There is apprehension among government departments and industry that a trade deal on the current terms will lead to China dumping goods in India.
Abhijit Kumar Dutta
India is facing a tricky economic choice — whether to set up more trade barriers or bring some of them down. The choice has been handed down by the member nations of the Regional Comprehensive Economic Partnership, RCEP for short, who have asked New Delhi at the Bangkok meeting last weekend to decide if it wants to remain a part of the proposed regional trading bloc.
For the uninitiated, the RCEP is a proposed free trade agreement (FTA) between the 10-member Association of Southeast Asian Nations (Asean) —(Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam — and its six FTA partners (China, Japan, India, South Korea, Australia and New Zealand).
With the World Trade Organization (WTO) — the multi-lateral forum — floundering, there has been a tendency among geographically close nations to forge regional trade agreements. The RCEP negotiations were formally launched in November 2012 at the Asean summit in Cambodia. If and when formed, the RCEP will be the world’s largest economic bloc covering half of the global economy.
In 2017, prospective RCEP member states accounted for a population of 3.4 billion people with a total gross domestic product (based on purchasing power parity) of $49.5 trillion, approximately 39 per cent of the world's GDP, with the combined GDPs of China and India making up more than half that amount. According to a PwC estimate, the GDP of RCEP member states is likely to amount to nearly $250 trillion by 2050, or a quarter of a quadrillion dollars.
Amid a dampened global growth outlook, the importance of such a trade bloc can hardly be over-emphasised and that is why trade ministers from the 16-nation grouping pledged last Sunday to address contentious issues and clinch a deal this year.
However, a Bloomberg report suggests that tension still persists between India and China over the amount of goods with preferential tariffs, putting a question mark on the fructification of the deal by the targeted deadline of November. So far 26 rounds of talks had been held, apart from seven minister-level meetings, including the one in Bangkok last weekend.
For India, the RCEP is the country’s most important trade pact that is under negotiation. Based on India’s existing FTAs with the Asean, the RCEP will include all the countries with which the 10-nation economic bloc has trade deals — China, India, Japan, South Korea, Australia and New Zealand.
However, being part of this regional trading bloc will mean that once the RCEP is implemented India will have to accept immediate elimination of import duties on more than one-fourth of traded items. And this is why opposition to the RCEP is growing within the country. There is apprehension among government departments and industry that a trade deal on the current terms will lead to China dumping goods in India. The ministries of steel, agriculture and chemicals, and executives of industries such as dairy, steel, copper, textiles, aluminium, engineering, pharmaceuticals, leather and food, have expressed their reservations.
The government, so far, has taken a very cautious approach to the RCEP negotiations as demands are being made by other members to eliminate tariffs on over 90 per cent of traded goods and an investment agreement favouring investors at the cost of the government. Moreover, India’s demand of improved offers in services is hanging fire.
It is true that if the number of tariffs to be initially slashed remains high, domestic industry will face immediate heat not only from China but also from Asean, Japan and South Korea with which it already has bilateral FTAs.
According to government officials, the FTAs that India has signed with Asean, Japan and South Korea have provisions of tariff elimination on 75-80 per cent items. Since these pacts are on the verge of full implementation, the countries would want India to take on elimination of duties on items that were left out of these bilateral agreements. So, items that were protected against tariff cuts in the initial agreements may see tariff elimination right at the beginning of the implementation of the RCEP.
But is the worry of the government and industry reason enough to turn one’s face away from the RCEP? It has to be kept in mind that FTAs are quid pro quo where you get better trade access to other countries in exchange of giving them easier entry to your home turf. The problem for India is, weighed down by the legacy of protectionism, our exports have never achieved the competitive edge that would have made them attractive in the global market. As trade economist Biswajit Dhar once wrote: “India has not been able to sufficiently leverage these agreements (FTAs) to increase its presence in the markets of its partners.” Hence, trade deficits have always run high.
So, should New Delhi go for higher tariff walls and allow export inefficiency to thrive at the cost of its consumers? Perhaps not. Because cheaper imports can make many goods affordable to a larger consumer base as against costlier local products. The government can ill afford to ignore its consumers.
While Make in India is a commendable drive, the government should never allow it to turn into a protectionist move. Instead of worrying about the pitfalls of joining the RCEP, New Delhi should use this regional trading bloc to further domestic reforms and remove structural bottlenecks hurting its exports so that it can leave a bigger footprint on the world market.Abhijit Kumar Dutta is a freelance writer. Views are personal.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.