India Should Join Asia’s New Free‐​Trade Area



Swaminathan S. Anklesaria Aiyar | CATO Institute

After seven years of negotiations, India has backed out of joining the Regional Comprehensive Economic Partnership (RCEP), a Free Trade Area (FTA) that was to include 16 countries—the 10 member countries of the Association of Southeast Asian Nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) as well as China, Japan, Korea, Australia, New Zealand, and India. China wants an RCEP minus India to be launched in 2020.

RCEP with India would cover 40 percent of global gross domestic product and over half the world population. It could become the most important trade zone in the world. India’s opting out is like a Brexit before entry.

India has been moving toward protectionism in recent years, and many Indian lobbies are terrified of competing with China. In theory, India could bargain for better entry conditions in the next six months and join RCEP when it is launched in 2020. India has a big market, and other Asian countries are anxious for it to join. Japan has said it is in no hurry to go ahead with an RCEP minus India.

Yet, negotiating seriously better conditions from RCEP members within six months would be difficult. Doing a U‑turn now, within months of opting out, looks politically unfeasible, given the strong opposition from many political parties and lobbies that claim Indian industry and agriculture would be killed by cheap imports if it joins RCEP.

A more gradual approach would be for India to spend the next five years carrying out reforms to make itself more competitive and then join RCEP. India has the highest import tariffs among potential RCEP members and should prune these within the next few years so that it could enter RCEP without any serious disruption.

After opting out of RCEP, Commerce Minister Piyush Goyal said India could instead strike FTAs with the United States and the European Union. That is daft. If RCEP conditions look tough, those demanded by the United States and the EU would be far tougher.

President Trump has called India a “tariff king,” withdrawn duty‐​free entry for $6.3 billion worth of Indian exports under the Generalized System of Preferences (though this may be renegotiated), imposed tariffs on Indian steel and aluminum, cracked down on H‑1B visas used by Indian software engineers, and taken India to the World Trade Organization for unfair export subsidies. Negotiations with the EU for an FTA have dragged for years with no meeting ground.

These are not realistic alter­natives to RCEP. Besides, world growth in the next half century will be driven by Asia, not Europe or the United States, so RCEP is where India should be.

Most Lobbies Oppose RCEP

Not a single prominent constituency in India supports RCEP. Opposition parties, farmers groups, trade unions, and the Confederation of Indian Industry say no. The ruling Bharatiya Janata Party found that its own industrial, farm, and trade union affiliates oppose RCEP.

Prime Minister Narendra Modi said he could not find enough popular support for joining. But there was no popular support for the economic reforms in 1991 when India went bust and asked for an International Monetary Fund rescue; however, that “forced” liberalization launched India toward 7 percent growth. Outside pressures are often the best way to overcome internal objections to reforms that are needed but feared. Joining RCEP could have provided the outside pressure for India to resume the reform path.

Goyal said that RCEP lacks enough safeguards against being flooded with Chinese imports; that access through RCEP to China’s market is hampered by non-tariff barriers; that RCEP does not give enough scope for Indian service exports; that RCEP’s proposed base rate for cutting duties was set at 2014 (when India’s duties were lower) and not 2019; and that RCEP’s rules of origin are weak. However, if 14 other countries were confident of meeting the Chinese challenge with safeguards that RCEP provided, why not India?

During negotiations, India sought and got safeguards against surges of agricultural imports (in which New Zealand and Australia are very competitive) and of “sensitive” manufactures. A quarter of Chinese goods were excluded from tariff cuts, while cuts on the rest were to be phased in over five to 25 years. This gave all members plenty of time to adjust to challenges while reaping the gains of creating a major trading bloc.

Global value chains now represent a huge chunk of global trade, and RCEP membership is vital to become part of those value chains. Yet India decided to opt out.One reason given was that India had entered into FTAs with other countries and that in every case, India’s trade deficit with those countries had widened.

However, implementation of those other FTAs has been slow, and only a small part of the proposed liberalization has occurred. Besides, India’s trade deficit with the rest of the world has also increased, so FTA deficits as a proportion of the total has actually fallen. The problem isn’t deficits or FTAs but a lack of Indian competitiveness.


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