India’s decision to stay out of the China-backed Regional Comprehensive Economic Partnership, or RCEP, Asia’s mega free-trade agreement (FTA), has been met both with a sense of approval and disappointment and divided economists on the issue.
The RCEP is an FTA between the 10 members of the ASEAN as well as China, Japan, South Korea, Australia, and New Zealand. Will India lose out on opportunities of trade and investment an FTA expectedly offers, or are we better off without it?
Free trade should drive prosperity for all. After all, humanity has ventured far and wide since ancient times to trade, guided by the principle of comparative advantage i.e. countries export stuff they can make cheaply at home and import goods costlier to produce domestically. That’s the theory.
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In reality, trade imbalances can result in big winners and losers, impacting wages, and employment. For instance, importing goods from China that rely on a lot of unskilled workers can reduce the demand for unskilled workers in India.
The objective of the RCEP is to create a mammoth regional-trading bloc. It comprises one-third of the world’s population and some 29% of the world’s gross domestic product (GDP).
Yet, without India, Asia’s third-largest economy, there will be limited gains to be had from the RCEP, some analysts say. One of the most in-depth studies of RCEP by Renuka Mahadevan of the University of Queensland and Anda Nugroho of Indonesia’s finance ministry found that an RCEP minus India will add just 0.08% to China’s estimated 2030 GDP. That’s because India on average has higher tariffs than other RCEP countries and, therefore, has the largest scope to reduce them.
FTAs like the RCEP are thought to be advantageous simply because they create preferential treatment among member nations, who get freer access to one another’s markets through lower tariffs, leading to re-orientation of supply chains and greater interdependence.
A recent paper from the Indian Institute of Foreign Trade, authored by Sunitha Raju and V Raveendra Saradhi, suggests India’s concerns about Chinese imports are exaggerated. The study found that, between 2007-08 and 2015-16, India’s import of Chinese intermediate goods, which refer to semi-finished items that go into the making of a final product, had raised domestic industrial output and efficiency. Import of Chinese capital goods, such as machinery, also had a positive impact, the study notes.
Yet, India has a sound basis to shut the doors on the RCEP for now. It’s important to note, in this context, that India already has FTAs with the ASEAN nations since 2009, South Korea since 2009 and Japan since 2011. India’s experience of these FTAs hasn’t been encouraging.
It has generally been the case that India’s lack of competitiveness in exports has meant it can’t take advantage of FTAs. Simply put, our industry lacks the scale, technology, and productivity required to compete.
The RCEP proposed that 92% of India’s traded goods must have zero tariffs by the end of a 15-year period. India fears it will end up importing far more than it will be able to export, which is the trade deficit. This remains the core concern.
India’s trade deficit with the ASEAN nations as a whole ballooned from $13 billion to $22 billion between 2014-15 and 2018-19, official data show. A recent analysis by ICICI Securities Ltd showed that in 2018-19, India’s trade deficit with RCEP countries, as it were, stood at $105 billion. With China alone, India runs a massive US$60 billion trade deficit.
India fears greater market access will impact its key manufacturing sectors like steel, leather goods, electronics, and textiles, which other nations can produce more cheaply.
Opening up agricultural markets, which enjoy tariff protection as high as 30-40%, could hurt farm incomes. Highly efficient dairy sectors of Australia and New Zealand, which export 90% of their dairy produce could pummel domestic profitability. A proposed FTA between India and the EU has been languishing for years, with both sides unwilling to open up their agricultural markets.
Higher standards for intellectual-property protection that RCEP-like FTAs entail could impact the domestic pharma industry and cause drug prices to soar. India fears the RCEP will also limit its policy-making room in areas such as foreign investment.
It’s wrong to assume that, since India has a comparative advantage in the services sector, the RCEP could be beneficial. India’s advantage is limited to software services and it would have lost out in areas such as business processes, telecom, and fintech services to technologically more advanced members.
While India should choose economic openness, it should simultaneously increase its trade competitiveness. This will require higher labour productivity, bigger firms, as opposed to a large unorganised sector, access to better technologies and investment. The need, therefore, is to create an economy that can compete in global markets.
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