The globalized economic world order has promulgated a widespread cause and effect impact. As a consequence, the onset of the Ukraine crisis will not only spike oil and gas prices across the world — disrupting energy supply chains —but also have gross ramifications on other critical global value chains ranging from wheat and barley to minerals like copper and nickel. Securing global supply chains to limit the adverse impact of the crisis will therefore be the need of the hour, and as the focal point of global economic activity, the Indo-Pacific will once again lie at the centre of such dynamics. What role can India and the EU, with its recent commitment to the Indo-Pacific and long held deep rooted economic interests in the region, play in securing regional supply chains? How will the EU’s New Industrial Strategy be useful in this regard, and how can it work in sync with existing actors in the region and their ventures, including the Supply Chain Resilience Initiative?
Refocusing on Supply Chain Securitization
Securitization allows for the merging of different financial assets into one group by an issuer that designs a marketable financial instrument, selling such revitalized assets to investors[i]. In the post-COVID order, in which supply chain diversification has emerged as a primary geo-economic goal, securitization allows for greater opportunities for investors, freeing capital and promoting liquidity in the markets. As new solutions appear with the ability to further reduce risks of a single issuer and distribute exposure across multiple suppliers, securitization emerges as a critical part of the market that can aid the diversification of risks.
Keeping such realities in mind, manoeuvring economic foreign policies to cater to supply chain sustainability and resilience becomes important in order to successfully endorse a post-pandemic fiscal recovery. International cooperation vis-a-vis supply-chain securitization is possible via dedicated focus on multilateral initiatives, through ventures like the Australia-Japan-India-led Supply Chain Resilience (SCRI) and the Build Back Better World (B3W) launched by the Group of Seven (G7) industrial economies. These initiatives are focused on building sustainable, diverse and secure post-pandemic global supply chains that take primary focus away from Chinese manufacturing. Even strategies such as the Global Gateway, released in December 2021 by the European Union (EU), and the UK’s Global Britain are looking at building new and resilient Asia-centric cross-sectoral supply chains. As the Quad also looks towards supply chains --especially vis-a-vis vaccine transport --it is important that international cooperation in securing such essential networks continues with more policy focus.
India’s Stake in Supply Chain Resilience
For India, which is grappling with the China threat on its border and facing increased aggression in a unilateral attempt to change the status quo, supply chain diversification has become a matter of security. New Delhi is highly motivated to reduce dependence on China and building alternative global value chains that do not put China at their centre is a key long-term priority requiring immediate action. For this purpose, after beginning negotiations in 2020, in April 2021, India launched a SCRI with Japan and Australia at the Ministerial level[ii]. The platform presently acts as a mechanism to coordinate risk management efforts and continuity plans so as to avoid undue disruptions to supply chains in face of future ‘black swan’ events like the pandemic. To further this objective, the SCRI has two key strategies: first, the sharing of best practices on supply chain resilience, and second, the holding of investment promotion and buyer-seller matching events between the three countries to encourage private sector stakeholders to explore opportunities away from China and therefore diversify their supply chains.
Although still in its nascent stages, the SCRI has significant scope for expansion and room to work with like-minded partners. While India, Japan and Australia are key to building alternative supply chains as three of the Indo-Pacific largest economies, diversification requires a much broader effort; cooperation with both the private sector and third partners is hence critical for effectively achieving its objective to “create a virtuous cycle of enhancing supply chain resilience with a view to eventually attaining strong, sustainable, balanced and inclusive growth” in the Indo-Pacific[iii].
Here, the EU can emerge as a key partner for the SCRI, and India particularly. As India’s third-largest trading partner with €62.8 billion in goods trade (2020), and the second-largest market for Indian exports accounting for 14 percent of total Indian exports, the EU is key to India’s geo-economic vision[iv]. The EU is also a key investor in India with almost €76 billion in foreign direct investments (FDI) and about 6000 companies, providing almost 2 million jobs, operating across various sectors in the country.
Yet, at present, the EU-India trade relationship remains far below its potential. In terms of FDIs for instance, EU’s foreign stocks in India are far below those in China (about €200 billion) or even Brazil (almost €320 billion)[v]. With India’s impetus on expanding its manufacturing capacity and fostering a positive business environment through its Atmanirbhar Bharat post-pandemic recovery plan and enhanced Production Linked Incentive (PLI) Scheme to boost manufacturing within India, their bilateral potential cap be tapped effectively. A focus on production in India would in turn help reduce excessive reliance on China-centric value chains and improve resilience. As political ties with China become ever-more complex, a focus on India in the EU’s geo-economic vision will help further a ‘China Plus’ strategy and secure value chains[vi].
Supply Chain Cooperation with the EU
As major global economic powers with strong cross-continental ties, India and the EU can take a lead in furthering such a supply chain agenda. Both actors became acutely aware of their respective vulnerabilities and excessive dependencies on a single actor (China) amid the COVID-19 pandemic. Since then, both have taken key steps as part of their pandemic recovery plan to respond to such weaknesses and securing supply chains is the foremost objective under such thinking.
