Under the prevailing conditions, it would be hard to have our way in most trade agreements as every country would be pushing to leverage the deal which increases their exports and limits imports.
India has once again displayed its macho image by walking out of the RCEP, keeping domestic interests in mind. Earlier, a similar position was taken at the WTO, and, more recently, with the US. This is a change of image from the past, and shows that the country has the strength to take a firm position on trade issues. More importantly, as India is a strong economic power, a powerful message has been conveyed to the rest of the world.
The Ricardian theory of comparative advantage states that countries should specialise in production of commodities where they have a comparative advantage in terms of cost, and import those where they don’t. This leads to an optimal solution. But the world is not that simple; generally, countries produce everything depending on their social structure, economic distribution and political motivations. In case of commodities like oil or gold, there are few producers and many consumers, thus, there are only a few options. Rarely does a large oil producer also import oil. Besides the prices have been more or less fixed via economic structures, which are formal. But for several other commodities there are both exports and imports. Besides, the overarching motivation for governments is to protect domestic industry.
There is a lot of talk of pushing forth India’s exports; the problem, however, is that they tend to be concentrated in less price-elastic goods, which are driven more by global growth prospects. While some suggest weakening the rupee to boost exports, anecdotal evidence shows that this hasn’t worked. If we are serious about pushing our exports, India needs to adopt an open door policy. It should also try removing bottlenecks. More important, countries should also let our exports come in. Curiously, we face tough competition from countries like China, Sri Lanka, Bangladesh and Vietnam in areas where we have a comparative advantage. Against this background, free trade agreements (FTAs) make sense.
The WTO is supposed to be the biggest FTA involving over 160 countries; all members agree on certain norms on movement of goods, services and investment. The idea is that elimination of quotas and reduction in tariff barriers would lead to materialisation of an optimal solution. This has seldom worked smoothly. WTO has been one-sided when it comes to services as the Western world is against immigration. Ironically, the developed world does not mind flooding emerging countries with their investment and goods. Therefore, the WTO solution has always been a mirage.
Now, let us look at RCEP. When 16 countries covering a large geography in terms of population and size have to negotiate, there would always be varying interests. It can never be a zero-sum game for everyone, even though on an average all countries would be better off. India is right to play tough while negotiating on imports in the farm area or textiles, as agreements like this are prone to encourage dumping. But, to get the benefits of freer entry into other countries, India has to be open to more imports in goods which may be lead to a direct competition with probably the most underprivileged class, i.e., farmers. Also, the choice of year for benchmarking will always be a bone of contention. Each country would like to bat for the year that is most convenient.
The fact is that all countries subsidise various sections of the economy based on social and political requirements, this trend is more prevelant in agriculture. Therefore, costs and prices tend to be skewed. Also, every country wants to protect their farmers as they constitute a big constituency. Dairy products or other agro products entering through the FTA window can create problems of survival of local communities. Thus, it is natural to have resistance to these bilateral and multilateral agreements. India puts export restrictions on farm product, which is not the case for other countries like New Zealand. Hence, there will always be such instances of competitive pressures.
So, is India right in walking out of the RCEP? Sovereign countries have a right to move on if they do not acquiesce to the terms, though ideally one would not go to sign the agreement and then withdraw. The spade work should have been done well in advance. Besides, walking out may not be the best way; negotiating agreements, which are serious in nature, requires a lot of diplomatic maneuvers. In political parleys discussions go on and diplomatic ties are maintained till the end, the same holds true for economic agreements. Walking out of the deal signals a message of intransigence, while keeping talks alive adds a strong diplomatic touch to a firm position being taken.
An argument that is often given is that the 16 nation group includes Asean, which is anyway not very significant in our trade basket. If this was indeed the case, there was little need to prolong the conversation. India needs to strike such agreements with various countries in different geographies to leverage mutual advantage to grow exports. While there are talks for looking more towards the US and Europe to sign such agreements, getting these countries and blocs on board won’t be easy either. Europe has been going through tough times and the US has been targeting India on certain trade issues.
More importantly, the world economy has been through a rather long phase of slowdown with few signs of an imminent turnaround. The pace of global trade has gotten truncated. Trade growth has been around 3.2% per annum, post the financial crisis. Several nations which are dependent on exports have gone into a tailspin. Any idea of trade talks with groups would invariably be directed at enhancing their own markets while keeping others out—typical of such phases.
RCEP composition shows that the ASEAN nations are export-oriented economies and countries like Japan and China, owing to limited domestic demand, have become more dependent on foreign trade. India has had an advantage of being fairly insulated as growth has been driven primarily by the domestic forces. Therefore, under the prevailing conditions, it would be hard to have our way in most trade agreements as every country would be pushing to leverage the deal which increases their exports and limits imports. The path along will surely be uneven.
(The author is Chief economist, CARE Ratings. Views are personal)