Southeast Asia Global Relations Outlook Part 2: EU and India

by Institute

This is the second part in a short series exploring Southeast Asia’s relationships with key global powers and economic blocs. The series aims to give a snapshot at the beginning of 2024, looking at the events over the past months that have shaped the region’s global relationships, and the dynamics that will determine them moving forward.

Part 1 looked at Southeast Asia’s relationships with the US and China; Part 2 will look at the ‘next two’ global economic powers, the European Union and India.

Introduction

The economic and strategic dynamics of Southeast Asia’s relationships with the EU and India underscore the evolving landscape of geopolitical partnerships in the Indo-Pacific region. Both the EU and India have emerged as significant players seeking to deepen their engagement with Southeast Asia, positioning themselves as credible third-party partners amid the ongoing US-China contest.

For the EU, trade and investment constitute the primary pillars of the relationship. While efforts to negotiate a region-to-region Free Trade Agreement (FTA) have been stalled, the EU has pursued bilateral FTAs with individual ASEAN member states, albeit facing hurdles on a range of issues including environmental protection. Concurrently, the EU aims to expand its security cooperation to bolster its strategic presence in the Indo-Pacific.

Similarly, India’s engagement with Southeast Asia has witnessed substantial growth over the past three decades, driven by its aspiration to compete with China for leadership in the Global South. Despite India’s designation as a Comprehensive Strategic Partner by ASEAN in 2022 and warming attitudes in Southeast Asia, economic ties remain constrained due to India’s protectionist stance. However, strides have been made in the strategic realm, marked by collaborative efforts such as joint maritime exercises and defense engagements.

As both the EU and India navigate their respective relationships with ASEAN, further developments are anticipated, albeit against the backdrop of challenges such as environmental concerns and economic disparities. The evolving dynamics underscore the significance of ASEAN as a key player in shaping the geopolitical landscape of the Indo-Pacific region, with implications for regional stability and economic prosperity.

European Union

Economic relationship remains key

Trade and investment remain the primary pillar of the EU-ASEAN relationship. In 2022, ASEAN was the EU’s third largest trading partner outside of Europe (after China and the US), with more than US$294 billion in trade in goods. Both parties have come to view each other as important economic partners, with the EU viewing Southeast Asia as an alternative trade partner that can help boost the bloc’s supply-chain resilience. Likewise, ASEAN views the EU as an important market for its goods as well as a source of investment.^[1]

In 2007 both parties would begin negotiations for a region-to-region FTA, but talks would be suspended two years later due to disagreements over the agreement’s scope, the differing development levels of the participating members, and human rights concerns in relation to Myanmar. In 2017, both parties would reignite formal talks and agreed to set up a joint working group. Beyond this, progress has been limited. EU officials have stressed that an EU-ASEAN FTA remains a long-term objective for the bloc.^[2]

In lieu of a regional FTA, the EU has refocused on signing bilateral trade agreements with individual ASEAN Member States. As of now, the EU has signed FTAs with Singapore (in force in 2019) and Vietnam (2020), with negotiations ongoing with several others. Following a rapprochement with Thailand in 2019, both parties would agree to relaunch negotiations on a bilateral trade agreement in March 2023. Initial trade talks had been stalled for nearly a decade after Thailand became isolated from the West following its 2014 military coup. Bangkok is aiming for negotiations to conclude by early 2025.^[3]

The EU would also begin negotiations with Indonesia in 2016 for a comprehensive economic partnership, with talks having been dragged out due to disputes over state-owned enterprises, local content requirements and Brussels’ environmental policies.^[4] In July 2023 both the EU and the Philippines would announce their intentions to restart negotiations over a EU-Philippines FTA, with talks having been halted in 2017 due to diplomatic tensions against the backdrop of the Philippines’ war on drugs.^[5] Negotiations between the EU and Malaysia, on the other hand, have remained stalled since 2012, with no further development since.^[6]

EU green policies, palm oil at the root of tensions

Over the last few years, tension has risen between the EU and ASEAN Member States over the former’s environmental policies, which critics have argued essentially serve as a form of protectionism. These policies have particularly impacted producers of forest-related commodities (a major sector in Southeast Asia), raising diplomatic tensions and stalling trade negotiations.

