India Plays Hardball With ASEAN After $45 Billion Trade Disaster

India’s trade relationship with the Association of Southeast Asian Nations (ASEAN) is at a critical juncture, as the nation grapples with a staggering $45 billion trade deficit in fiscal year 2024-25. With the ASEAN-India Free Trade Agreement (AIFTA), signed in 2009, under scrutiny, the Modi government is adopting a hardline stance, threatening to exit the pact unless significant reforms address unfair trade practices and market access issues. This blog explores the roots of the trade imbalance, India’s strategic pivot, and the broader implications for its economic and geopolitical relations with ASEAN.

The $45 Billion Trade Deficit: A Growing Concern

The AIFTA was intended to boost economic cooperation between India and ASEAN’s ten member states—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam—by reducing tariffs and enhancing market access. However, the agreement has disproportionately benefited ASEAN, with bilateral trade reaching $123 billion in 2024-25 but leaving India with a trade deficit that ballooned from $5 billion in 2010-11 to $45 billion today.

India’s exports to ASEAN grew sluggishly at a compound annual growth rate (CAGR) of 2.43% between 2014 and 2023, compared to ASEAN’s imports from the world at 3.45%. Meanwhile, India’s imports from ASEAN surged, with top import sources including Indonesia, Singapore, Malaysia, Thailand, and Vietnam. Key imported products—fuels, electronics, vegetable oils, and machinery—account for 89% of India’s imports from ASEAN, while its exports, concentrated in fuels, machinery, and organic chemicals, have struggled to penetrate ASEAN markets effectively.

A significant concern is the rerouting of Chinese goods through ASEAN countries, exploiting weak rules of origin in the AIFTA. This has flooded Indian markets with low-cost Chinese products, undermining domestic industries. Commerce and Industry Minister Piyush Goyal has called ASEAN “China’s B-Team,” highlighting suspicions that Chinese investments in ASEAN, which reached $15.4 billion in 2022, are facilitating this circumvention.

India’s Hardball Strategy

Frustrated by nine rounds of inconclusive negotiations to review the AIFTA, India is now signaling a willingness to walk away if the tenth round, scheduled for November 2024, fails to deliver. The Modi government is pushing for:

• Stricter Rules of Origin: To prevent Chinese goods from being rerouted through ASEAN, India demands tighter regulations to ensure only ASEAN-origin products benefit from tariff concessions.
• Improved Market Access: Indian exporters face non-tariff barriers in ASEAN markets, limiting growth in sectors like textiles, leather, and agriculture. India seeks reciprocal access to ASEAN’s $3.9 trillion market.
• Service Sector Inclusion: India’s service exports, valued at $24 billion to ASEAN, are underexploited. The government is advocating for greater integration of services, particularly in IT, healthcare, and education, to balance trade.
• Protection for Domestic Industries: Aligning with the “Make in India” initiative, India aims to adjust tariffs to shield nascent sectors like electronics and manufacturing from cheap imports.

This tough stance reflects a broader shift in India’s trade policy under Modi. Unlike the “gentleman’s agreement” of the UPA era that prioritized free trade idealism, the current approach is pragmatic, focusing on national interests. India’s recent successes in securing trade deals with the UK (2025) and the UAE (2022), alongside ongoing negotiations with the EU and Australia, underscore its growing confidence as a strategic negotiator.

The China Factor

China’s growing economic influence in ASEAN complicates the situation. ASEAN’s trade with China reached $722 billion in 2022, making it the bloc’s largest trading partner. Chinese foreign direct investment (FDI) in ASEAN, particularly in manufacturing sectors like electronics and automotives, has surged, with Vietnam and Indonesia receiving 56% of China’s $10 billion annual FDI from 2018-2024. This has enabled ASEAN countries like Vietnam to become key nodes in global supply chains, outpacing India’s manufacturing competitiveness, where logistics costs (14% of GDP) remain higher than ASEAN’s 5-10%.

India’s Ministry of Commerce has initiated anti-dumping investigations, such as one against Vietnamese steel products, to curb the influx of Chinese goods. The Economic Survey noted that Chinese firms are rerouting supply chains through ASEAN to bypass tariffs, a concern echoed across the region, with Vietnam also implementing anti-dumping measures against China. India’s decision to opt out of the China-led Regional Comprehensive Economic Partnership (RCEP) in 2019 was influenced by these dynamics, as it feared further trade imbalances.

Implications for India-ASEAN Relations

India’s hardball approach risks straining ties with ASEAN, a key partner in its Act East Policy and Indo-Pacific strategy. ASEAN accounts for 11% of India’s global trade, with Singapore as its largest ASEAN trading partner and FDI source ($164 billion from 2000-2024). Terminating the AIFTA could disrupt access to ASEAN’s 678 million-strong market and affect sectors like agriculture, where India’s bovine meat exports have already declined due to domestic policies.

However, deeper integration could yield mutual benefits. ASEAN’s digitalizing economies offer opportunities for India’s IT and fintech sectors, while initiatives like the ASEAN-India Science and Technology Development Fund and the 2025 ASEAN-India Year of Tourism (backed by India’s $5 million commitment) signal continued cooperation. Infrastructure projects like the India-Myanmar-Thailand Trilateral Highway, though delayed, could enhance trade flows if completed.

Geopolitically, ASEAN is a strategic counterbalance to China in the Indo-Pacific. India’s maritime security collaboration through the ASEAN Regional Forum and its SAGAR doctrine (Security and Growth for All in the Region) aligns with ASEAN’s interests. Walking away from the FTA could weaken this partnership, pushing ASEAN closer to China.

Global Context: Trump’s Tariffs and Trade Shifts

The India-ASEAN tensions coincide with global trade disruptions, particularly U.S. President Donald Trump’s proposed tariffs in 2025, which could impose up to 49% duties on ASEAN exports to the U.S. (e.g., Vietnam’s $105 billion surplus). This has prompted ASEAN to diversify trade partners and deepen regional integration via the RCEP and upgraded ASEAN Trade in Goods Agreement (ATIGA). India’s push for AIFTA reforms aligns with this trend, as it seeks to protect its economy amid rising protectionism.

Looking Ahead

The outcome of the November 2024 AIFTA review talks will be pivotal. If ASEAN addresses India’s concerns—tightening rules of origin, reducing non-tariff barriers, and expanding service trade—bilateral trade could double to $300 billion by 2030, as projected by the PHD Chamber of Commerce. Failure to reach an agreement may lead India to prioritize bilateral deals, such as with Singapore or Indonesia, where trade reached $38.84 billion in 2023.

India’s stance is not isolationist but pragmatic, balancing domestic industrial growth with global integration. As Commerce Minister Goyal stated, India will not play by “one-sided rules.” The ASEAN FTA must evolve to ensure fair trade, or India may walk away, reshaping its economic and strategic ties in the Indo-Pacific.

Sources: News18, The Indian Express, ORF, ASEAN Briefing, Business Standard, Posts on X