Experience of FTAs with 12 East Asian countries shows that participation in regional value chains without ensuring that the domestic entities are efficient is a non-starter
After months of ambivalence over its position vis-à-vis the Regional Comprehensive Economic Partnership (RCEP), India finally made the decisive move to step away from the 16-Member economic grouping in East Asia. PM Modi had made it clear that India would not sign a deal that does not address its concerns. It became clear from the Leaders’ statement issued in Bangkok, at the end of the 3rd RCEP Summit, that 15 countries were going ahead with an Agreement which had several elements that militated against India’s interests.
For quite some time now, Indian farmers and a number of leading manufacturing companies have been consistently flagging the imminent dangers of joining RCEP. This grouping had agreed to undertake sweeping tariff liberalisation, and India was expected to eliminate tariffs on 90% of its imports from ASEAN, and on 80% of its imports from China. Such demands went completely against Indian core interests of protecting and promoting its vulnerable segments of agriculture and the manufacturing. In fact, in all the major free trade agreements (FTAs) India has negotiated thus far, especially with the 10-member ASEAN, Korea and Japan, the country was able to prevent the vulnerable segments from getting exposed to market competition. However, with RCEP demanding such deep tariff cuts, the possibilities of protecting the vulnerabilities became next to nothing.
There were at least two reasons why Indian entities were worried about their future if the government had signed on to RCEP. The first is that the three FTAs, with ASEAN, Japan and Korea, implemented from the beginning of the current decade, have not served India well. In every case, the trade deficit with the FTA partners has ballooned, owing to a double whammy, namely, increasing imports, but more importantly, the lack of momentum in exports. In fact, the trade deficit with ASEAN had seen a spike recently, rising from about $13 billion in 2017-18 to nearly $22 billion in 2018-19. No wonder then that the prime minister has called for a review of the India-ASEAN FTA.
The second factor is the large footprint of Chinese products in the Indian economy. But more significant than the sheer size of the trade deficit, once again caused by India’s inability to penetrate China’s market, is the fact that India exports raw materials and intermediates to its northern neighbour and imports finished products, not to speak of critical electronic items. This almost resembles the colonial pattern of trade, which we thought was behind us seven decades ago.
Over the past two years, the lack of competitiveness of Indian entities and their constant agitations, made the government take an unprecedented step towards reversing the tariff liberalisation policy. Between 2017 and 2018, tariff increases effected by the government hiked the average tariffs on manufacturing products from below 11% to nearly 14%, while average tariffs on agricultural products increased from below 33% to nearly 39%. This trend in tariff increases was also followed in 2019, with the finance minister hiking tariffs on several product categories.
There is no doubt that the decision to exit from RCEP was also taken because the manufacturing sector is going through its worst phase in decades. Exposing the manufacturing sector to competition from some of the most efficient producers would have accentuated the existing vulnerabilities and worsened the unemployment situation.
Finally, there is also a need to address an oft-heard position that not joining RCEP would deprive India of important markets and participation in value chains in the East Asian region. It seems that this position is taken without making the necessary fact-check. The reality is that India has existing FTAs with 12 of the 15 RCEP participating countries. These markets are available to us, but, as mentioned earlier, domestic vulnerabilities are preventing India from exploiting them. Moreover, imports from these countries have registered steep increase in the past few years; RCEP would have reinforced this trend. The second reality is that RCEP would have provided preferential market access to Chinese products, which, even without these lower tariffs, have had a dominating influence on the India market. Third, participation in regional value chains without ensuring that the domestic entities are efficient is a non-starter; the decade long experience of implementing FTAs with 12 East Asian countries has proved this beyond any doubt.
The author is Professor, Centre for Economic Studies and Planning, JNU. Views are personal