Maldives’s Free Trade Agreement with China; What prompted it to go for it; India’s concerns

Maldives-China FTA

  • Maldives, which is a strategically-located island nation in the Indian ocean, signed a crucial free trade deal with China.
  • 12 agreements, including the Free Trade Agreement (FTA), were signed.
  • The Maldives had so far only signed the regional South Asian Free Trade Area agreement.
  • This is Maldives’s first FTA with any country, and China’s second FTA with any country in South Asia — after Pakistan.
  • The FTA, hammered out over two years, aims to reduce tariffs on more than 95% of goods to zero, with the Maldivians hoping to reap foreign exchange from a spike in fisheries exports to China.

What prompted Maldives to go for the FTA with China

  • The Maldives, a collection of islands and atolls in the Indian Ocean, earned $140 million from fisheries in 2016, contributing 5% of gross domestic product. That was second to tourism, the money spinner that accounts for 60% of the Maldives’ foreign exchange and contributes to 28% of GDP.
  • The Maldivian economy runs regular trade deficits, given its resource constraints and need to provide for the nearly 400,000 people who live on 200 out of 1,192 islands. Imports last year equalled $2.12 billion, while exports amounted to $137 million.
  • China currently accounts for the Maldives’ largest import bill — an estimated $320 million in 2016. But China also contributes to the Maldives’ coffers as the largest supplier of tourists to its luxury resorts.
  • The growth of Maldives from a Least Developed Country (LDC) to Middle-Income Country status was accompanied with huge duties levied on fish products exported to the international market.
  • In 2013, the European Union dropped the island nation from its list of the Least Developed Countries, which are entitled to generous tariff reductions under the EU’s Generalized Scheme of Preferences, or GSP. At the time, 40% of the Maldives’ fisheries exports were headed to Europe.
  • Without GSP Plus, Maldivian fisheries products are now paying 25-26% duty to enter Europe.
  • Maldives had to look to China because the European Union had stopped its GSP Plus concessional duty facility to it on account of the country becoming a middle-income country.

Why is the FTA being criticised by the Opposition in Maldives?

Sovereignty in danger

  • Former Maldivian president Mohammad Nasheed, head of the country’s main opposition party, criticised the FTA saying it undermined the Maldives’ sovereignty, was bad for the region, and leaves the country in debt to China.
  • More than 70 per cent of Maldives’ foreign debt is owed to China, which gives it huge leverage over Maldives, undermining Maldivian sovereignty and independence.

No scrutiny of the pact; passed in opposition’s absence

  • While the text of the FTA between Maldives and China was concluded in September this year after two years of negotiations, there has been little debate and scrutiny of the pact in the island nation.
  • Nasheed accused the government of rushing through the FTA deal in parliament in under an hour, in the absence of the opposition.

Not legally tenable

  • The opposition also said that the approval with just 30 votes in the 85-member house was not legally tenable.
  • The MDP was pointing to Section 87(b) of the Maldives constitution, which states that “voting on any matter requiring compliance by citizens shall only be undertaken when more than half of the total membership of the People’s Majlis are present at the sitting at which the matter is voted upon”.

Fear of China taking over the nation’s strategic assets

  • There is a fear that China might acquire strategic assets in the island nation, in a debt swap deal (similar to Sri-Lanka’s Hambantota), if Male fails to pay the foreign debt to Beijing.
  • The MDP demanded that the implementation of the FTA with China should be “suspended” till a proper feasibility study is conducted “to ensure the Agreement is in the best interest of the Maldives both economically and also to ensure the Agreement does not place Maldives in a geo-politically vulnerable position”.

Maldives support to Maritime Silk Route

  • Maldives endorsed China’s Maritime Silk Road project which was shunned by India for its strategic implications in the Indian Ocean.
  • President Xi Jingping says that the multi-billion-dollar Belt and Road Initiative (BRI) – of which the MSR is a part – is similar to Maldives’ strategy of achieving economic progress by making use of its geographic advantages.
  • President Yameen said the Maldives viewed China as as “amongst our closest friends, most trusted and most dependable partners.”
  • India has strong reservations over the MSR and did not endorse it over apprehensions of increasing Chinese clout in the Indian Ocean.

