Conundrum! India Inc’s RCEP fear is not unwarranted

With Make-in-India on a slippery slope, policymakers need to be mindful of domestic industry’s concerns and not get into a raw deal with respect to the RCEP.

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In the past, too, India has not been able to get a fair deal with respect to services trade, despite giving greater market access in goods trade.

Prime Minister Narendra Modi, in the recently concluded Regional Comprehensive Economic Partnership (RCEP) summit in Singapore, had extended his support to other leaders for an early conclusion of the agreement. However, back home, the deferment of RCEP negotiations to 2019 has come as a relief for Indian policymakers who are under tremendous pressure from Indian industry, civil society groups and the agriculture sector to withdraw or go slow on the 16-nation mega pact.

The RCEP is a proposed free trade agreement (FTA) between 10 ASEAN countries and their six FTA partners—namely Australia, China, India, Japan, South Korea and New Zealand. The bloc accounts for 25% of global GDP, 30% of global trade, 26% of FDI flows, and 45% of the total population. According to reports, the negotiations for seven out of 16 chapters have been completed.

India’s uneasiness and concerns over RCEP negotiations are not unwarranted. Time and again, India has flagged its concerns on the slow pace of services trade. For example, the liberalisation in Mode 4 services that facilitate movement of professionals from one country to the other. Apart from liberal visa regimes, India has backed greater liberalisation in Mode 3 (commercial presence) and Mode 2 (consumption abroad) services, but with limited success. The Prime Minister, in Singapore, also urged the negotiators to make efforts to fast-track services trade negotiations, being mindful of India’s competitive advantage in services trade.

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Apart from services trade, India has constantly resisted provisions on intellectual property rights. India doesn’t want to commit to provisions over and above the TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement under the World Trade Organisation (WTO), as that could be detrimental for the domestic generic pharmaceutical industry and could lead to monopolisation by pharma MNCs. India has already opposed few proposals on patent extensions and restrictive rules on copyright exceptions. The fear is that it may limit access to affordable drugs and have serious implications for the domestic pharma industry.

Moreover, India’s experience with the previously concluded FTAs hasn’t been good. A recent NITI Aayog note co-authored by me (FTA and their costs, NITI Aayog, Dr Saraswat, Priya, Ghosh 2018) also highlights that India’s combined trade deficit with FTA partners like ASEAN, Japan and South Korea has almost doubled in the last eight years. India’s trade deficit with the RCEP bloc of over $100 billion is almost 64% of its total trade deficit, of which China alone accounts for over 60% of the deficit.

Therefore, it comes as no surprise that Indian industry’s key contention has been that of China’s dominant position in the pact and India’s burgeoning trade deficit with China—which is India’s biggest trading partner, accounting for almost 12% of its overall trade. The Sino-Indian bilateral trade has increased from a mere $1.8 billion in FY2000 to $90 billion in FY18. The trade especially picked up after China’s accession to the WTO in 2001.

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However, the trade is skewed heavily in favour of China. India’s trade deficit with China has grown from a mere $0.6 billion in FY01 to $63 billion in FY18. India’s exports to China in FY18 were a mere $13 billion, compared to imports of $77 billion. Almost 65% of India’s trade deficit with China is accounted for by two segments—machinery and mechanical appliances & electric machinery.

The asymmetry of trade balance between India and China is compounded by the nature of the goods flow between the two partners. India’s top exports to China include organic chemicals, ores and slag, vegetable fibre, electric machinery, salt and sulphur, and plastics, while Chinese exports to India are mostly a wide variety of sophisticated products higher up in the value chain (with higher profit margins and which create more jobs at home) such as capital goods, electronics and machinery.

India’s exports basket to China is significantly different from its exports composition to the world—India’s top export segments such as precious stones, machinery & mechanical appliances, vehicles, ready-made garments and pharma do not find their way into China. Thus, the Chinese market is yet to emerge as an important destination for India’s most significant exports.

Apart from factors such as economies of scale, greater regional value chains and benefit of subsidies, China’s use of non-tariff barriers like complex product certification process, labelling standards, custom clearance and factory inspection procedure play a big role in creating an entry barrier for imports into Chinese markets. Non-tariff barriers, in fact, are China’s secret weapons for checking imports, especially in the pharma, IT, agriculture and metals sectors.

On the other hand, China’s penetration into India’s top imports is a worrying trend. China dominates both in terms of value-added import items as well as labour-intensive industries. Overall, India imports almost 20% of its non-oil imports from China. Almost 60% of India’s electric machinery imports, 36% of machinery and equipment imports, and 37% of organic chemical imports are from China.

Imports where China has more than 50% share include furniture, industrial textiles, footwear, ceramic, toys, knitted fabrics, leather articles and handbags, base metals, apparel and clothing, silk, umbrellas and headgears. These are all labour-intensive industries. Importantly, with the US-China trade war escalating, there has already been evidence of surge of aluminium and steel imports into India. Re-routing of goods through FTA partner countries into India is also fairly common.

A deep dive reveals that China’s share in telephone and mobile handset imports is 73%, it’s 64% in automatic data processing machines imports, 82% in diodes, transistors and semiconductor devices, 46% in electric transformers, 45% in air vacuum pumps, 30% in electronic integrated circuits, and so on.

Thus, Indian industry’s fear with respect to China cannot be ignored. There is ample evidence of Chinese subsidisation programme, dumping of goods into various markets (given that the highest number of anti-dumping measures have been taken against China, as per the WTO), and the US’s recent trade remedial measures against China.

With Modi’s Make-in-India also on a slippery slope, Indian policymakers need to be mindful of domestic industry’s concerns and not get into a raw deal with respect to the RCEP. In the past, too, India has not been able to get a fair deal with respect to services trade, despite giving greater market access in goods trade.

(The author is a Mumbai-based economist)

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