Month: February 2023

In July 2022, India, Israel, the United States (US), and the United Arab Emirates (UAE) announced the formation of a new minilateral grouping called the I2U2 at a hybrid summit. The four countries see their partnership as ad hoc, informal, issue-specific, and geoeconomic initiative.

Background information: The I2U2 forum

• Following the Abraham Accords between Israel and the UAE, I2U2 was established in October 2021 to address the region’s maritime security, infrastructure, and transportation challenges.
• At the time, it was known as the International Forum for Economic Cooperation. The new grouping was dubbed the ‘West Asian Quad’ at the time by the UAE.
• As the Accords made it easier for Israel and its Gulf neighbours to interact more, other partners such as the United States and India have found it easier to engage with the region through plurilateral forums.
• I2U2 prioritises economic strengths over political differences, leveraging mutual cooperation by leveraging India’s growing economy, Israel’s technical expertise, the UAE’s capital, and the United States’ international clout.
• I2U2 meetings investigate B2B relations and establish the I2U2 Business Forum; proposal to establish a ‘I2U2 Hub’ in the UAE as an ideation centre for forming economic partnerships and sharing intellectual property profits.

The Importance of I2U2: Personal Reasons for Joining the Group

For India:

• I2U2 strengthens India’s strategic engagement with West Asia and its robust bilateral relationships with the UAE, Israel, and the United States.
• In 2022, India’s total trade with the UAE will be worth US$ 73 billion, making the UAE India’s third largest trading partner. The UAE is also India’s second largest export destination, accounting for 40% of total trade with the Arab world.
• Israel is a major supplier of defence equipment to India and a key technology partner in a variety of fields, including defence, space, agriculture, and cybersecurity.
• The United States is India’s largest trading partner and second-largest foreign investor, with bilateral trade expected to reach US$119 billion in 2022 and investments accounting for 18% of total Foreign Direct Investment.

For Israel:

• From Israel’s perspective, I2U2 is a continuation of the Abraham Accords and a new opportunity to build a platform on which it can combine old partners (the US and India) with new partners (UAE) through a broader economic and strategic partnership.

For UAE:

• The Emiratis believe that such a grouping, with a focus on complementarities, will aid in the resolution of global challenges such as food, energy, and water security.
• The UAE is all too familiar with these challenges, given its own food and water scarcity, with an annual rainfall of only 100mm and importing 85 percent of its food supplies.
• The UAE also sees I2U2 as a platform that can help it strengthen bilateral ties with the other three countries while positioning itself as a bridge between West Asia and South Asia.

For the United States:

• Following the Abraham Accords, the grouping is a low-hanging fruit through which it can cultivate bilateral and multilateral relationships with its allies and partners, particularly in the West Asian region.
• This also aids the US in containing China’s growing presence in the region, particularly in the areas of investment, innovation, and technology.
• The United States’ participation also demonstrates that it has abandoned its traditional strategic and security lens and now views the world order through a trans-regional and multilateral lens.

What distinguishes this forum?

• Economic cooperation: Unlike other forums such as the Quad, Negev Forum, and AUKUS, the I2U2 is a regional forum focused on economic cooperation.
• Water, energy, transportation, space, health, and food security have been identified as six core sectors for intervention by the I2U2.
• The grouping envisions a proactive role for private capital and technology, with the goal of collaborating on joint investments, resource mobilisation, and new initiatives.
• The following global issues have been prioritised: The grouping food security and clean energy prioritises two key global concerns with local, trans-regional, and long-term dimensions.

Project for a Food Corridor

• I2U2’s Food Security Project Responds to the Global Hunger Crisis: I2U2 aims to combat the global hunger crisis by leveraging member countries’ financial, technological, agricultural, and knowledge strengths.
• For example, the project will use Israeli and American technology to establish integrated food parks in Gujarat and Madhya Pradesh, with future expansion plans for Telangana, Andhra Pradesh, and Maharashtra.
• The overarching goal is to establish alternative supply chains: The initiative’s overarching goal is to establish alternate supply chains among countries with similar goals in order to ensure environmentally sustainable food security.

