India’s RCEP decision: A tactical retreat

November 12, 2019 2:00 AM

Since trade negotiations ultimately boil down to bread-and-butter issues, having no deal is far more prudent than signing up for a bad one.

Prime minister Modi invoked Gandhi’s Talisman while announcing India’s decision to a domestic audience from a global stage.

By Ashish Kundra

India finally opted out of the much anticipated Regional Comprehensive Economic Partnership (RCEP). Even in its truncated shape, it remains a formidable economic grouping. Free trade economists have questioned this move, on grounds of its protectionist inspiration. Strategic analysts lament the lost opportunity of being an integral part of the new geo-political alignment. Some have gone so far as to describe it as a failure of the Act East Policy. Indian industry, on the other hand, has hailed the withdrawal for pre-empting the flooding of Indian markets with cheap Chinese imports. Behind this decision to abstain lies the cold logic of economic pragmatism.

At the outset, it needs to be understood that any free trade agreement is merely an instrumentality by which a set of countries choose to accord favourable access to their market, vis-à-vis others, by lowering the ceiling of applicable custom duties. Trade negotiators have a herculean task in arriving at the right balance of concessions, which would enhance market access for goods produced in their country while allowing greater choice to domestic consumers through cheaper imports. In doing so, they have to be equally judicious in assessing the impact of such imports on domestic manufacturing and agriculture. The underlying spirit of such agreements is that nations would draw upon their respective comparative advantage to shape a robust economic partnership. In a nutshell, a fair and balanced agreement, like a good marriage, would be mutually beneficial, without hurting the growth prospects of either partner.

With the virtual collapse of World Trade Organization, regional and bilateral trade agreements have gained salience. RCEP was positioned as a game changer. It embraced the ten nations of ASEAN, and four Asian economic giants—China, Japan, India, and South Korea—apart from Australia, and New Zealand. ASEAN has signed FTAs with the six dialogue partners while India does not have an FTA with either China, Australia, or New Zealand. Economically disparate countries of ASEAN, from Singapore to Laos, have effectively embedded themselves into regional production value chains anchored in China and Japan. On the other hand, Indian experience of FTAs has seen a modest export growth, but a burgeoning trade deficit. This impelled the finance ministry to initiate a review of FTAs, citing concerns about their impact on manufacturing. Contrary to expectations, barring the case of Japan, there has been no significant increase in foreign investment or technology transfer as a result of these FTAs. The proverbial elephant in the room is China. A huge trade imbalance, touching $60 billion, is a sure deterrent, especially at a time when our domestic economy is witnessing a slowdown. The nature of imbalance is more worrisome—we end up exporting commodities, and importing finished goods. A maze of non-tariff barriers and hidden subsidies have ensured that this dynamic remained unaltered over time. It has been argued that Indian negotiators should have sought greater market access for pharmaceuticals and IT, areas of strength. Bilaterally, China has stymied such efforts in the past, and would hardly be expected to cede ground plurilaterally. Concerns of small dairy farmers of India were not unfounded, given that they were pitted against multinational companies of New Zealand, the worlds largest dairy exporter, holding sway over a third of global dairy trade. It is no surprise that we have been unable to conclude our bilateral negotiations with New Zealand even after nine years.

It has been argued that Indian industry has hidden behind a wall of protectionism for far too long, and must open itself to global competition. After all, Indian consumers deserve wider choice at better prices. This may be partly true, but, at the same time, let us not lose sight of the fact that India is still a laggard in the ease of doing business, despite impressive gains in the recent past. Competitiveness of Indian industry must be augmented through deeper economic reforms in critical areas such as labour laws and taxation.

Prime minister Modi invoked Gandhi’s Talisman while announcing India’s decision to a domestic audience from a global stage. The politics behind all global trade negotiations is always rooted in the local. A couple of years ago, president Trump jettisoned the Trans Pacific Partnership as he believed it was detrimental to the interests of American industry and jobs. If the biggest proponents of free trade adopt a cautious stance towards trade liberalisation, India can hardly be blamed for economic realism. India is no longer the closed economy it used to be decades ago. The focus, at this juncture, should remain on attracting greater foreign investment, which would boost manufacturing, and generate jobs. Having no deal is far more prudent than signing up for a bad one. Strategic arguments apart, in the ultimate analysis, trade negotiations boil down to basic bread-and-butter issues. It is easy to succumb to the rapturous sound of global applause, but far tougher to make a tactical retreat in the larger national interest.

(The author is IAS officer, Govt of Mizoram Views are personal)

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