Entering into force in 2018, the EU’s Renewable Energy Directive (RED) II, included the phasing out of biofuels that are sourced from recently deforested areas or peatlands. Among the biofuels included in this new directive is palm oil, which has been associated with high levels of deforestation in the past. Both Indonesia and Malaysia, which account for around 85% of global palm oil supply, have argued that the EU’s decision is discriminatory and protectionist in nature, designed to support European producers of other types of vegetable oils such as rapeseed and sunflower. In response, both countries have taken the EU to the WTO.^[7]

More recently, the EU would introduce a deforestation initiative which would ban the import of forest-related commodities and their products from entering EU markets if they are found to be linked to deforestation. Dubbed the European Union Deforestation-Free Regulation (EUDR), the initiative requires producers and companies trading timber, palm oil, soy, rubber, cattle, cocoa and coffee into the EU to provide detailed evidence proving their goods were not grown on land deforested since 2020. The new rule came into June 2023, and gives producers and companies until December 2024 to fully comply. ASEAN countries argued that such regulations will negatively impact the millions of smallholder producers who depend on the EU market, and who lack the technical capacity and financial capital required to meet the strict due diligence requirements of the new rules. Smallholders produce some 95% of Vietnam’s coffee, 42% of Indonesia’s palm oil, and 95% of Thailand’s rubber. In countries like Malaysia and Indonesia, such smallholders represent a significant voting bloc.^[8]

Another recently introduced EU green policy which has caused consternation in ASEAN is the European Union Carbon Border Adjustment Mechanism (CBAM), which applies duties on certain products — including iron and steel — imported from countries without carbon pricing mechanisms or with carbon prices below the Emissions Trading System. This new policy will apply to Indonesia and Malaysia’s iron and steel exports to the EU. By one count, the CBAM could cause annual trade losses of US$500 million for ASEAN in 2030, while simultaneously driving gains for developed markets.^[9]

Cooperation in security realm

While the EU-ASEAN relationship is primarily economic in nature, Brussels has also sought to expand its security profile in the region. While the EU’s positioning as security provider in Southeast Asia is still at an early stage, the hedging strategy of ASEAN Member States in response to the Sino-US contest has provided the strategic space for the EU to step in and provide an alternative security partner. For Brussels, expanding security cooperation with Southeast Asia would help strengthen the bloc’s larger strategic engagement with the Indo-Pacific. For ASEAN members, the EU provides an alternative, and possibly more inclusive, strategic option. As a result, both EU and EU Member States’ security-related activities in Southeast Asia are on the rise, especially in the maritime domain.^[10]

India

A welcome ‘third party’

With Southeast Asia looking for credible alternatives to help navigate the Sino-US contest, India has emerged as a welcome partner. For New Delhi’s part, it has sought to compete with China for leadership of the so-called ‘Global South’, with ASEAN identified as a crucial area of interest. Relations between India and ASEAN have been on a steady rise over the last three decades, beginning in 1991 when India implemented its “Look East” policy and became a sectoral dialogue partner. These relations were elevated to dialogue partnership and strategic partnership in 1996 and 2012, respectively. In 2014, New Delhi revamped the Look East policy and rebranded it “Act East” in acknowledgment of the need for a more proactive role in the Asia-Pacific. In November 2022, in recognition of the 30th anniversary of ASEAN-India relations, ASEAN granted India the status of a Comprehensive Strategic Partner at the ASEAN-India Commemorative Summit in Phnom Penh, Cambodia.^[11]

Southeast Asian attitudes towards India seem to have warmed over the last year. This was suggested in the ISEAS-Yusof Ishak Institute’s 2023 survey of elite Southeast Asian public opinion, with India emerging as a surprise third choice for a “third party” partner for ASEAN, with the support of 11.3 percent of respondents behind the European Union (42.9 percent) and Japan (26.6 percent). The survey also showed an increase in levels of trust in India in almost all of the ASEAN countries, with overall trust jumping from 16.6 percent in 2022 to 25.7 percent in 2023, with levels of distrust also dropping in tandem.^[12]

