It is uncertain as to how Indian negotiators will draw the line to tackle an inevitable surge in Chinese imports through RCEP countries
Arjun Raghavendra M
The much-talked about Regional Comprehensive Economic Partnership (RCEP), a multilateral trade agreement between the 10-member ASEAN bloc and its six FTA partners, is entering the final phase of negotiations.
This comes at a time when tough government policy decisions are being driven by the singular pursuit of national interest.
The ASEAN (Association of South-East Asian Nations) is a trading group that comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The six FTA partners in question are India, China, Japan, South Korea, Australia and New Zealand.
What does India gain and concede as the high-stake game plays out? Have we factored in various paradigms, including tax avoidance and circumvention of trade goods in a post-RCEP scenario? Where will trade remedies figure in this scheme? Finally, is India ready for RCEP now? We will analyse this in three parts.
RCEP, the negotiations of which began in Cambodia in 2012, covers more than 3 billion world population, with a total GDP of $50-odd trillion, which is roughly 40 percent of the global GDP and covers areas, including trade in goods and services, investment, market access, economic cooperation, intellectual property and e-commerce.
The FTA extends preferential tariffs to contracting countries subject to the ‘rules of origin’ which determines the country of origin that subsequently establishes the economic nationality of goods. In the absence of any specific definition for the ‘country of origin or export’, the rules of origin have become technically complex and a layered challenge for negotiators, leading to varied implementation methodologies across the world. This has spilled over to what economist Jagadish Bhagwati called “spaghetti bowl phenomenon” in his paper on ‘US trade policy: the infatuation with free trade agreements’.
India has already signed FTAs with the ASEAN, Japan and South Korea, and is finalising agreements with Australia and New Zealand (14 of the 15 RCEP nations except China). Seven out of 15 RCEP countries are already part of the other mega regional FTA, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPATPP), and could export duty-free RCEP non-party goods to India.
Notwithstanding the excellent intentions of the government, a simple question that deserves to be asked – Is India walking into the Chinese quicksand? Should we be exploring a bilateral with China instead of a circuitous multilateral?
It is uncertain as to how the Indian negotiators will draw the line to tackle sudden and inevitable surge in the import of Chinese goods to India through RCEP (read ASEAN) countries, owing to concessional tariffs (China-ASEAN and ASEAN-India), a scenario that could rattle Indian markets.
India has signed 16 free or preferential trade agreements till date and strangely, no detailed study appears to have been undertaken by the government, specifically highlighting the gains made by the domestic industry or exporters or otherwise. FTA frauds, including gold (Thailand & South Korea), television (ASEAN), just to name a few -- investigated by enforcement agencies -- have not influenced consequent policy evolution.
It would not be wise for India to enter multiple trade agreements when the sole purpose behind these negotiations – to provide larger and preferential market access to Indian exporters or the domestic industry – is not achieved or more importantly, is not achievable.
With Dussehra and Diwali round the corner, the sales and marketing of everything Chinese – from diyas to firecrackers and from television sets to mobile phones – will peak, making this the ideal time for collective introspection.
Chinese data pegs India’s trade deficit in 2018 at $57.86 billion (compared to $51.72 billion in 2017). India's exports to China, during the same period were at $7.70 billion (a drop of 1.62 percent) while Chinese exports to India reached $29.17 billion (down 6.1 percent).
Indian exports to China continue to decelerate in 2019. Reports indicate that deceleration of Chinese imports into India should be viewed through the prism of increase in imports from Hong Kong. Trade deficit of $3.9 billion in 2017 converted into a trade surplus of $2.7 billion in 2018 for Hong Kong.
This should ring an alarm bell as China appears to be camouflaging imports through Hong Kong and this model would definitely be replicated in the RCEP era. Further, ‘revenue foregone’ because of the consistent increase in imports (including telecom equipment, set-top boxes, mobile phones, electronic and electrical gadgets) from ASEAN countries over the past few years is affecting domestic manufacturing.
The impact through Customs duty concessions available under the India-ASEAN FTA is directly showing up in Prime Minister’s flagship Make in India. At a time when the auto industry is reeling under a crisis, there could be a scenario where the Indian automobile plants move to ASEAN countries to exploit the ASEAN-China FTA juxtaposed with RCEP.
Another area that deserves equal attention is the impact of FTAs on our agriculture sector and agri industry.
Beyond the confines of fetching brownie points for bureaucrats of three powerful ministries – finance, external affairs and commerce – will RCEP serve any substantial Indian national interest?
(This is the first of a three-part series on the evolving dynamics of RCEP.)
(Arjun Raghavendra M previously worked for the Government of India and is an advocate based in Delhi. 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.