Changing winds in the Indian Ocean

This was the first FTA for Maldives and the 16th FTA for China. (Image/Reuters)

By Amitendu Palit

Trade Agreements are about enhancing access of parties to each other’s domestic markets and goods and services. But they can also be major political tools. A classic example is the free trade agreement (FTA) between China and Maldives.

China and Maldives had signed a bilateral FTA on December 7, 2017. This was the first FTA for Maldives and the 16th FTA for China. Though the Maldives Parliament had passed the FTA, it wasn’t eventually implemented following a change of government in Maldives. The then incoming government under President Mohamed Solih had held off from passing laws that would have brought into force the preferential tariffs mandated by the FTA. As a result, the FTA didn’t take off.

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The recent elections in Maldives have brought in a new government. Current President Mohamed Muizzu is widely visualised as a pro-China leader while being close to former President Abdulla Yameen, during whose leadership the FTA with China was signed. The current president has insisted on India withdrawing its military presence from the island. While it is perhaps too early to conclude about whether Maldives will take an anti-India turn, the country is certainly looking to reduce its strategic dependence on India and widen its network of partners. China is an obvious choice in this regard. This makes the prospects for the stalled FTA considerably bright. The commencement of the FTA will have some concerns for India.

The first concern is the decisive strategic benefit and ability to ‘influence’ that the FTA will bring for China. The structural economic asymmetries and difference in trade capacities between Maldives and China are too glaring. The size of the Maldivian economy is $6.2 million compared with China’s mammoth $18 trillion. Maldives’s share in global trade is almost negligible. China’s, on the other hand, is a whopping 12.5%, making it the world’s largest goods exporter and second-largest goods importer.

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According to the WTO’s statistics, Oman, and the United Arab Emirates (UAE) are the largest sources of imports for Maldives, followed by China, India, and Singapore. Oman and the UAE are understandably large sources of imports as they are major exporters of petroleum oil products to Maldives. China, however, is the leading source of manufacturing imports for Maldives. With its preponderant presence in the import profile of Maldives, a bilateral FTA, enabling exhaustive tariff-free entry of imports from China, can make the Maldivian economy develop an excessive dependence on China. India’s specific concern in will be over this dependency.

The world is struggling with the tendency of countries utilising economic dependencies for geo-political purposes. Critical minerals, energy resources and semiconductors have become economic weapons for obtaining political gains. Monopoly in sourcing and control over imports can also be used similarly. China’s geopolitical influence over Maldives—positioned strategically within the arc of major sea lanes of communication—will be a new strategic challenge for India.

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The second concern for India should be the economic weaknesses that Maldives might suffer from upon commencement of the FTA. Customs revenues are a major source of revenues for the Maldivian government. Giving sweeping tariff-free access to imports that are ‘made in China’—including goods that are not only imported directly from China, but also re-exports of China-made imports from third countries—implies substantial loss of customs revenue. There could be serious adverse implications of such loss in revenue for the Maldivian economy. These implications need to be assessed carefully given that a weaker fiscal position for the government arising from loss of customs revenues could be combined with a worsening current account deficit due to higher imports. The outcome could trigger a structural economic crisis in the Maldivian economy.

An economically weak Maldives cannot be good news for India. Apart from retarding South Asia’s economic momentum, national economic weaknesses, particularly revenue shortages, could make a small economy like Maldives heavily vulnerable to external influences. The weaknesses might push Maldives to a situation where it is forced to secure external debt with unfavourable conditions on debt servicing. As the region’s largest economy and with a history of having stayed invested in a long bilateral partnership with Maldives, India will need to step in if Maldives faces a debt-driven economic crisis, from the vantage point of standing by a close neighbour.

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The third concern for India is in a one-sided FTA being specifically used for enlarging a China-dominated network of trade rules and relations around India. Interests have already been expressed by India’s maritime neighbours—Sri Lanka and Bangladesh—for joining the Regional Comprehensive Economic Partnership (RCEP). The FTA with Maldives might pave the way for Maldives inching closer to RCEP. This would lead to a substantial part of the Indo-Pacific region becoming part of a rules-based trade and investment framework that excludes it. The economic and political implications need to be studied carefully.

Commencement of the FTA with China will make Maldives another location in the Indian Ocean where the India-China strategic rivalry will manifest. It will require India looking closely at its economic and strategic priorities in the Ind-Pacific region for counterbalancing China.

(The author is Senior research fellow and research lead (trade and economics), Institute of South Asian Studies, NUS)

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