Economic ties remain weak

While both parties have evidently placed importance on the relationship, India’s aversion to economic openness has provided a hindrance to closer economic ties. India’s share of ASEAN’s total trade has stagnated between 2 to 3 per cent in the last decade. In contrast, China’s (excluding Hong Kong) share of ASEAN’s total exports and imports between 2012 and 2021 increased from 11.4 per cent to 16.4 per cent and from 14.4 per cent to 23.9 per cent respectively. Amongst ASEAN-plus FTAs, the ASEAN-India Trade in Goods Agreement (AITIGA) has the lowest level of trade liberalisation and the most restrictive rules of origin requirements.^[13]

With multinational firms looking to diversify their production bases away from China, Indian officials have claimed that this provides opportunities for India-ASEAN value chains linkages to grow. However, such claims lack credibility in light of India’s inherent protectionism. Recently, India’s political class have chosen to place India’s trade deficits with ASEAN under scrutiny, attributing them to unfair trade practices. In August 2023, both parties agreed to review the AITGA by 2025 to address issues of concern, including India’s current trade deficit. However, it is more likely that India’s high trade deficits with ASEAN economies have more to do with India’s underdeveloped manufacturing sector and low integration with East Asian value chains. The fact that ASEAN economies are heavily interlinked with China has also presented obstacles to closer economic interconnectedness with India. New Delhi could ultimately come to view ASEAN economies more as rivals than partners as it seeks to capitalise on economic opportunities arising from global value chain restructuring.^[14]

Despite these limitations in the economic realm, genuine gains have been made. Declining shares of exports and imports of minerals, mineral fuels, and oils in the post India-ASEAN FTA years indicate that trade between ASEAN and India has diversified into non-oil non-mineral sectors, suggesting the trade has moved into higher-value goods, which is one of the primary objectives of AITIGA.^[15]

Movement in strategic realm

While economic ties between India and ASEAN have significant room to grow, there has been more movement in the strategic realm. In 2023 alone, both parties held the first ASEAN-India Maritime Exercise off the coast of Singapore. India also had defense engagements bilaterally with Malaysia, Indonesia, the Philippines, and Vietnam. India’s growing strategic profile in ASEAN has been facilitated by the fact that ASEAN Member States and India both share territorial disputes with China.^[16]

More recently, Prime Minister Narendra Modi participated in the 20th Annual ASEAN-India summit and the 18th East Asia summit held in Jakarta in September 2023. During the visit, he presented a comprehensive 12-point proposal aimed at deepening cooperation between India and ASEAN nations, including through enhanced connectivity, digital transformation, affordable medicines, counter-terrorism, and disaster management. Moreover, the ASEAN-India Summit also witnessed the adoption of two joint statements, one focusing on Maritime Cooperation and the other addressing Food Security.^[17]

The Modi administration will no doubt be distracted with India’s upcoming general election, expected to be held in April. As such, further developments in the ASEAN-India relationship may only continue in the second-half of 2024.

Conclusion

In conclusion, the economic and strategic engagements between the European Union (EU), India, and the Association of Southeast Asian Nations (ASEAN) underscore the evolving dynamics of partnerships in the Indo-Pacific region. While both the EU and India have pursued deeper ties with ASEAN, challenges in negotiating comprehensive agreements and addressing environmental concerns have surfaced. Nonetheless, the recognition of ASEAN as a crucial economic and strategic partner remains paramount for both entities.

Efforts to expand cooperation in the security realm, such as joint maritime exercises and defense engagements, highlight the shared interests and mutual aspirations of the EU, India, and ASEAN in promoting regional stability. Despite hurdles in economic integration, including India’s protectionist stance and disagreements over environmental policies, strides have been made towards fostering deeper ties and enhancing connectivity.

