There’s a lot of global power play in South Asia these days. India, China, the US… and now we are likely to have a new global US doctrine with a change in the White House.
Sri Lanka hasn’t played the global investment game very well. That’s because we keep confusing economics with geopolitics. Investors want long-term economic stability to be sure their investments are safe. They don’t particularly care whether a country is democratic or what its military alliances are. Lots of stable but more authoritarian regimes get far more investment – Singapore, Vietnam, Taiwan, Dubai, Kuwait, Abu Dhabi, Oman…
We need to capitalise economically on the increased focus of global powers on South Asia. But we need to identify what’s in our country’s best economic interests – investment, soft loans, free access to markets for our goods, tourism – rather than be overawed by visits by high-powered foreign officials. The military balance of power – with the outgoing Trump administration throwing its support to India versus China – is of no consequence to us.
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In 2015 Chinese President Xi Jinping and then US Vice President Joe Biden walk down the red carpet on the tarmac during an arrival ceremony for the President at Andrews Air Force Base in USA.[/caption]
Indeed, US-India-China interests constantly collide, with the new world power China extending its reach across the Indian Ocean as it seeks resources and India seeking to retain its waning influence in South Asia and searching for allies and markets; all this in the background of the trade war between the US and China.
Sri Lanka also needs to figure out very quickly what a Joe Biden presidency would mean to our economic interests.
But we need to keep in mind that this is Asia’s century. Asia will grow richer and stronger for a prolonged period of time. India and China will both improve their economic outlook by 2025. In reality, China could overtake America by the end of the 2020s as the largest economy in the world, and India is a legitimate economic superpower with the world’s fifth largest economy and not simply the world’s “back office”, contrary to conventional belief. Furthermore, India is projected to overtake China as the most populous country in 2024.
Military matters matter not to Sri Lanka
Many countries have borders with multiple nations, and need to form alliances to ensure their own survival. Sri Lanka is blessed: We have one neighbour, India, which is so huge that we can’t possibly dream of a conflict with it and hasn’t invaded us in more than 500 years. So we really don’t need any military alliances. That puts us in a unique geopolitical situation, since most countries need to first ensure their security before their economies. We can directly focus on our economy and ignore the international military issues.
A long history of getting conned
Don’t confuse economic interests with military and political interests. Foreign powers make promises to Sri Lanka, because they don’t want us jumping into geopolitical alliances with other global powers. But we really haven’t got much out of this. The Russians made overtures to us in the 1950s. Dudley Senanayake was more pro UK in the ‘60s. Mrs. Bandaranaike courted the Indians and Chinese in the ‘70s and harped on being a staunch member of the Non-Aligned Movement, but we didn’t get much investment. J.R. Jayawardena and R. Premadasa allied with the west, but we didn’t see much investment from there either. Mahinda Rajapaksa allied with China, with mixed results of both investment and controversy.
Our current President, Gotabaya Rajapaksa, has struck the right note by firmly telling visiting US Secretary of State Mike Pompeo that Sri Lanka will remain non-aligned. But we need to use this to draw investment from multiple powers. Otherwise, there’s no benefit in being non-aligned.
Don’t overplay the importance of foreign visitors
Pompeo came, he saw, and he left. So what? How does that help us economically? Not much. In fact, he was very frank in a public interview when he said that it is the US private sector that provides investment, not so much the US Government. But he didn’t bring the US private sector with him. In fact, Sri Lanka was just a sideshow, as he had actually travelled to India to sign a major defence agreement there. His quick flight across the Palk Strait was the sort of visit to a long-lost relative that one might do if one has the time, while one’s main focus is a major business conference that one is in town for. He also gave us a lecture about democracy like some old Dutch uncle, which seems quite quaint given the shambles in his own country.
Frankly, a visit by a team of investors from any major country would be more productive – India, China, Singapore, Dubai, or even the US. We should have invited the US Secretary of Commerce, not the Secretary of State, and told him to bring along a team of investors. The visit by the Chinese delegation a few weeks back appears to have been more fruitful economically.
Markets for our exports and tourism
Which country or region is going to be our major market in the near future and long-term future? We currently export a lot (prior to Covid) to the US and Europe. Not so much to India, the Far East, or China. That’s primarily because in past decades the west had the buying power. But will China be the market of the future with its growing wealth? Which industries should we focus on for the Chinese market? What about Chinese tourism? Where does India fit into all this – what do we have that we could export to India? Remember that India continues to be a major source of tourists, because it’s half an hour’s flight away.
Be aware of the effects of the US-China trade war
As US exports increased and imports declined, its foreign advance trade deficit decreased to $ 79.4 billion in September from $ 83.1 billion in August (October 2020).
There have been significant side effects on East Asian economies from the US-China trade war, especially for Japan and the Asian Tigers. India has also been impacted. It has led to a strengthening of trade relations among these Asian nations and significant economic gains for Japan.
The trade war has not impacted all countries in the same way. For example, it brought major advantages to Vietnam and opened the way for investment from around the world, including China. Vietnam has actually been the world's largest target of the trade war between the US and China to date. But changes in Vietnam's US trade policy are to be expected as the US trade deficit is widening with Vietnam. Malaysia, while considered as an alternative destination for relocating companies from China, suffers from changes in the demand for chip makers, which has negatively affected its economy. Singapore's manufacturing industry is particularly the semiconductor industry that is much in demand in the West.
Short-term industries would be given an encouragement to replace the expense of costly imports with local production sources or alternatives from other countries, if the US and China charge higher import prices on each other's imports. Using the National Import Substitution Index (NISI), researchers can determine the degree to which China and the US import substitution can be beneficial to Asian countries and particular sectors within them. It appears from the index that the main beneficiaries are Malaysia, Japan, Pakistan, and the Philippines. Figure 1 shows some of these country figures.
Meanwhile, the prolonged US-Sino trade war, on a medium-term basis, will allow nations to start diverting some of their manufacturing to factories in other countries to evade tariffs. The Nomura Production Relocation Index (NPRI) uses three criteria to estimate possible beneficiaries of production relocation:
- An export similarity index
- Qualitative multinational company (MNC) surveys
- Appealing foreign direct investment (FDI) scorecard
Be aware of the India-China trade war
India recently banned 59 common Chinese apps and their clones – including TikTok, Weibo, Camscanner, ShareIt, and UC Browser.
Sri Lanka needs to avoid the pitfalls of this trade war, much more than becoming fascinated by the on-again, off-again India-China military tensions.
India faces many economic challenges. Despite being Asia’s leading emerging market state. Its GDP growth is projected to decline due to poor domestic consumption, with the manufacturing sector being weakened. Much needs to be done to stimulate the Indian economy, which is suffering from stagnant wages in rural areas and low consumption expenditure, as well as a slowdown in growth in the agricultural sector.
- India is one of the largest of China's trading partners after the US. Secondly, it accounts for almost 12% of the imports of India into sectors like chemicals, automotive parts, consumer electronics, and pharmaceutical goods
- India's increasing smartphone sector also strongly relies on Oppo, Xiaomi, and other cheap Chinese phones, which have the lion's share of the market
- India's overall trade with China also declined from $ 21.42 billion in April-June 2019/20 to $ 16.55 billion in April-June 2020
- India's trade deficit with China amounted to $ 48.64 billion in fiscal year (FY) 2019/20, down from a $ 53.56 billion trade deficit in 2018/19. The key items shown in India's 2019/20 Chinese imports are accumulators and batteries, man-made yarn and textiles, aluminium and its components, glass, paper, and other plastic items
- More than 14% of India's FY19-20 imports came from China