The narrative that RCEP-Asean-type of deals are hurting is incorrect & the talk of a US/EU FTA is just wishful thinking.
There are essentially two strands to the arguments made after India walked out of RCEP. First, that the lack of safeguards in RCEP that India wanted against a surge in Chinese imports will hurt India, so the country is better off without being a part of RCEP; the Asean FTA is held up as an example of how FTAs are hurting. Second, rather than getting bogged down in an FTA driven by Chinese interests, India’s interests are better served by concluding an FTA with the US or the EU; and since both are higher-cost economies than India, India’s exports will also grow faster than, say, in an RCEP FTA.
Apart from the fact that it makes little sense to give up on trade with the world’s fastest-growing region, the assertion that the Asean FTA has hurt India is incorrect; nor is it a given that India’s exports will rise in a US/EU FTA. After all, if countries in the RCEP—and China is just one of them—are more competitive than India, they will continue to export more to the US/EU, even when India has an FTA; you just have to look at the growth in India’s exports and those of various RCEP countries to know this. More on the proposed US/EU FTAs in a bit.
Indeed, even when you look at India’s exports growth to Asean, this lack of competitiveness is a factor that can’t be ignored; just because India and Vietnam, say, have the same access to the Chinese market and the same duties levied on them, it doesn’t mean India’s exports will do better even if they are less competitive. Vietnam’s better performance relative to India can’t possibly be laid at Asean’s doors. The fact that, between 1990 and 2018, Vietnam’s overall exports grew 102 times versus just 18 for India—as a result, Vietnam’s exports are now 75% those of India’s—makes it clear that the Asean FTA is hardly the issue.
If India is not part of RCEP, and doesn’t get the benefits RCEP members do, its exports to these countries are unlikely to grow as fast as those of others. And, as India fails to join other such FTAs, whom will it trade with? As India gets more inward-focussed—it has been raising import duties—it will get less competitive. This will push up its trade deficit; as its import duties go up, so will smuggling levels.
India’s imports from Asean growing faster than its exports—exports grew 2.07 times in FY10-FY19 while imports grew 2.3 times—also has to do with India’s poor domestic policies, which resulted in imports of items like coal or mobile phones/components shooting up. After all this, between FY10 and FY19, India’s global exports rose 1.9 times while those to Asean rose 2.1 times; India’s imports from the world rose 1.8 times while those from Asean rose 2.3 times. Yet, in relative terms, India’s trade deficit hasn’t risen discernibly.
India’s Asean trade deficit was around 8.3% of its total deficit with the world in the 2000s, and fell to 7.7% in the 2010s (see graphic); the deficit was as low as 4.2% in FY11, and as high as 12.5% in FY16. Those denouncing the Asean and other such FTAs would do well to look at the data.
Pravin Krishna of Johns Hopkins University points out in a recent paper that between 2007 and 2017, India’s trade deficit with Asean (as a percentage of India’s total trade deficit with all countries) fell from 9.9% to 6.6%. For all bilateral agreements that India has, such as with Japan, Korea, etc, this fell from 12.6% to 7.5%. The numbers will vary depending on the year—the number for 2018 could be different than that for 2017—but, there is no evidence of a catastrophic impact of FTAs, either bilateral or plurilateral. Indeed, the sharpest deterioration in India’s deficit is with China, a country it has no FTA with; once again, FTAs are not the problem.
The reason for that is simple. For one, according to Krishna, there is a long gestation before any FTA gets actualised; this applies to RCEP as well. The India-Japan trade agreement began in the year 2011, but implementation is complete for only about 23% of the tariff lines so far; India will liberalise imports for 63% of goods only in 2021, and another 14% of goods are not even part of the FTA. Similarly, under the India-Korea agreement, signed in 2010, only about 8% of tariff lines had been fully eliminated prior to 2017; 20% are totally out of the FTA’s purview. Nor is it true, Krishna points out, that all trade in an FTA takes advantage of the preferential duties since there are complex rules of origin etc; despite the recent explosion in FTAs, Krishna says, only about 16% of world trade takes place on a preferential basis (the figure rises to 30% when intra-EU trade is included in the calculations).
It is not clear how soon India can sign an FTA with US/EU, but suffice it to say that India has not even been able to resolve its dispute with the US on simple issues like duties on Harley Davidson motorbikes. An FTA with India, along the lines of the TPP that the US was working on, will presumably be as stringent—TPP had rules on labour laws, intellectual property protection (India will have to grant patents to a lot more US drugs as US rules are more liberal than India’s), reducing sops to PSUs, and the need for unfettered market access to US firms. If lobby groups like Amul could stop an RCEP, surely they will try and do the same when the US/EU want even more market access and have even larger subsidy levels? Since most Indian markets will have to be opened, other lobbies will also get active. India’s trade negotiators need to get real.