo-Pacific region. However, there has been a growing convergence in the areas of security and economic relations in recent times. There is a mutual interest in ensuring regional security and stability. Although there have been pessimistic views of the India-Australia relationship, it has been steadily growing in recent years. China’s expansion in the Indo-Pacific region is creating shared concerns that did not exist before.

The early 2000s marked the beginning of bilateral security cooperation, followed by the conceptualization of the Quadrilateral Security Dialogue (“QUAD”) in 2007. The grouping’s perspective (the United States, Australia, Japan, and India) appeared to counter China’s growing maritime strength but lacked clear objectives. Various intra-quadrilateral meetings, “mini-lateral” and multilateral exercises were carried out with Japan and India as crucial nations. However, critics argue that this is a rather informal grouping, without an institutional framework, and lacking in concrete results.

China’s coercive behavior and threats to its security after 2015 led to the resumption of QUAD in 2017, following regular senior official and ministerial-level meetings. The military exercises as an outcome of QUAD have undoubtedly renewed the foundation of the India-Australia relationship. US Secretary of Defense James Mattis has stated that the four key areas in which QUAD can be the crucial group – maritime security, supply security, technology and diplomacy.

Bilateral trade between India and Australia has steadily grown from $13.6 billion in 2007 to $30.4 billion in 2018. Since the Comprehensive Economic Cooperation Agreement (CECA).  However, negotiations have been suspended to re-engage with India to propose Australia’s economic strategy in 2018 under Prime Minister Modi. Both nations have identified key sectors and priority areas that have the potential for trade. In addition, close engagement on the strategic front should fuel economic ties. However, a strong trade relationship must be based on a mutual willingness to negotiate for the long term.

In 2018, India was the eighth largest trading partner and fifth largest export market. Prior to the current economic roadmap, India and Australia had economic differences, with India leaving the Regional Comprehensive Economic Partnership (RCEP), an agreement between ASEAN nations and their free trade agreement (FTA) partners. Australia has a comparative advantage in agriculture and has negotiated access to the Indian market, while India has imposed various trade barriers in agriculture to protect 50% of the population engaged in this sector.

The China factor

China accounts for 26.4 percent of Australia’s total global trade in 2019 and is the top export destination. As the largest bilateral trading partner, China’s trade jumped to $230 billion in 2018-19. Australia has exported more to China than it has imported. In 2019, exports to China accounted for A$151,504 million and imports accounted for A$81,052 million.

The diplomatic relationship between the two nations dates back to 1973 and has established ties based on strong commercial ties. The China-Australia Free Trade Agreement (ChAFTA) came into effect in 2015 to strengthen economic engagement and leverage competitive advantage.

Despite thriving trade ties over the years, diplomatic friction existed in the past. Many observe Australia’s call for an international investigation into China’s handling of the Covid-19 pandemic as the critical bump in the road that created a series of trade disputes. However, Canberra has spoken out about Beijing’s actions in the South China Sea and its political interference. Australia has sought to reject multiple Chinese investments on national security grounds. Multiple episodes over the years have subtly deteriorated relations between the two nations.

At the time of the pandemic and the global economic downturn, China imposed $20 billion worth of tariffs on Australian imports such as wine, beef, barley, etc. The informal ban on thermal coal and the indefinite suspension of economic negotiations show that relations have reached a new low. The economic consequences of this damaged partnership cannot be overstated. For Australia, China is the largest export market for iron ore. Similarly, China is the top export destination for services such as education-related travel, contributing 53 percent of total exports in 2016. In 2018, Australia was the first nation to issue safety guidelines to prevent the purchase of the fifth generation (5G) from Chinese company Huawei. A subsequent series of episodes of Australia’s commentary on China’s treatment of Xinjiang Uighurs has deeply affected Canberra’s bond with Beijing.

Much of the trade conflict appears to be one-sided, with China taking a more aggressive stance by imposing tariffs and limiting discussions with Australia. The economic cost of this political divergence appears to be weighing more heavily on Canberra. The trade dispute could potentially reduce Australia’s GDP by 6 per cent and lead to a 14 per cent drop in real per capita disposable income.

Even China, which imports two-thirds of Australia’s iron ore, has imposed restrictions on only a few other items to express its diplomatic displeasure. This is evident as China still takes a substantial 37.28% share of Australia’s total exports in March 2021.

Repairing and rebuilding the relationship is an inevitable action given the economic interest, but the timeline is unclear. Australia has been making progress on thermal coal exports to India since friction with China escalated in mid-2020.  Australian coal exports in April 2021 saw an increase of $287 billion, driven by exports to India which saw a 167% increase.

Is India bound to replace China?

Beijing’s activities have cost Australia nearly $3 billion in lost exports in the recent past. Under the impact of the global economic downturn due to Covid-19, Australia is looking for a replacement market. It may be a mistake to think that India can completely replace China. It is true that Australia is trying to make up for losses due to trade frictions. It has also managed to secure a larger market share by competing with Indonesia in the export of iron ore to India.

The trade deficit between Australia and India amounts to $12 billion, largely in Australia’s favor. This deficit is viewed with suspicion by India, although Australia exports intermediate goods that can contribute to the production process. Australia contributes 71% of India’s metallurgical coal imports and 4% of thermal coal imports in 2018.  From India’s perspective, mineral fuels, distillation products are exported to Australia, contributing a 5.5% share of Australian imports.  Despite the growing trade momentum, there is still an asymmetry in trade gains. As of March 2021, India still accounted for only 4% of the total value of Australian exports.

The relationship between India and China also reached a new low after the Ladakh border clash and New Delhi’s decision to ban 59 Chinese applications. Although both India and Australia depend on China for their economic prospects, they share a mutual hostility towards it. This situation has encouraged India and Australia to establish a fundamental relationship centered on critical technologies.

As a services-based economy, India is the third largest market for services exports, with a two-way investment stock of $36.7 billion. Australia also strives to build people-to-people links and has launched the Australia-India Business Exchange (AIB-X) program to strengthen a holistic relationship with India. In a bid to make them even closer and stronger, they have signed a $12.7 million pact on critical technology development over the next 4 years. It is said that this project will be funded by both governments with the main aim of strengthening cyber resilience. This agreement will also aim to bring ethics, business management and sustainability closer to both sides.

Both India and Australia stand to benefit from this long-term technology partnership. This ambitious economic strategy is an important step for the new relationship that is being built on defensive ground. China may indirectly be the undeniable factor that fuels the bond between the two nations, but the friendship will only be sustainable if the economic foundation is solid. There is reason to be optimistic about India and Australia at this stage, a partnership aimed at creating a balance of power in the Indo-Pacific region.

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