Through varied channels, like trade negotiations that resumed in May 2021 and negotiations on investment protection, India and the EU are already actively working towards an open, transparent and sound business environment with reduce technical barriers to trade (TBT). Supply chain resilience is an important aspect of this. Not only does building secure and resilient supply chains via a competitive global ecosystem feature under the EU-India Connectivity Partnership, but it is also a key aim under a newly launched India-EU working group on the issue and coordination that came as part of their High-Level Dialogue on Trade and Investment[vii] [viii]. India and the EU have a broad-based economic agenda, and they could effectively take forward their cooperation through multilateral forums like the World Trade Organisation (WTO) and minilateral platforms like the SCRI to ensure access to supply and value chains.
Notably, cooperation with the SCRI can also emerge from the EU’s New Industrial Strategy, introduced in 2020 for resilient and sustainable post-pandemic recovery. The New Industrial Strategy seeks to work across sectors, with policy tools like the Circular Economy Action Plan and Renewable Energy Regulation to scale the digital economy, and transition to a carbon-neutral society in an inclusive and just manner[ix]. Such industrial measures are inherently tied with trade policies, and can help ensure that the EU remains open and competitive in trade globally – a prerequisite to achieving supply chain resilience, diversification and securitisation[x]. With the SCRI, the EU can act as a third-party participant in its investment promotion and buyer-seller matching events, which would provide the European industry critical access to inputs that help enhance its capacity to innovate and scale production, and provide the Indo-Pacific partners vital improved access to the coveted EU single market.
Similarly, supply chains are also a focus under the EU’s Global Gateway, which was introduced in 2021 and has swiftly become a cornerstone for the implementation of the EU’s Indo-Pacific strategy, as reaffirmed at the France-led Indo-Pacific Forum in February 2022. With a commitment of €300 billion in investments until 2022, the Global Gateway is, in some ways, Europe’s modest answer to China’s Belt and Road Initiative (BRI). It comes as an extension of the EU-Asia (and EU-India) Connectivity partnership and looks to improve cross-continental connectivity, which is bound to enable further diversification of supply chains.
At the same time, as with the SCRI, supply chain cooperation cannot be limited only to a handful of actors but requires cooperation of multiple actors. An EU-India supply chain resilience partnership must necessarily advance with key economies like Japan, Australia and ASEAN. China is increasingly stressing its Dual Circulation Strategy to safeguard its economy against a volatile global environment and become more self-reliant, in terms of resources, technology, and demand by prioritising domestic consumption and the markets it has immense access to via the BRI[xi]. This inward-looking model will only serve to make the already imbalanced trade with China more asymmetric in Beijing’s favour. Here, effective broad-based cooperation between India and the EU, alongside like-minded regional partners, can help ensure that the supply chains are not made more vulnerable.
[i] See Ian Falconer, "How supply chain finance can boost manufacturing resilience", Pinsent Masons, 15 July 2020, https://www.pinsentmasons.com/out-law/analysis/supply-chain-finance-boost-manufacturing-resilience#:~:text=The%20securitisation%20model%20provides%20financing,a%20range%20of%20different%20customers.
[ii] See "Australia-India-Japan Trade Ministers’ Joint Statement on Launch of Supply Chain Resilience initiative", Press Information Bureau, 27 April 2021, https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1714362
[iv] See, "India", European Commission, https://ec.europa.eu/trade/policy/countries-and-regions/countries/india/
[vi] See Jagannath Panda, "“China Plus One”: Supply Chain Resilience Initiative and Beijing in Indo-Pacific", Manohar Parrikar Institute for Defence Studies and Analyses, 26 July 2021, https://idsa.in/issuebrief/china-plus-one-beijing-indo-pacific-jpanda-260721
[vii] See "India-EU Connectivity Partnership", Ministry of External Affairs, 8 May 2021, https://www.mea.gov.in/bilateral-documents.htm?dtl/33854/IndiaEU_Connectivity_Partnership#:~:text=The%20Partnership%20will%20support%20sustainable,Goal%20principles%20that%20no%20one
[viii] See 4.
[ix] See "PRESS RELEASE - The New Industrial Strategy for Europe: What is the Role for the TIC Sector?", TIC Council, 27 April 2021, https://www.tic-council.org/news-and-events/news/press-release-new-industrial-strategy-europe-what-role-tic-sector
[x] See "EU industrial strategy: a good step forward, tailor-made actions must follow", Business Eurpe, https://www.businesseurope.eu/publications/eu-industrial-strategy-good-step-forward-tailor-made-actions-must-follow
[xi] See Alicia Garcia-Herrero, "What is behind China’s Dual Circulation Strategy?", Bruegel, 7 September 2021, https://www.bruegel.org/2021/09/what-is-behind-chinas-dual-circulation-strategy/
This booklet is promoted within the fourth edition of the Asia & Europe Initiative "Stability and Security in the Indo-Pacific: The US, Japan, the EU and the Elephant in the Room" which gathers together leading experts, Asian and European think thank representatives, as well as Italian companies and agencies to discuss the increasing geopolitical interest in the Indo-Pacific Region.