Why is the FTA significant for India?

  • Sino-Maldivian trade balance remains considerably in favour of China, and there are concerns that the FTA will further increase the deficit and push Maldives towards a debt trap like Sri Lanka — an issue that has alarmed Delhi amid apprehensions of neighbourhood plunging into economic crisis in future.
  • China is eyeing naval base in Maldives much to India’s discomfort. The Maldives has also agreed to become a partner in China’s maritime silk route and the Chinese government pledged $100 million as grant aid for a bridge connecting Male and the reclaimed island Hulhumale.
  • This development is similar to the events in July 2015 when Maldives passed an amendment to its constitution allowing foreign ownership of freehold land for the first time just a day after the legislation was tabled in parliament. There were concerns that it could lead to increased Chinese military presence in the island nation.
  • Chinese trade officials have also completed six rounds of talks with Sri Lankan counterparts to nail down a China-Sri Lanka FTA. And Beijing has set its sights on bilateral deals with Nepal and Bangladesh.
  • China’s latest inroads into the Maldives expand on a foundation it has laid through loans, grants and foreign direct investment — all aimed at gaining a foothold at a strategic point in the Indian Ocean at India’s expense.
  • The Yameen administration has preferred China over India for its flagship projects. Also, Chinese state-owned companies have struck deals to build resorts and housing projects.

Chinese manoeuvres in the Indian Ocean region (IOR)

After acquiring Sri Lanka’s Hambantota port on a 99-year lease in a USD 1.1 billion debt swap deal, China has now roped in the Indian Ocean archipelago nation, Maldives, located strategically in India’s backyard, to implement the MSR.

Sri-Lanka

  • Colombo says it will not allow the docking of Chinese warships and submarines at Hambantota, but this is unlikely to endure in the long run.
  • However, Beijing may benefit from the agreement’s ambiguities, which could be used to facilitate Chinese naval deployments.
  • Colombo hasn’t revealed the exact nature of the pact and has avoided discussion of the issue in parliament.
  • To add to Delhi’s woes, the implementation of India​-backed projects on the island seems to have ground to a halt.

Djibouti

  • China has also set up a ‘logistics base’ for its navy in Djibouti, also located in the Indian Ocean region, India’s strategic “backyard.”
  • Described as a “logistics facility” for anti-piracy and humanitarian missions, the new base embeds China into the geopolitics of the Indian Ocean.

Bangladesh

  • Despite a successful visit by Prime Minister Sheihk Hasina to Delhi in April, Dhaka avoided signing a long-term comprehensive defence pact with India, presumably because much of its military equipment (including strategic platforms such as submarines) is sourced from China.
  • Dhaka has decided to give majority stakes at Payra Port to China Harbour Engineering Company Limited (CHEC), a Chinese state-owned enterprise.

Myanmar

  • In Myanmar, China is looking to take a stake of up to 85 percent in a strategically important sea port in Kyaukphyu, even pushing for preferential access to port facilities. Beijing has already built an oil and gas pipeline spanning from Kyaukphyu to Kunming, in the province of Yunnan.

China’s String of Pearls

  • ‘String of Pearls’ refers to a geopolitical theory to the network of Chinese intentions in India Ocean Region (IOR).
  • Precisely, it refers to the network of Chinese military and commercial facilities developed by China in countries falling on the Indian Ocean between the Chinese mainland and Port Sudan.
  • First, the China-Pakistan Economic Corridor (CPEC) and now its macro form of One Belt One Road (OBOR) under which China will construct various land and maritime trade routes are also seen as a part of China’s larger military ambition.
  • India has already been encircled by Chinese military and commercial facilities and if as reported, Chinese naval base comes up on Pakistan soil, that’s going to be the possible last cog in the chain of pearls encircling India.

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