Free trade agreements: India’s main challenge will come after RCEP

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Updated: September 11, 2019 1:52:50 AM

Concluding the RCEP is probably not as big a challenge for India, as making it useful is going to be. The toughest part of the deal is yet to be reached.

As India prepares to join the RCEP—and negotiators try hard to obtain a deal that would be as acceptable to a grudging industry as possible—the reality remains unchangedAs India prepares to join the RCEP—and negotiators try hard to obtain a deal that would be as acceptable to a grudging industry as possible—the reality remains unchanged (Illustration: Shyam Kumar Prasad)

The Regional Comprehensive Economic Partnership (RCEP) negotiations are turning out to be agonisingly burdensome as some of the countries, including India, are not yet able to align the negotiating outcomes to their perceived national interests from the deal. The recently concluded Bangkok Ministerial highlighted the fractures and fissures that remain among India and several other RCEP members in agreeing on major issues. The hopeful part, though, is that despite outstanding issues, members are not giving up, and are continuing to push ahead.

Trade negotiations do stretch, and the RCEP is not an exception. Its forerunner in the region—the Trans-Pacific Partnership (TPP) Agreement was negotiated for nearly eight years, covering both terms in office of the former US President Barack Obama. After the US abandoned the TPP, fresh talks on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) went on between the members for several more months.

The Uruguay Round of multilateral trade talks leading to the formation of the World Trade Organisation (WTO) also lasted for nearly eight years during the 1980s and 1990s. Many regional trade agreements have taken as long, or more, to conclude, most notably India’s trade deals in goods and services with the Association of Southeast Asian Nations (ASEAN).

The prolongation of the RCEP talks is, therefore, natural, more so because it comprises a heterogeneous group of economies with different structural conditions, comparative advantages and domestic institutions.

It is also noteworthy that trade agreements often encounter vicious opposition from various quarters. Civil society opposition to free trade agreements (FTAs) is not a new thing. In fact, various WTO ministerials and negotiations, right from the beginning, have witnessed protests and agitations over various issues. So has been the case with various regional trade agreements, including particularly the TPP.

The RCEP, interestingly, has witnessed much less agitation within member countries, except in India. In fact, opinions within India have been almost unanimously against India joining the RCEP. And the most powerful of these opinions are those of Indian industry.

Indian industry, as such, has been opposed to the country entering into trade agreements. In this respect, its views on the RCEP are not surprising. From India’s trade engagement perspective, the RCEP is an interesting example. It is probably the first FTA where the government has tried to have extensive consultations with various sections of industry for getting them ‘on board’. It is also probably the first FTA where general industry reluctance over staying away from FTAs is combined with the geopolitical bogey of entering into a trade agreement with China. This might not be there with future FTAs that India might look to negotiate with other countries and regions. However, industry’s concerns on engaging with FTAs will remain.

Many outside the country find it difficult to understand Indian industry’s reservations to engage in FTAs. This is particularly true with respect to countries from the Asia-Pacific region, where industries and businesses often lobby with their respective governments for engaging into FTAs that would give them preferential access to new markets. Such access is not just for promoting exports and investments, but also for accessing cheap imports—both finished and semi-finished—and both for further processing as well as final consumption needs. Cross-border trade and investments for several Asia-Pacific economies—who are negotiating the RCEP along with India—are fundamental elements of long-term economic vision. This could be due to the region’s long history of export-oriented development abetted by export-inducing foreign direct investment (FDI) and the emergence of tightly-knit supply chains. Domestic businesses from these economies, many of whom, including SMEs, can be described as ‘regional’ businesses due to their close operation links with counterpart businesses across the region, are strongly pro-trade, and with what trade experts describe as ‘offensive’ market access agendas. No wonder, these industries, and their governments, are often baffled by India’s perceived reluctance to lower tariffs and other market access barriers.

Indian industry’s much maligned reluctance and fervent lobbying with its trade negotiators to not lower market access barriers is, in many respects, a natural response. Across most industries, irrespective of upstream or downstream functions, the cost of producing in India remains higher than in several economies, particularly many of those that are in the RCEP. These costs are high due to relatively higher costs of electricity, skilled labour, industrial land and internal transportation. For exporters, these costs are augmented by costs encountered at the country’s borders and problems of availing export credit. The cost disadvantage, vis-à-vis countries such as Vietnam, Malaysia, Thailand, the Philippines and, of course, China, produces two negative responses towards FTAs.

The first is the opposition to ‘cheap’ imports. As other countries can produce at much less cost and export the same, the only way domestic producers can stay competitive is if these imports are taxed at the border through high tariffs, making their domestic prices higher. The second response is a much lesser interest of exporters in FTAs, compared with other countries, as they know that, in spite of preferential access in foreign markets, they might still not be competitive if domestic production costs remain high.

As India prepares to join the RCEP—and negotiators try hard to obtain a deal that would be as acceptable to a grudging industry as possible—the reality remains unchanged. Concluding the RCEP is probably not as big a challenge for India, as making it useful is going to be. The toughest part of the deal is yet to be reached. Giving industry the RCEP must be accompanied by sustained efforts to make it competitive by cutting down domestic costs of production. Otherwise, Indian industry will continue to view FTAs as devil incarnates!

(The author is Research lead, Trade & Economic Policy, Institute of South Asian Studies, National University of Singapore. Views are personal amitendu@gmail.com)

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