Project for hybrid renewable energy

• Gujarat Renewable Energy Project: I2U2’s second project aims to build a 300 MW hybrid renewable energy facility in Gujarat using advanced battery storage technology developed with Israeli expertise and Emirati and American investment.
• Strong Interest in UAE-India Renewable Energy Partnership: Companies based in the UAE, such as Masdar, are interested in collaborating with India to explore renewable energy opportunities, particularly given India’s goal of achieving 500 GW of non-fossil fuel capacity by 2030.

What are the Potential Difficulties?

• Security Interests May Pose Difficulties for I2U2: Individual countries may prioritise their own security interests over the interests of others.
• For example, US and Israeli perspectives on West Asia are influenced by Iranian rivalry, whereas India and the UAE may have a different perspective. While these security concerns have not yet hampered the project, the unpredictability of Iran’s situation could pose a challenge.
• The US and India are concerned about China’s growing presence in the region through trade deals, infrastructure investments, and security cooperation, whereas Israel and the UAE have a more positive view of China, with the UAE upgrading its ties to a Comprehensive Strategic Partnership and Israel engaging in defence and technical cooperation with China, respectively.
• Institutional bottlenecks may impede I2U2: Institutional bottlenecks could be a potential stumbling block for the I2U2 project, as there may be a lack of synergy in the working cultures of businesspeople from the four countries, and accountability mechanisms may be ambiguous.

The stakes are high in India

• India’s participation in I2U2 is critical because of its role as a link between West Asia and South Asia.
• The initiative has the potential to attract investments, innovation, and technology to India, accelerating its progress towards becoming the world’s third largest economy.
• I2U2 can also help ‘Make in India’ by attracting manufacturing facilities in fields like artificial intelligence, fintech, transportation, and space.
• India can designate nodal officers in its embassies and form a Coordinating Committee with the sherpas to facilitate cooperation.
• I2U2 could also inspire India to form similar minilateral groups with its South Asian and African partners.

@the end

Minilaterals like I2U2 offer hope for more effective and mutually beneficial international cooperation as an alternative to the poor performance of most multilateral institutions. Such platforms can serve as a solid framework for exploring opportunities, assisting in the collective resolution of global challenges, and opening doors to greater convergence of interests and actions among countries.

Source: https://www.iiss.org/blogs/analysis/2022/11/the-minilateral-i2u2-group

To be sure, the Ukraine-Russia conflict has thrown several Global South countries’ energy markets into disarray. Furthermore, supply cuts by edible-oil exporting countries, combined with rising fuel prices, have resulted in a surge in food prices, making food security a primary concern, particularly for vulnerable segments of society. Furthermore, China’s COVID-19 surge has dampened the global economy, particularly in BoB.

How is the South Asian neighbourhood changing?

• Sri Lanka and Pakistan are both facing economic challenges, with the former experiencing a full-fledged economic collapse and the latter dealing with massive external debts, power shortages, and extreme inflation.
• Bangladesh: The IMF approved a precautionary loan of US $4.7 billion to Bangladesh, despite the country’s precarious macroeconomic situation, which includes high inflation and volatility in the Bangladeshi Taka.
• Myanmar: Following the coup, businesses are closing and unemployment is skyrocketing.
• Nepal, too, is experiencing growing trade deficits and declining foreign exchange reserves.

How is the Russia-Ukraine conflict threatening food security?

• Russia-Ukraine war and the resulting food crisis: Ukraine and Russia play important roles in global food supply chains, affecting low- and middle-income countries as well as vulnerable populations who are already struggling with hunger in the post-pandemic world.
• Wheat suppliers: Because both countries exported more than one-third of the world’s wheat and barley, as well as roughly 70% of sunflower oil, governments around the world suffered greatly as the war halted exports of approximately 20 million tonnes of Ukrainian grain.
• Exports of agricultural commodities to Asia have ceased: Monthly agricultural commodities exports to Asia, Africa, and the Middle East were estimated to be 6 million tonnes. By June 2022, this figure had shrunk to one-fifth of its original value.
• Food price and availability ripple effects: Global food prices have risen by 20%, according to the United Nations (UN) Food and Agriculture Organization (FAO). It also predicts an increase in the undernourished population of 7.6 to 13.1 million as a result of the conflict and its effects on food prices and availability.

