Rebalancing India's trade and market access after RCEP move

Obviously, India has a low industry competitiveness compared to other countries despite the fact that it has moved up to 43rd most competitive economy in 2019 of the 63rd ranked economies, only ahead of Philippines in RCEP.

Low competitiveness coupled with recent slowdown could have hurt the domestic manufacturing in the post RCEP under a zero tariff situation.

Though the economic slowdown in other contemporary economies, particularly those in  BRICS and many ASEAN countries is even more intense compared to India, but the lack of a mutual ground for a trade and market access could have harmed India more in the future.

India has the room to re-join at a later stage provided majority of its concerns are addressed satisfactorily.

The issue of complete tariff elimination remained critical for India as it has already an existing trade deficit of over $106 billion with RCEP negotiators, of which, over $57 billion is alone with China in 2018.

The half-preparedness and the low competitiveness of many sectors such as dairy sectors, textile sectors, pharmaceuticals, steel & chemical industries, etc., compelled them to demand to keep them away from a final RCEP pact.

Post-RCEP scenario might have offered India an opportunity for greater market access but import from the partner countries would have increased much higher than the export in a zero tariff scenario.

Now the bigger question is, in a later stage if India decides not to join in
RCEP, will it hurt India’s trade prospects in the region?

While these things yet to be answered with real-time analysis, but looking at India’s existing trade relations and FTAs, the chances seem negligible.

Here is why.

At present, the RCEP trade bloc includes ten members of ASEAN and its five FTA partners viz. Australia, China, Japan, New Zealand, and South Korea.

India has an existing trade agreement with the ASEAN and bilaterally with Singapore, Malaysia, Thailand, Indonesia,Japan, and South Korea. Clearly, the inclusion of India in the RCEP could have given more market access to the rest of the three countries namely, China, Australia, and New Zealand.

Not to forget, India has launched trade negotiations with Australia and New Zealand but these are yet to be signed. If India signs FTA with these two countries by resolving all the trade and market access issues, the only country with whom India will not have a trade agreement is China.

It is evident that India's trade deficit with China keeps increasing even at the present tariff rates despite India’s measures of anti-dumping duties, safeguard duties and other countervailing measures to protect the domestic industry.

The influx of cheap imports from China with further reduction of tariff through RCEP, in all likelihood, would widen the trade deficit and impact adversely India's Balance of Payments. While the pressure was on India to
reduce or eliminate tariff on nearly 80 percent of the products over a 10 year period, there was no guarantee of China to meet the same obligation in reciprocation.

Even with the agreed initial tariff elimination by 42.5 percent of India’s tariff lines for China over a 10-year period, the import could have surged much ahead than India’s export.

Further, India has witnessed a growing trade deficit with ASEAN, Japan, and South Korea after the agreement is signed, particularly due to the surge in metal and capital goods into the country. Though the review process on these trade agreements has been initiated but it should move strategically to make a surplus or at best a trade balance with these partner countries.

This move will not only strengthen the Act East Policy goals but also India's basic trade interest. Similar steps with the Japan, South Korea would also strengthen India’s trade interest and reduce the deficit along with bridging the trade gap that may arise during the post RCEP.

The earlier reduced corporate tax and relaxation in several FDI policies could further work as an impetus to attract more investment provided the trade and investment relation is strengthened by reviewing these trade agreements.

The other angle is- what about the impact of the trade creation and trade diversion on India’s trade prospects in the region post RCEP?

After the RCEP is signed, even diversion of trade from India to other signatory countries could reduce India’s export to these countries.

In the light of these, India needs to proactively look at completing the trade agreement with Australia and New Zealand alongwith strengthening of the existing trade agreements in the region to offset any trade diversion that may occur post-RCEP.

India is already into negotiation for the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and India-Southern African Customs Union Preferential Trade Agreement.
Successful completion of all issues on tariff, market access, sanitary and phytosanitary (SPS) and technical barriers to trade (TBT) issues would strengthen India further and even beyond the region.

Similarly, India and EU have been working on a broad-based trade and Investment agreement since 2007. Though several rounds of negotiations completed, there is no consensus on an FTA primarily because of a comparatively restrictive regulatory environment.

On the other hand, in the wake of a trade war between USA and China, the chance to form a meaningful trade agreement between India and US cannot be overruled. Even though India and US have considerable differences in the trade practices, related economic policies and often accuse each other of unfair trade means but for a stronger geopolitical hold in the Asia-pacific
region, the duo can come together for a mutual strategic interest.

A mutually accommodative trade framework and agreement of India with EU and US will help India strategically and economically in the region even if it decides not to join RCEP in future.

(The writer teaches Economics at the Birla Global University- Bhubaneswar and is an external trade consultant to the Commonwealth Secretariat)