India, Japan, Australia working on a supply chain pact to counter China

Japan, India and Australia are seeking to build stronger supply chains to counter China’s dominance as trade and geopolitical tensions escalate across the region, according to people in Tokyo and New Delhi with knowledge of the matter.

The three nations are discussing building a “supply chain resilience initiative,” according to the people, who asked not to be identified because they are not authorized to speak to the media about internal discussions. The talks are at a working level currently, but Japan would like to bring them to a higher level at some point, according to a person in Tokyo.

India’s government is considering the plan and will make a decision soon about whether to participate, some of the people said. An Australian official declined to confirm the talks.

The discussions were earlier reported by The Economic Times.

The intensifying US-China conflict and worsening diplomatic relations across the region are forcing companies to consider whether they can continue to do business in China as before. In addition, the disruptions to trade caused by Covid-19 brought home how dependent many nations were on China for essential goods such as ventilators or masks, spurring talk about diversification.

Factory Diversification

Japan is trying to pare its reliance on Chinese factories, with the government subsidizing some companies to shift or expand operations in Japan and Southeast Asia. So far 87 firms are participating in the program, which will pay out 243.5 billion yen ($2.3 billion).

Both India’s and Australia’s trade and diplomatic relations with China are fraying. Prime Minister Narendra Modi’s government restricted some Chinese imports and banned several Chinese apps after a deadly border clash with its neighbour. In Australia, exports like beef, barley and now wine have been targeted by China amid deteriorating ties between the two nations.

The QuadAlong with the US, Japan, Australia and India are members of the Quadrilateral Security Dialogue, or Quad, a loose grouping for national security consultation.

Two calls and a text message sent to India’s trade ministry spokesperson during business hours were unanswered.

A spokesman for Australia’s foreign ministry said the nation is working with a range of partners to ensure supply chains are kept open and resilient during the recovery from Covid-19, but did not confirm whether it was working on a deal with Japan and India. There’s no clear agreement between the three nations on any action yet, an official from Japan’s trade ministry said.

Earlier this year Australia and India agreed to work together on diversifying supply chains.

The new proposal will seek to lean on such bilateral agreements between countries and put in place further measures for trade facilitation and attracting foreign direct investment in the Indo-Pacific region, the people said. Nations from Southeast Asia would also be invited to participate, they said.