Sri Lanka: A Case of Food Insecurity

• The Sri Lankan economy’s collapse has wreaked havoc on the country’s food security.
• For Sri Lanka, the sudden switch to organic farming in 2021 worsened its trade performance in the agricultural sector.
• The island nation was forced to import sugar, rice, and a variety of other commodities, including intermediate goods in which the economy previously had a surplus.
• By 2022, the tea industry, a major commodity of exchange, had suffered losses of approximately US $425 million, worsening the economy’s foreign exchange situation even further.

The energy crisis

• All of the countries in the Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC), particularly India, Myanmar, and Bhutan, rely heavily on energy imports, according to data analysis.
• The region’s trade dependency on fuel makes it highly vulnerable to external shocks: The region’s trade dependency on fuel is a major curse, making it highly vulnerable to exogenous macroeconomic shocks. The Russia-Ukraine conflict emphasises the importance of nations having energy self-sufficiency.
• Absence of infrastructure and synchronisation in BIMSTEC Grid Despite the BIMSTEC countries developing a ‘Plan of Action for Energy Cooperation in BIMSTEC’ and signing a Memorandum of Understanding for the establishment of the BIMSTEC Grid Interconnection in August 2018, the lack of required infrastructure and adaptive power markets, the lack of grid synchronisation, the lack of financial policies, and other related issues have slowed progress in energy cooperation among the region’s countries.

Bangladesh: In a difficult situation

• Bangladesh, in particular, has been placed in a difficult position in terms of energy security due to its inability to initiate the transition to renewable energy and its heavy reliance on fuel imports.
• The conflict between Russia and Ukraine has fueled the fire. With rising energy prices and rising subsidy bills, Bangladesh’s fiscal balances and current account deficits have been concerning.
• The government had no choice but to impose austerity measures. Domestic prices for diesel, kerosene, octane, and gasoline were raised in order to achieve price parity with neighbouring countries such as India, China, and Nepal.

Way forward

• Prepare for a food security crisis: Regional groups must establish safeguards against crises where their food security is threatened by geopolitical events and domestic macroeconomic threats.
• Food Bank for BIMSTEC: The concept of a food bank for BIMSTEC countries, modelled after the Association of Southeast Nations (ASEAN) Food Bank, is a good place to start because it will help to stabilise prices.
• India has been urged to develop a regional strategy for millets: Recently, India hosted the second Agriculture Ministerial-level meeting of the BIMSTEC nations in November 2022, where it urged the member countries to develop a regional strategy for transforming agriculture and promoting millets into food systems.
• Millets have the potential to reduce food insecurity: Promotion and intra-regional trade of food items such as millets, where these countries have surplus production, can significantly reduce food insecurity.
• Energy self-sufficiency: Overdependence on fuel will make the region more vulnerable and jeopardise its financial stability. As a result, creating a domestic energy market is critical for the region. This can be accomplished by hastening the green transition.
• For example, FDI from Japanese firms has consistently resulted in greater impacts and spillovers in the Indian economy. If Japanese firms’ economies of scale and potential in developing various green energy technologies could be fully realised, the region’s reliance on China, which is currently the dominant player in the domain of solar energy, would be reduced.

@the end

Regional economies have enormous potential to invest in green transition technologies and sustainable agriculture research, which can help them achieve self-sufficiency in energy and food markets, respectively. The Bay of Bengal region, led by India, has the potential to lead the way in renewable energy innovations such as solar and wind.

Source: https://www.researchgate.net/publication/46476331_Food_Security_in_South_Asia_Issues_and_Opportunities

With a projected 7% growth rate for the current fiscal year, the Indian economy is on track to have the highest growth rate among the world’s major economies. Furthermore, the unfolding geoeconomic and geopolitical forces that will sustain India’s consumption-driven growth phenomenon will drive investment and production in the coming years.

Regional Trade Agreement (RTA)

• A regional trade agreement (RTA) is a treaty between two or more countries in a specific region that aims to reduce or eliminate trade barriers such as tariffs and quotas in order to facilitate increased trade between the member countries.
• Free Trade Agreements, Customs Unions, Common Markets, and Economic Unions are all examples of RTAs.

What exactly is a Free Trade Agreement (FTA)?

• A free trade agreement (FTA) is a type of RTA that eliminates tariffs and other trade barriers on goods traded between member countries.
• FTAs may also include provisions on trade in services and investment, but they are primarily focused on reducing tariffs on goods.

