By Mihir S. Sharma
The following commentary is part of a series – “Agenda 2021: A Blueprint for U.S.-Europe-India Cooperation” – co-produced with the German Marshall Fund as part of the India Trilateral Forum initiative
The coronavirus pandemic has strengthened trends that were already visible in the global economy. Concerns have built up over years over imbalances in world trade; and the post-pandemic geo-economic order will initially be defined by attempts to create more secure, resilient, and sustainable supply chains. The danger is that these attempts will, unless properly coordinated between like-minded powers, lead to a resurgence of economic nationalism and accelerating de-globalization.
The Indo-Pacific is Ground Zero for this realignment of the world economy. It is already facing several disruptive changes, including China’s increasingly aggressive foreign policy and weaponization as well as the enactment of the Regional Comprehensive Economic Partnership. The patterns by which goods, services, workers, and capital move across the Indo-Pacific in the coming decade will determine the course of the century.
Yet this realignment also comes at a time when economic relations between India and the European Union and the United States have hit a barrier. Indo-U.S. trade had become a major irritant over the past four years, with India chafing at being bracketed with China as a trade distorter. And the governing establishment in New Delhi has decisively soured on free trade agreements, which means that the one with the EU is unlikely to move forward substantively no matter how hard the EU pushes. The question therefore is what can be done at this crucial time to repair these relationships in a manner that helps direct the Indo-Pacific toward a more stable and inclusive economic trajectory?
One answer might be to focus on creating institutions and agreements in those areas where it is still possible to immediately find points of consensus. Investment is one, particularly because the current moment is particularly appropriate. Past crises—the one in 2008–2009 in particular – were also addressed, like the current one, by a gush of liquidity from central banks. This caused vast cross-border investment flows. Shaping these flows of liquidity is essential to determine the structure of the post-pandemic economy—more or less green, more or less integrated, more or less resilient.
Such deals on investment do not need to be comprehensive to work. They do not need to be formal investment agreements that span multiple sectors, like the one the EU signed with China recently. Indeed, a focus on specific instruments, sectors, or even borrowers might not have just a better chance at success but also an outsize impact.
The U.S. Treasury, for example, has had considerable success in creating the capacity for several Indian urban governments to issue municipal bonds. Some of these urban governments are from traditionally underserved areas—for example, when the capital of Uttar Pradesh issued these bonds it made national headlines partly because it was unexpected. This is an example of the sort of area where cooperation is of importance. Replacing a temporary, time-bound program with an institution that will help urban local bodies in India and the rest of the Indo-Pacific access private-sector capital from India and Europe would have the potential of directing capital flows to sustainable infrastructure and also create a potent alternative China’s Belt and Road Initiative.
In Europe, meanwhile, there has been a great deal of action on green bonds and sustainable finance from national governments and the European Commission. The EU has just released a climate taxonomy that attempts to classify economic activities—and, by extension, projects and investment opportunities—on the basis of their environmental impact and contribution. This helps standardize options for sustainable investing and enhances the size of fund flows. The benefits to having a similar set of standards across various countries are great. For India and the EU, movement toward regulatory convergence or at least coherence on questions of classification and rating of green bonds and Environmental, Social and Governance investment flows is something both doable and impactful in 2021.
There are many ways in which cooperation between India, the EU, and the United States can be deepened over the coming years, through security or collaboration at various multilateral forums. Yet many of these will run into questions of urgency, priority, capacity, enthusiasm—or inclusion. The Quad, for example, for all the headlines it receives, remains a bit problematic as something on which to hang the future of the Indo-Pacific given that some in Southeast Asia view it as inherently exclusive.
The reality is that the restructuring of the global economic order after the pandemic will have to be more inclusive. Effective interventions are those that are doable immediately, but also can be scaled up in an inclusive manner. Norms, regulatory approaches, and development-finance institutions have precisely these qualities. A focus on existing or new trade treaties or on comprehensive agreements runs the risk of missing this crucial moment of leverage.
Mihir Swarup Sharma is and economist and senior fellow and head of the Economy and Growth Programme at the Observer Research Foundation.