India and ASEAN are growing apart. Blame tariffs

By Mihir Sharma

It’s still far from clear what President Donald Trump’s tariffs will eventually look like. But the pressures they will put on stable trading relationships — even those that don’t directly involve the US — are already visible. Ties between India and the 10-member Association of Southeast Asian Nations are already fraying: They’re being pushed into different camps, and the free-trade agreement they signed in 2010 could become an unexpected victim of the turmoil.

Trump might be the immediate cause of this rift, but, as always, China’s massive manufacturing overcapacity is at the heart of the problem. Even if no country knows what rates they or others will face, everyone can be reasonably certain that the mainland’s tariffs will be the highest of all. Unfortunately, this also means that there’s a big incentive to help Beijing game the system enough that we all trust each other less.

Many Asian countries are reasonably pleased at the thought that duties on their exports will be lower than on those out of China: They’ve all been searching for a way to regain a sliver of competitiveness, and this might help. But the same nations are also a little scared. They fear a flood of underpriced Chinese goods, once meant for the US, will inundate their fledgling manufacturing sectors.

In fact, that’s already happening to an extent, and policymakers are responding. Vietnam has introduced anti-dumping tariffs on certain kinds of Chinese steel; Indonesia has banned direct-shipping e-commerce apps like Temu.

But, for some, there’s also the tempting possibility that China’s overcapacity can be turned from an enemy into an ally. Any country that remains integrated both with China and those that are putting up tariff walls could, if it wanted, become a location for the trans-shipment of goods. Instead of paying the higher China levies, importers would pay lower ones imposed on the third country — and share a bit of the take with local partners.

Tariff arbitrage could become as profitable in the future as interest rate arbitrage is today. The more countries that impose anti-dumping duties on China, the more money the successful trans-shipper would make. The US, for one, is already very concerned that parts of Asean might take this route — which is why Trump’s trade deal with Vietnam included a clause that any goods suspected of being trans-shipped would pay double tariffs.

For countries like India, it’s an even greater fear. India’s commerce minister caused a bit of a stir recently when he described Asean as “China’s B-team.” That was certainly impolitic. But, perhaps, not entirely unjustified.

New Delhi has been trying to update its free trade agreement with Asean for a while. Its particular focus has been to tighten rules-of-origin requirements — the way in which you ensure that a free trade agreement only benefits local producers in both countries, not those shipping goods that originate elsewhere.

Indian officials feel that Asean has been going slow on these discussions. Meanwhile, news broke in May that the bloc had expanded the scope of its parallel FTA with China. They achieved that in double-quick time — negotiations only started in November 2022 — which raised a few eyebrows in New Delhi.

Some in India, clearly including its commerce minister, now seem to think that tariff-free trade with Southeast Asia is the same as opening your market to China. That isn’t true — or, at any rate, not yet. But the fact is that member states simply aren’t doing enough to reassure their other trading partners, including India.

It would be a nightmare for most countries, including India, if closed-off blocs were to replace today’s open trading system. Yet Trump’s actions, when combined with China’s overcapacity, are taking us there. Any country that wants to trade with both sides of the divide — which, clearly, many in Southeast Asia would prefer — will also need to be able to be very transparent about the goods it is exporting, and how much value has been added domestically. In other words, it’s Asean’s move: They will have to step up and give most of their trading partners, not just India and the US, a clearer view into their supply chains.

The US is clearly worried that some countries will evade its tariffs. Those concerns will be shared, especially by India. New Delhi seems to believe that, if world trade blocs form, then Asean has already chosen its side — and it won’t be the one India picks. Trade’s impossible without trust, and these two partners will have to work to rebuild it.