The RCEP dilemma
THE CURRENT ECONOMICAL SLUMP HAS URGED INDIA to CONSIDER PROSPECTS OF JOINING THE EMERGING TRADING BLOC that PROMISES ADVANTAGES BEYOND Just TRADE MERIT
After the World Trade Organisation failed to be propitious for trade expansion, Free Trade Agreements (FTA) emerged as the thumb rule for trade buoyancy. India followed suit, signing several FTAS – both bilateral and multilateral.
But, none of them proved to be a boon to India. Instead, they did a boomerang by increasing the trade deficit. FTA with ASEAN escalated trade deficit from US$ 5.4 billion in 2011-12 to US$ 21.8 billion in 2018-19; with Korea, it increased from US$ 8.5 billion in 2011-12 to US$ 121.1 billion in 2018-19 and with Japan, it increased from US$ 5.7 billion in 201112 to US$ 7.9 billion in 2018
19. All in all, FTA increased the burden of trade deficit by one-fifth.
Notwithstanding the losses, India is in the middle of deliberating whether to join the emerging bloc — the Regional Comprehensive Economic Partnership (RCEP). Why? While the industry circle has warned of huge damage to domestic manufacturing, fear triggered over possible alienation from the world’s largest trade block, which consists of world’s largest trading partners excepting the USA is equally to blame.
RCEP, comprising the members of ASEAN plus six more countries is significant to India’s economy. It is the biggest stakeholder in India’s global trade and foreign investment, accounting for 28 per cent of India’s global trade and 20 per cent of India’s export. It also emerged as the biggest source of foreign investment, nearly 39 per cent, with Singapore topping the list in 2018-19.
Aligning to RCEP increases India’s export potential since it accounts for 35 per cent of the world economy. The importance of RCEP in recent years was further spurred after the fall of TPP, with the US leaving the block.
Export has become a matter of urgency for India to insulate itself from the current downturn, which it is feared will be lingering for a longer period still. Noted economist, Dr Arvind Panagariya, has harped on export boost as an immediate remedy for the Indian auto sector, which has cried out for fiscal remedies.
Given the situation, RCEP can provide a vibrant platform to boost India’s exports, notwithstanding the prevailing concern over import surge. It can also prove instrumental in ratcheting up the Make in India initiative and giving a strategic shape to the Act East policy.
Therefore, the objective of joining RCEP should be viewed not only from the perspective of trade merit but also from the point of view of geo-economy and geo-strategy as a political dividend in the world.
Given the industry circle raising alarm on China’s aggressive exports and damaging domestic industry in India, policymakers are in a dilemma. They are fumbling around for suitable countermeasures to the tsunami of Chinese exports.
Whether they find doable measures to resist this gushing flow of goods or not, time will tell.
Nevertheless, the landscape of global trade has changed with the eruption of a trade war between the USA and China. Protectionism has become the thumb’s rule for the trade between the two global economic superpowers. This has unleashed a cascading impact on the economies for smaller countries, which are reliant on an export-based economy. To this end, RCEP opens up a new avenue to insulate their economies through the duty-free regime.
Undoubtedly, China, which is an export-based economy and the most affected by Trump’s high tariff salvo, will push export to India with the benefit of duty-free to offset the downfall in exports to the USA, having in India a big market. By now, India’s FTAS with ASEAN, Japan and South Korea has already immunised it with the trade deficit. Hence, if India joins RCEP, they only have China to worry about.
In addition, RCEP will also provide a big market for Indian
agricultural products in China, which the USA is losing in the wake of China’s high tariff retaliation. The USA is the largest exporter of agricultural products to China. With the imposition of higher tariff by China, India’s market accessibility to China will surge. Currently, with the exception of cotton, India’s main exports to China are petroleum refinery products, iron ore, pharmaceutical and plastic products. RCEP has the potential to accelerate India’s exports of agricultural and pharmaceutical products to China.
Another example would be soybean. China is the biggest importer of soybean in the world and the USA is the biggest supplier to China. Given that US exports are shrinking due to the high tariff by China, new space will be created for India’s export to China, with tariff dividend in RCEP. India is the fourth biggest exporter of soybean in the world.
The Us-china trade war will also augur well for India’s exports of animal husbandry meat to China. China is the second biggest importer of chicken broiler meat in the world and the USA is one of the biggest exporters of it to China. With the demand for USA chicken broiler meat receding due to high tariff, a new space will be generated for India’s exports of this item in China.
Joining RCEP will provide new hope for ‘trade in services’, such as IT services. India has pitched itself for supremacy in IT services after being globally recognised as one of the top IT service providers in the world. With the USA restricting immigration and H1-B visa, many Indian IT service providers are left jobless. India can push trade in IT services in RCEP while being within the block. It is almost an uphill task to push it while being outside the block.
India has been moving towards a new phase in manufacturing in the recent past. From sectoral growth (based on natural resources, such as textile, steel, metal and agrobased), it is moving towards technology-based industries, such as electronics, digital and high-tech industries. As a result, electronic production took a great leap by over three times in between 2015-16 to 2017-18.
This gives India leeway to enter GVC (global value chain) network of manufacturing. RCEP can provide a strong platform to engage in GVC network of manufacturing across the border. ASEAN has been the pioneer in providing a similar platform to the Japanese auto industry to produce Asian car model when it lost competitiveness in the wake of Japanese yen appreciation in end-eighties.
To sum up, there are manifold advantages for India to join RCEP, even though they are not related to trade merit directly. Political dividend and low-cost manufacturing, after China lost its paradise, should steer India’s significance to join RCEP. (The views expressed are
strictly personal)
Export has become a matter of urgency for India to insulate itself from the current downturn, which it is feared will be lingering for a longer period still. Given the situation, RCEP can provide a vibrant platform to boost India’s exports, notwithstanding the prevailing concern over import surge