Moving forward, addressing economic disparities and environmental concerns will be pivotal in realizing the full potential of the partnerships between the EU, India, and ASEAN. Balancing economic priorities with strategic imperatives will be essential in navigating the complex geopolitical landscape of the Indo-Pacific and promoting sustainable development and prosperity for all stakeholders involved.

About the Southeast Asia Public Policy Institute

The Southeast Asia Public Policy Institute is a research institute based in Bangkok and Singapore, working across the region. Our mission is to support the development of solutions to the most pressing public policy challenges facing Southeast Asia in the 21st century. The Institute undertakes in-depth research to develop actionable policy solutions on a range of issues across sustainability, technology, public health, trade, and governance. We convene dialogues with stakeholders and decisionmakers to drive discussion on the challenges and opportunities facing markets across the region. The Institute draws on a network of in-market researchers, advisors, and partners to provide insights and recommendations for governments, policymakers, and businesses.

^[1] Bomassi, L. (2023), ‘Reimagining EU-ASEAN Relations: Challenges and Opportunities’ by Carnegie Europe,

^[2] Bomassi, L., ‘Reimagining EU-ASEAN Relations: Challenges and Opportunities’, Zhao, Y. and Goh, R. (2023), ‘Despite setbacks, EU-Asean free trade deal can still be realised: analysts’ by The Business Times, Shofa, J. N. (2024), ‘EU-ASEAN Trade Deal Remains Long-Term Objective: Envoy ’ by Jakarta Globe,

^[3] Zhao, Y. and Goh, R., ‘Despite setbacks, EU-Asean free trade deal can still be realised: analysts’, Hutt, D. (2024), ‘EU, Thailand eye ambitious trade deal’ by DW,

^[4] Zhao, Y. and Goh, R., ‘Despite setbacks, EU-Asean free trade deal can still be realised: analysts’, Hutt, D. (2023), ‘Can the EU succeed on closing Indonesia trade deal?’ by DW,

^[5] EURACTIV, ‘EU, Philippines agree to relaunch free trade talks’ by EURACTIV,

^[6] Zhao, Y. and Goh, R., ‘Despite setbacks, EU-Asean free trade deal can still be realised: analysts’

^[7] Hong, J. (2019), ‘Policy Brief: EU’s Renewable Energy Directive (RED) II and Implications on Palm Oil Trade’ by CARI ASEAN Research and Advocacy, Hutt, D., ‘Can the EU succeed on closing Indonesia trade deal?’

^[8] Sudjana, B. G. and Tamzil, C. F. (2023), ‘Towards an equitable EU–ASEAN green deal’ by East Asia Forum, Cowan, C. (2023), ‘EU deforestation-free rule ‘highly challenging’ for SE Asia smallholders, experts say’ by Mongabay, Hutt, D. (2023), ‘What’s in store for EU-Southeast Asia ties in 2024?’ by DW,

^[9] Sudjana, B. G. and Tamzil, C. F., ‘Towards an equitable EU–ASEAN green deal’

^[10] Figiaconi, F. (2023), ‘Egmont Policy Brief 134: Southeast Asia’s Hedging: A Strategic Opportunity for the European Union?’ by the Egmont Institute,

^[11] Shamsunahar, I. (2023), ‘Rising India: A Welcome Partner for ASEAN?’ in The Diplomat,

^[12] ASEAN Studies Centre (2023), ‘The State of Southeast Asia 2023 Survey Report’ by the ISEAS-Yusof Ishak Institute,

^[13] Ha, H. T.. and Tan, E. R. L. (2023), ‘India’s Expanding Global Influence Has Limited Reach in ASEAN’ in Fulcrum,

^[14] Ha, H. T.. and Tan, E. R. L. (2023), ‘India’s Expanding Global Influence Has Limited Reach in ASEAN’ in Fulcrum, Marjani, N. (2023), ‘India and ASEAN need to focus on shared concerns’ in The Times of India,

^[15] De, P. (2023), ‘Reactivating the Asean-India partnership through an FTA’ in HIndustan Times,

^[16] Marjani, N. (2023), ‘India and ASEAN need to focus on shared concerns’ in The Times of India,