India and Australia aim to bypass China

A new trade deal between Australia and India could help New Delhi reduce its reliance on China for critical minerals while also providing Canberra with an emerging market for its wine exports, which have plummeted following a trade dispute with Beijing.

Ratified by Canberra last week after being signed in April, the Australia-India Economic Cooperation and Trade Agreement (ETCA) is poised to eliminate tariffs on more than 90 per cent of Australian goods exported to India by value, including seafood, barley and sheep meat. India would also substantially reduce its 150 per cent tariff on some bottled Australian wine.

Meanwhile, 96.4 per cent of India’s exports to Australia would get zero-duty access under the agreement, which could potentially go into effect by the end of this year if India ratified it soon.

“I think it’s probably the most comprehensive agreement that India has entered into, even though it is not by any means the most comprehensive one for Australia,” said Peter Varghese, a former secretary of the Department of Foreign Affairs and Trade in Australia.

Canberra announced the deal’s ratification at the same time as it confirmed a separate one with Britain – the first full trade agreement that the UK has negotiated from scratch after Brexit. The British parliament must now ratify that deal for it to take effect.

For India, the agreement with Australia solidifies its economic partnerships with members of the US-led Quadrilateral Security Dialogue, known as the Quad. It also offers India an opportunity to reduce its reliance for critical minerals and rare earth elements on China, with whom it is embroiled in a border dispute.

The agreement provides Australia with greater access to the vast Indian market, which has become an emerging destination for Australian wine exports that were decimated after China slapped tariffs ranging between 116.2 per cent and 218.4 per cent on wine containers of up to two litres in March 2021.

“On the strategic side, there is a shared concern [between India and Australia] over the sum of the actions China has taken. And a shared concern about what appears to be China’s strategic ambition to be a predominant power in the Pacific,” Varghese said.

He added that there was “a strong underlying complementarity” between the economies of India and Australia.

Two-way trade between Australia and India was valued at roughly US$27.5 billion in 2021, less than a quarter of Australia’s US$178 billion trade with China in the same year.

The agreement with India is expected to increase bilateral trade to as much as US$50 billion in the next five years, and it marks a step towards a Comprehensive Economic Cooperation Agreement between the countries.

The deal will eliminate tariffs and reduce customs duties on key critical minerals exports to India, a further step forward after the two countries entered into a critical minerals investment partnership in 2020.

These minerals – including lithium, cobalt and rare earths – are used in hi-tech and cleanenergy products and are also essential for countries such as India to meet their goals in cutting greenhouse gas emissions.

Since there is often no substitute for them, monopolies over their extraction and processing by just one or a handful of countries create greater supply risks.

China produces 63 per cent of the world’s rare earth elements. As for cobalt, which is not considered a rare earth, about 70 per cent is supplied by the Democratic Republic of Congo, and Chinese companies own or finance the vast majority of industrial cobalt mines there, according to an updated working paper released by India’s Centre for Social and Economic Progress in September.

China is also among the top three global extractors for eight of the 10 minerals identified as most essential for India to meet its renewable energy targets.

“Australia is in a very fortunate position to build up its critical mineral exports,” said Varghese.

“To the extent that there is currently a near monopoly in the sector that relates to China, I think our ability to do that with India as well as many other places will become more and more significant.”

In March, Australia allocated A$5.8 million (HK$30.5 million) to the investment partnership, aiming to support Indian investment in the country’s critical minerals projects.

Both countries have envisioned joint investment in lithium and cobalt projects in Australia.