Strengthening India’s trade policy
Greatertradewithaseanwillbesupportiveoftheprimeministerial call for greater Indian manufacturing for world markets
The statement by the external affairs minister last week, on multilateralism not having risen to the challenge of the pandemic (Business
Standard, August 21, 2020), has been evident in the realm of international trade as well. In response to the pandemic, almost 80 countries had by April imposed export restrictions and prohibitions in essential commodity sectors like foodstuffs, medical supplies, and pharmaceuticals. While justified as “temporary” and emergency measures, such unilateral trade restrictive policies further undermine the multilateral trading system, which has already been rendered weak by the persistent flouting of World Trade Organization (WTO) rules by the
United States.
Notwithstanding, as production starts to resume with the slow and phased re-opening up of economies across the world, trade will regain momentum. Large lead firms in global supply chains will continue to need facilitating trade rules for movements of commodities, intermediate and final, across national borders. In the absence of a well-functioning multilateral system, mega regional trade agreements will become the preferred, if not the only, alternative trading mechanism among like-minded countries involved in global value chains (GVCS). In Asia, there are currently two mega regionals — the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Trans-pacific Partnership (CPTPP). India decided to withdraw from the RCEP when it was close to concluding negotiations in November 2019. And India is not a member of the CPTPP. In this context, it may be pertinent to reflect on India’s trade policy orientation and to ask if that contributes to its role as a significant player in regional Asian dynamics.
It may help to recall, at this point, that one of the primary reasons for India to sign the free trade area (FTA) agreement with the Association of Southeast Asian Nations (ASEAN) in 2009 was its desire to be on an equal footing with other regional players in Asia. The FTA was signed, even though it was a compromise for India, both in terms of the size of the negative list and the rules of origin. Any further delay in India’s signing of the FTA would have rendered the country insignificant in the region because by then all other founding members of the East Asia Summit, that is, Japan, South Korea, Australia, and New Zealand, had signed an FTA agreement with ASEAN. More importantly, China’s FTA with ASEAN was to be effective from January 2010. Now, having announced a review of the FTA, which has not progressed for almost a year and having withdrawn from the RCEP, India may be confronted with a similar, if not even more difficult, regional scenario where China already has far greater leverage.
China is central to Factory Asia, the dynamic regional GVC hub in which the ASEAN economies are closely integrated through dense production networks. India’s withdrawal from the RCEP, combined with the earlier withdrawal by the US from the CPTPP, has greatly strengthened the regional situation in favour of China. Further, US President Donald Trump’s support to connectivity projects in ASEAN under the Better Utilisation of Investment Leading to Development (BUILD) Act with a cap of $60 billion, being rather small in comparison with the scale and magnitude of Chinese investments under its Belt and Road initiative, leaves the Asian space wide open for China’s expansionist ambitions.
In the circumstances, it would be best if India were to focus on enhancing its economic engagement with ASEAN. India’s continued and strengthened economic engagement with ASEAN will not only contribute to the bloc’s ability to reinforce its centrality in the region but also to India’s capacity to act as a counter-balancing force as envisioned in the concept of the Indo-pacific. Participation in regional value chains and integration with ASEAN, as discussed in my earlier column (“India’s exports and Factory Asia”, Business Standard, September 3, 2019), should therefore be among India’s foremost trade policy priorities. This would be best achieved by a combination of a forward-looking and trade-friendly review of the INDIA-ASEAN FTA and a re-think on joining the RCEP, even if at a deferred date.
That India’s trade policy should be oriented towards engaging with ASEAN and other economies in East Asia is also supported by the fact that the East Asian region has been the most resilient one, in terms of trade, in a world reeling from the Covid19 pandemic. According to the June 2020 Global Trade Update of the United Nations Conference on Trade and Development, trade in East Asia and the Pacific region seems to have fared better than in the others, with only single-digit declines in the first quarter of 2020 and even in the month of April, when all other regions have experienced sharp drops and countries in South Asia and West Asia registered a fall of almost 40 per cent. In addition, globally, sector-specific trends show signs of early revival of trade in computers, printers, and related accessories while the electronic components sector, according to the WTO Goods Trade Barometer (released on August 19, 2020), has shown minimum decline compared to trend. Relatively positive trade trends in these two sectors, which lie at the heart of value chain activity and integration in Factory Asia, thus point to the likelihood that trade will recover first in this region. Sectors like chemicals, where India has revealed some comparative advantage in recent years, are among those that have registered significant declines in trade during the pandemic and are yet to recover. Further, while India may see an advantage for itself in the fact that agriculture trade has been the least volatile during the pandemic, it may be worth noting that this may also be the sector to face maximum trade barriers after the pandemic. Sanitary and phytosanitary standards for food and agri-products are likely to become increasingly stringent and may soon transform into non-tariff barriers that would be particularly difficult to negotiate in trade agreements with the developed economies.
Thus, reorienting India’s trade policies proactively in favour of stronger links with ASEAN is likely to serve our economic interests better than the current trade policy orientation of greater emphasis on trade agreements with the US and EU and an apparent objective of achieving self-sufficiency through higher import tariffs, encouraging more import substitution, and building complete supply chains domestically. Greater trade with ASEAN through vibrant regional supply chains will also be more supportive of the prime ministerial call for greater Indian manufacturing for world markets.