With China facing noticeable international isolation, India must review its stand.
The Regional Comprehensive Economic Partnership (RCEP) officially came into effect on the first day of the New Year. Even without India, which virtually at the last moment developed cold feet and refused to join the 15-nation trade pact, it is the world’s largest free trade agreement. It covers a market of 2.3 bn persons or 30% of global population, with an annual output of US $26 trillion and 25% of world’s exports. That puts it way ahead in size of the Comprehensive Agreement for Trans-Pacific Partnership (CPTPP), which became operational in December 2018 and has the United States in it. China, Japan, Australia and a number of other Association of South East Asian Nations (ASEAN) countries who are in the RCEP, are also its members.
The Asian Development Bank (ADB) has recently estimated that despite not dealing with the standards on labour and environment and excluding the vast network of public enterprises, which most of these nations have, the potential benefits of RCEP to its member-nations would be more than twice of CPTPP. Its 2021 study reckons with the developments since RCEP was initialled by the member-nations in late 2019. In particular, it has recognised the emerging disruptions in supply chains because of the sudden anti-China stand several free world countries have taken after the onset of the Covid-19 pandemic in December 2019. Its flat denial of being in any way responsible for the alleged leakage of the Covid virus, which has devastated the entire world, from its Wuhan laboratory and the refusal to let a fair investigation into it have not gone down well.
Besides that its uncalled assertiveness in persisting with military incursions across the Himalayan borders with India, ruthlessly putting down the pro-democracy movement in Hong Kong, the more frequent threatening of Taiwan and continued persecution of the Uyghur population in Xianjing have ended up in it alienating even the hitherto relatively neutral nations, as well as its long standing trading partners. On top of these the Chinese government’s own economic and social actions to curb the combustion of fossil fuels, selectively address the huge emerging income and wealth inequalities, its hiking of prices of most of its export-products, and imposing of curbs on exports of critical components like semi-conductors (chips) and other high technology products have slowed down its pace of economic growth. Also, there is a lurking possibility of a banking crisis emerging with the bursting of a housing boom and banks folding up in the distant North East towns on the border with Russia. Such events have caused noticeable disruptions in international trade. Its trading partners are consciously moving away from excessive dependence on their imports from China and looking to establish other sources, preferably closer to home.
This is where the significance of RCEP comes in, even though Indonesia, Philippines, Malaysia and Myanmar have yet to ratify the agreement. South Korea ratified it recently on 1 December 2021 and would become its member on 1 February 2022, viz., 60 days after ratification. 90% of the tariffs on goods traded amongst its members are intended to be reduced over 20 years. This should give a fillip to trade and investment in the region by reducing their trading costs and tapping into their economic complementarities as well as rebuild the supply chains. The envisaged simplification of Customs and Rules of Origin related procedures and the mutual support to the MSMEs, the bedrock of South Asian manufacturing, should also allow the small and medium sized industries to upgrade and join the global value chains. The rapidly growing manufacturing in countries like Vietnam will thereby be able to access a much bigger market in the region itself. That should provide the much needed relief to the pandemic hit member nations. As per the ADB research, if implemented on schedule, by 2030 the agreement would annually augment the member-countries’ GDP by 0.6% or an equivalent of US$245 bn of output, and create an employment of 2.6 mn in the region.
The Indian reservations in 2019 to join were largely based on the apprehension that through the RCEP, China would get an unbridled access to the huge regional market including Indian and its already large trade deficit with China (and South Korea) would burgeon. In view of these two countries’ dominance of most low-cost manufacturing and digital technology based products, and both being at a higher stage of development, there was considerable validity in the apprehension. Also, without an understanding on having a meaningful set of rules of origin, it had experienced a high degree of entre-port trade. Chinese goods were being exported to it through Bangladesh, Hong Kong, Singapore and Thailand without addition of any meaningful value in their territories. In the sensitive agricultural and dairying too, India had feared being swamped by the exports of commercial Australian farming and the New Zealand cattle-raising and dairying, respectively. It also did not want to develop long term dependence upon Malaysia for the edible oil produced from its large-scale palm-plantations.
India had also opposed the inclusion of e-commerce in the scope of the partnership. It objected to signing up a pact for trade only in goods to the exclusion of services and investment. To safeguard against the Chinese and possibly South Korean goods through third countries, it had proposed a 40%-60% value added threshold in the country of origin, but its suggestion was virtually brushed aside by Australia, Japan and South Korea. In a similar vein, the Indian proposal for having an “automatic trigger” for imposition of higher tariffs by the importing countries, when the agreed threshold limit of imports gets exceeded, and the insistence on data localisation requirements were not accepted. It was in such circumstances that India, after being in negotiations for years, had walked away in late 2019, even though its trade with all the members had been growing in recent years.