India’s experience with RTAs/FTAs

• India’s signing of bilateral trade agreements has increased dramatically since 2021.
• Some examples include the India-Mauritius CECPA in 2021, the India-UAE CEPA, and the Australia-India ECTA in 2022.
• Talks on these topics are underway with the United Kingdom and Canada, and serious intentions to sign FTAs with the EU and Israel have also been expressed.

Geoeconomic Implications

India-UAE Comprehensive Economic Partnership Agreement (CEPA):

• Western QUAD: The India-UAE CEPA strengthens India’s commitment to I2U2 (Israel, India, the United Arab Emirates, and the United States), also known as the Western QUAD, a regional force convened in October 2021.
• Access to Western Neighbors: This agreement gives India access to Western Neighbors, which can help India negotiate trade agreements in the absence of China.
• Advantage for India-GCC FTA: It moves India closer to establishing an India-GCC (Gulf Cooperation Council) FTA, thereby improving relations with the gulf countries.
• Economic boost: The trade agreement is expected to nearly double bilateral commodity trade by 2027, increase service trade, and create 10 lakh jobs in labor-intensive sectors.

The Economic Cooperation and Trade Agreement between Australia and India (ECTA)

• The Australia-India ECTA strengthens Australia-India ties on a variety of fronts, including geopolitics.
• Once the two countries sign a more comprehensive FTA, known as the CECA (Comprehensive Economic Cooperation Agreement), various other areas such as services, investments, government procurement, and intellectual property will be covered.
• Even within the QUAD, Australia and India’s strong relationship will aid in the development of an Australia-India niche.

Prosperity in the Indo-Pacific Economic Framework (IPEF)

• The IPEF, a Biden administration-led economic initiative with fifteen participating member countries, has the enormous potential to ink a regional trade agreement and establish a trade bloc without China.
• If that occurs, India, as a member, will undoubtedly benefit.

How will FTAs affect consumption-driven growth?

• FTAs can increase consumption demand through two channels.
• Increase consumer choice: FTAs will allow for cheaper commodity imports and will increase consumer choice.
• The second point to make is that the direct multiplier effect of increased trade and employment will have a multiplier effect on domestic incomes.
• Increase purchasing power: When both forces are combined, consumers’ purchasing power and consumption demand will increase.

Factors that put India at Competitive Advantage

• The demographic dividend in India: India’s comparative demographic dividend over China provides it with a competitive advantage. The under-30 population in India is approximately 52 percent, compared to around 40 percent in China, which is expected to shrink faster over the next decade. The young population is expected to drive consumption-led growth by increasing consumption, saving, and investing.
• Second, according to 2019 estimates, the average Indian wage is 10% of that of China, resulting in relative cost-competitiveness for products manufactured in India when compared to China. Foreign investment is already being attracted.
• National Infrastructure Pipeline: India’s massive emphasis on physical infrastructure through projects such as the National Infrastructure Pipeline (NIP) for FY 2019-25 and growth in the transport sector will lower transaction costs.
• Reforms in the business environment: India has worked extensively to reform its business environment through effective policy practises, such as the Production Linked Incentive (PLI) scheme, or by bringing about significant changes in its tax regimes, or by liberalising Foreign Direct Investment (FDI) policies in manufacturing, among other things.
• It includes both digital literacy and English language skills. On both counts, Indian youth outnumber Chinese youth.
• Strong Indian Diplomacy: Indian diplomacy is also playing an important role, with trade agreements serving as important diplomatic instruments. This is true for the UAE, Australia, and collaborations such as QUAD (or even IPEF) and I2U2.

@the end

Without a doubt, FTAs are emerging as important economic diplomacy tools for India as it seeks deeper levels of engagement with friendly nations. At the same time, India’s FTAs are a two-tiered game. It must negotiate with the concerned nation/s at the international level, while it must negotiate with various contending constituencies at the domestic level. However, the role of FTAs as a growth driver through trade and investment cannot be overlooked. Furthermore, with India set to overtake China as the world’s most populous country in January 2023, it will be the world’s largest product and factor market.

Source: https://www.investopedia.com/terms/f/free-trade.asp