Australia, India move toward free trade pact to cut China dependence

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 Australia and India are expected to reach an interim free trade agreement as early as this month as both countries seek to diversify trade to cut their economic dependence on China.

The so-called early harvest deal would lower tariffs on some goods and take other steps in advance of a full FTA. It would cover goods, services, rules of origin and customer procedures, among other areas, according to India’s Ministry of Commerce and Industry.

Looming in the background of the negotiations is China, Australia’s top trading partner and India’s main source of imports. Both countries saw relations with the Asian economic powerhouse deteriorate over the past several years.

New Delhi is trying to increase trade in textiles and jewelry with Australia, while Canberra seeks greater flows of pharmaceuticals, coal and rare earths, said Abhijit Mukhopadhyay, senior fellow at the Observer Research Foundation, an Indian think tank.

India’s top goods exports to Australia in 2020 were oil, pharmaceuticals, diamonds and precious metals, according to the International Trade Center. Coal accounts for about 80% of Australia’s exports to India, followed by copper and scrap iron.

A tentative agreement could add momentum to negotiations on a full-fledged FTA by creating a track record of expanded trade.

Indian Commerce Minister Piyush Goyal said in mid-February the tentative agreement would be announced in 30 days. The two countries would then aim to reach a formal FTA, known as the Comprehensive Economic Cooperation Agreement, a year after that.

Both Australia and India have suffered trade friction with China.

Australia’s call for an independent investigation into the source of the COVID-19 pandemic heightened tensions with Beijing. China later restricted imports of Australian meat and coal and imposed high tariffs on wine and barley. China was Australia’s largest trading partner, taking in 35% of Australian exports in the year to June 2020. This creates a sense of urgency in Canberra for diversifying export markets.

For India, China is the biggest source of imports, with $87.4 billion in 2021. Indian dependence on Chinese-made electronics and other industrial goods is high. Tensions between India and China remain elevated after a deadly clash along their disputed Himalayan border in 2020. While Prime Minister Narendra Modi’s government seeks to create areas of self-sustaining economic activity within India, weaning the country’s manufacturing sector off Chinese imports remains a challenge.

Australia and India, along with Japan and the U.S., have deepened their security cooperation through Quadrilateral Security Dialogue, or Quad, with leaders holding a virtual meeting as recently has March 3 to discuss the Russian invasion of Ukraine. Goyal has said collaboration as part of the Quad has also strengthened the Australia-India economic relationship.

Still, barriers to a full-fledged FTA remain. After initial participation, India decided against joining the Regional Comprehensive Economic Partnership, a newly minted trade megadeal that includes China and Australia. Behind this is a sense of caution about opening up India’s markets for dairy and other agricultural products to Australian competition.

Given the Modi government’s concern for farmers, the FTA will likely focus less on agricultural products and more on trade in services and investment, said David Brewster, a senior research fellow at Australian National University. -NikkeiAsia