Broadly speaking, India had feared the emerging more intensive competition from the similarly placed labour surplus member-countries of RCEP. Already with 11 of the 15 such nations it had a trade deficit. It seemed more inclined to go along with the current approach of protecting its economic activities through the traditional and the time-tested infant industry protection through imposing tariff and other trade walls. It was willing to make do with incremental gains from its Atmanirbharata (self reliance) type of efforts and campaigns. Seemingly, it preferred this course to letting its citizens reap the immediate advantages of cheaper imported goods and modern technology in vogue in other parts of the region besides improved access to a greater varieties of goods. Apparently, it did not demonstrate the requisite appetite to upset the prevailing status quo, even if it promised more significant benefits in the longer term.
During the last two years, the Indian government has taken a few notable measures which have laid a kind of ground for it to reconsider its earlier stand. The launching of a successful Production Linked Incentive mechanism in as many as 15 industries and the work in progress for a more liberal arrangement for domestic semi-conductor manufacturing is certainly a more optimum way forward. Steeping up the import duties on items identified for domestic production goes against the grain of healthy nurturing to grow and expand businesses. The much needed multi-faceted development of the logistics industry is also being addressed and its impact on the level of trade is showing itself. The country, as a result, seems well on its way to reach the much aspired goal of US$400 bn of exports during 2021-22 and maintaining a greater pace of growth in the years to come. This would be after years of stuttering and stagnating of exports between $300 and $330 bn.
The growing exports could, perhaps, well be a sign of Indian products becoming more competitive. This year the export merchandise is not the usual mix of refined petroleum, its products, gems and jewellery, a handful of textiles and automobiles or their components. Such building up of competitiveness should enable the Indian businesses to find a spot in the evolving non Chinese new global supply chains. The developed countries of the West are likely to continue to source a significant portion of their labour intensive products and services’ requirements from the workforce surplus ASEAN region. With all of them in the RCEP (the yet to ratify Philippines, Indonesia, Malaysia and Myanmar should also be a part of it soon), only upon joining it, would India be able to become a part of such value chains. Otherwise, its higher tariff rates and the other trade barriers in place, would strike a disconcerting note and make others in the supply chains to bypass it altogether.
India has for long been espousing its Look East foreign policy. RCEP is an opportunity to add substance to it. Enmeshing its trade with the member countries of the Eastern region viz., the ten ASEAN and the five others already having FTAs with them—Australia, China, Japan, New Zealand and South Korea—is an effective way of doing it. Devising arrangements to ensure that China, despite its size and economic muscle, does not dominate the ensuing overall trading relations in this partnership is no longer a fervent wish. Three member countries viz., Australia, Japan and South Korea, collectively and severely have the capability to effectively checkmate it and ensure fair treatment to all. Along with India, Australia and Japan are together in the newly formed Quad. It is likely to be more of an economic co-operation set-up than a hard core military alliance (earlier the US and Australia had joined AUKUS, the pure defence arrangement with the US and UK, and last week Japan and Australia signed up a bilateral defence co-operation understanding).
India, which in recent years has realised that the free trade agreements (FTAs) of the past with Japan, South Korea and South Asian nations had not benefitted it as much as was expected, has for quite some time been struggling to finalise its new bilateral trade pacts. Except for the one with United Arab Emirates (UAE), it has been in prolonged negotiations with the EU, the US and Australia. Other than a few low hanging fruits, no substantive trade benefits are likely to be reaped by it even after these are finalised. Under such circumstances, it should be worthwhile for it to signal to the RCEP nations about its willingness to resume its negotiations to become a partner of theirs. A more accommodative stance than before can be expected of them—most of them are keen to have India inside the pact, though a complete separate “carve out” for it is not likely to be agreed to (already an agreement had been verbally reached in the 2019 negotiations to let India reduce its tariffs only on 83% of its traded items against the 90% prescribed for others). Another indication of their earnestness was the unanimous declaration at the time of forming the multilateral trade agreement in 2020, that India upon joining, would be considered a founding member and accorded all the obligations and preferences as them.
Dr Ajay Dua, a development economist by training, is a former Union secretary, Ministry of Commerce and Industry.