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Wednesday, October 28, 2020

For Equality In Trade Pacts

India should use the churn in the global economy to strengthen its economic competitiveness, it can then enter agreements such as RCEP on a firm footing

October 15, 2020 5:40:33 pm
RCEP, Regional Comprehensive Economic Partnership, RCEP India, India backs out of RCEP, RCEP countries, Express Opinion, Indian ExpressFrom left, New Zealand Prime Minister Jacinda Ardern, Indian Prime Minister Narendra Modi, Chinese Premier Li Keqiang and Thailand Prime Minister Prayuth Chan-ocha talk before a group photo at The Regional Comprehensive Economic Partnership Association of Southeast Asian Nations (ASEAN) summit in Nonthaburi, Thailand, Monday, Nov. 4, 2019. AP/PTI

(Written by Manash Kalita Neog)

In November 2019, when India refused to join the Regional Comprehensive Economic Partnership (RCEP), there was a feeling that the country may have missed the bus to join a large market having some of the world’s fastest-growing economies. With multilateralism slowly losing shine, there were also concerns that India was stepping back from economic links to key global growth centres. But the spread of COVID-19 and China’s belligerence in the Himalayas has likely forced a rethink —perhaps RCEP is not the panacea for India that some thought it would be. At least not in its present form and given India’s current economic and strategic challenges.

The economic downturn due to COVID-19 has forced countries to take aggressive measures to support households and businesses within their borders. Naturally, at such a time, commitments to market access have likely dropped in priority. India is no different as policymakers try to steer the economy from an expected contraction with an eye on “self-reliance”. Such an approach would have been difficult as a signatory to RCEP, which would not have offered much protection for Indian businesses. Yet, it is not just short-term economics that perhaps justifies India’s stance vis-à-vis RCEP on hindsight: It makes for strategic prudence to leave manoeuvring space while dealing with China given the northern neighbour’s recent attempt to unilaterally rewrite borders.

Even before its aggression in the Himalayas and the South China Sea, it was China’s external sector that had many worried. The core of these tensions centred on China’s steadily rising current account surplus since its accession to the World Trade Organisation in 2001. While the United States appears to have taken a lead role in confronting China on trade practices, others like India had also been voicing concerns. On pure headline figures, India-China trade seems a success story with strong growth in bilateral trade over the years. Yet, a closer examination of the data reveals the source of India’s discomfort on any free trade agreement (FTA) with or involving China. In 2001, India’s merchandise trade deficit with China was just $0.9 billion. Eighteen years later, that figure had jumped to $51.2 billion with growth in imports from China during this period (22.3 per cent on average per year) far outpacing India’s exports (17.6 per cent) to that country.

Explained: Why India has said no to RCEP

That is not all. The deep differential in value-added between imports from China (mostly manufactured products) and exports to that country (mostly primary or intermediate products) has also been a worry. What has also riled India often is restricted access to the Chinese market for India’s globally competitive sectors such as pharmaceuticals and services. This trade distortion, in India’s view, has happened even without an FTA with China. So, Indian policymakers’ fear that being part of any trade agreement involving China may lead to a further inflow of goods, thereby hurting Indian firms, is a genuine concern. While the RCEP has some safeguards, they fell far short of India’s demands such as on ‘country of origin’ rules and automatic tariff mechanisms.

So, what now? Should India sit back, pointing the finger at current economic and border troubles to justify its RCEP decision? That would be a mistake. A major worry for India in liberalising further has been the country’s competitiveness, especially in manufacturing. Despite efforts over the years, including the recent ‘Atmanirbhar Bharata Abhiyan’ initiative, the share of manufacturing in India’s economy has been on a broad downward trend since 2007 and was just 15.4 per cent in 2019. To raise this figure, India needs to link up with global value chains and then move up that value chain. And to do so, the country needs to get more competitive; shying away from competition will not help.

In the World Economic Forum’s (WEF’s) global competitiveness index, India ranks 69 out of 141 countries, far below emerging market peers such as China (28) and advanced ones such as Singapore (1) and Japan (6). With a world in turmoil, now is perhaps the time for India to fine-tune the key pillars of economic competitiveness to be better prepared for a post-COVID-19 global economy. This will require investments in digital and hard infrastructure, spending on healthcare and education, labour market reforms, and better dispute-resolution and bankruptcy mechanisms. As competitiveness improves, more global companies will flock to India to do business, thereby accelerating the cycle of economic dynamism driven by talent, innovation, and technology.

Opinion | No pact for India

Any transformation attempts, however, cannot be a short burst of reforms followed by years of ennui as has happened so often. It should rather be a medium- to long-term process with constant upgrades along the way so that the economy emerges more confident and capable to engage with the world in the post-COVID-19 era. Only then will trade agreements such as RCEP be one with equals and on more favourable terms to India than was the case in 2019.

Efforts to enhance competitiveness should also go together with those to augment existing trade relations. Arguably, India has not had a great run with FTAs with the preference utilisation rate—a metric for the efficiency of trade agreements—moderate at best. That needs to change, starting with more trade and investment links with Japan and South Korea. It is also time to engage more with key democracies in Europe and the Americas. Whether be an FTA with the European Union or other enhanced links to the bloc, there are potential areas of collaboration like technology, green energy, and talent where India will gain from experiences such as Germany’s Mittelstand. And now more than ever, India needs to upgrade economic relations with the United States. Perhaps the way forward is to steer clear of market access issues where frictions remain and instead focus on possibilities — combining India’s edge in services with the vast experience of American businesses. That would be a key step to a successful Indian century. And it will also cement India’s strategic role in the Indo-Pacific as a counterweight to China that many in the region are pushing for.

The writer is Co-Founder & EVP, Chase India

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