RCEP Cost-Benefit Trade-Offs: Is India Ready?

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The ninth RCEP ministerial meeting took place in Bangkok on 11-12 October 2019. (Image courtesy: @PiyushGoyal)

Few debates have been as polarised as the debate on Regional Comprehensive Economic Partnership (RCEP), the ASEAN plus six nation (India, Australia, China, Japan, South Korea and New Zealand) trade agreement that brings together 16 countries accounting for 25 per cent of global GDP, 30 per cent of trade, 26 per cent of foreign direct investment and 45 per cent of the world’s population. With most of industry, big, medium and small, including some agri-industries like dairy, vehemently opposed to India signing on to what is in effect an expansive Free Trade Agreement and government equally determined to press ahead, the discerning citizen is caught in between.

Is RCEP all that it is made out to be by its votaries: an opportunity for India to join a powerful economic club from which it has been excluded so far? One way of looking at it is that RCEP is only an extension of the FTAs India has already signed with many countries, barring China, Australia and New Zealand. However, and this is the catch, not only is RCEP far more ambitious than any FTAs to date, more importantly, it includes China, our big neighbour to the East, with whom we already run a huge trade deficit. Any further opening up of trade to imports from China risks not only widening this deficit but also has the potential of decimating large parts of Indian industry that are not competitive, especially vis-à-vis their Chinese counterparts. Additionally, given border tensions between China and India there are geopolitical and strategic concerns that cannot be ignored.

In such a scenario, it is often argued it would be wrong to look at RCEP only through the economic prism. But geopolitical and strategic interests are hard to quantify. Economic interests, in contrast, can be quantified. And with a reasonable degree of accuracy. Hence, the most important question, from the economic perspective, before we join RCEP is: Will India, more importantly the average Indian, be better off if India joins RCEP? Subsumed in this are other sub-questions: will we be swamped by cheap imports from partner nations, especially China, in the process sounding the death knell for much of domestic industry? How should we weigh the gains from cheap imports with the potential long-term losses not only of our domestic capabilities but also of jobs?

With the deadline for concluding negotiations barely a month away, and the latest meeting of trade ministers in Bangkok over the weekend (12-13 October 2019) ending in a stalemate, we desperately need a dispassionate assessment of cost-benefit trade-offs for India before we join RCEP. Unfortunately, RCEP arouses strong passions on both sides—both among nay-sayers and its votaries—with the result that it is hard to find a sensible middle ground.

Granted trade negotiations always entail some give and take. But the numerous FTAs we’ve signed to date have left us with a strong sense that India has, invariably, given more than it has taken. Whether this is because we have not been able to take advantage of greater access to the markets of trading partners, post FTA, or because our trading partners have been more successful in using non-tariff barriers, such as sanitary and phytosanitary standards, ostensibly meant to ensure food safety and animal and plant health, to keep Indian exports out, is something on which the jury is still out. Suffice it to say there has been no great additionality to trade.

Part of the reason is that FTAs often tend to divert trade to partner country/countries, rather than increase trade overall. Indeed, our experience to date with FTAs hasn’t been particularly encouraging. Studies show FTAs have made little difference to our trade flows; such trade accounted for 16.3 per cent of overall trade in 2000 and 17.9 per cent today. The obvious question that follows from this is it then worth joining a much more all-encompassing trade deal unless we are very sure the long-term gain will be worth the short-term pain, of which there will definitely be some as Indian industry adjusts to the new realities.

Even within industry, there are different views. This is not surprising since industry is not one homogeneous entity; some will benefit and others will lose, so it boils down to a question of identifying those that are likely to gain and those that are likely to lose to see how best we can protect the interests of the latter without necessarily protecting inefficient industries. Cheaper imports of raw materials will benefit user industries while cheaper imports of finished goods are likely to pose a threat to domestic industry.

If those on the losing side are sunset industries that are anyway fated to die while those that are likely to gain are sunrise industries in which India has a competitive advantage, then RCEP might be worth the disruption. Naushad Forbes, co-chairman of Forbes Marshall, and one of the few industrialists who is a strong votary of RCEP, argues that we must ignore the growls of auto sector and look at the opportunities for auto components and the garment industry. Except that even in the garment industry, India has not been able to take advantage of the opportunity offered by companies looking to exit China, with most opting to relocate to Vietnam and Bangladesh. At a time when economic growth is at a low ebb, job losses are a reality and U.S.-China trade wars are threatening global trade, the big question is whether the risk-reward trade-off from the disruption on account of RCEP is worth the inevitable disruption.

The elephant in the room, not surprisingly, is China. Of India’s merchandise trade deficit with RCEP countries ($105 bn in fiscal year 2019) close to roughly 60 per cent ($53.6 bn) is with China alone. And therein lies our biggest fear: the fear that once we join, this deficit will grow even further and we will be swamped by imports, especially from China.

Moreover, India’s interests are in services, not goods. Given the global reservations on free movement of labour, it is unlikely we will be able to cash in on that. The reality is while countries are happy to open their borders to trade in goods, it’s a different yardstick in case of services where lack of mutual recognition of degrees acts as a convenient excuse to keep out labour from India.

The reality also is that if India doesn’t join, other countries are likely to go ahead, regardless. An RCEP of 15 will possibly be a much worse alternative than an RCEP of 16, including India. We have already lost out by not being part of the global supply chain; not signing RCEP will ensure we remain excluded.

So how can we make the best of a deal that, by all reports, seems to be a ‘done’ deal? First, by improving the competitiveness of Indian industry. Sadly, that is easier said than done. We might have moved up the ranks in the World Bank’s global ranking for ‘Ease of Doing Business’ but as businesses, without exception, will vouch, the position on the ground is not much better. Moreover, any concerted effort to increase exports calls for coordinated action from a host of ministries—shipping, roadways, railways, agriculture, power etc. It cannot be taken as only the Commerce Ministry’s baby. It also means keeping the Rupee fairly valued and ensuring it is not over-valued, especially vis-a vis competitors.

Second, we must insist on a twin-track mechanism for opening up, wherein lowering of tariffs against imports from China are put on a slower track compared to other partner countries. Provided tariffs are lowered in a phased manner, there is no reason why Indian industry will not be able to compete. The caveat being that government does its bit and along with being a better facilitator of economic activity, reforms factor markets like land and labour as also the judiciary.

For now, government has got down to work on preparing for RCEP. Commerce Minister Piyush Goyal has cleared critical changes in anti-dumping, countervailing and safeguard rules. For instance, lesser duty rules in terms of which authorities levy import duties at a lower rate than the margin of dumping if this is enough to remove injury to domestic party are to be scrapped. The logic is that this will guard against a sudden surge in imports.

The ultimate solution, however, is to set our domestic house in order. The root of many of our problems is that our focus, all along, has been on protecting Indian industry. This must change; but at a calibrated pace, not overnight, so as not to rock the ship of the Indian economy!

 

(The author is a senior journalist and columnist who writes on business and economy. Views expressed in this article are personal.)

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