New Delhi: India has decided to stay out of the 16-nation Regional Comprehensive Economic Partnership (RCEP) over unaddressed “concerns”. But leading trade economists, including former Niti Aayog chief Arvind Panagariya, don’t find Prime Minister Narendra Modi’s move surprising at all.
Speaking to ThePrint about India’s decision and the China-driven pact, trade economists say Modi chose not to join the RCEP despite it being a “shallow” agreement which did little to go beyond tariff cuts.
“Whether good or bad, above all, this is not a surprising outcome. Despite his reputation as a market-oriented leader, Modi has been very cautious in opening up the Indian market, especially to Chinese goods,” said Krzysztof J. Pelc, associate professor at Canada’s McGill University.
India was among the 16 countries negotiating the RCEP. These included the 10 ASEAN members — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam — and their six trade partners — Australia, China, Japan, South Korea, New Zealand and India. The other 15 have decided to go ahead with the pact.
The Modi government was under pressure from the agriculture and industrial community, including from the establishment, over joining the RCEP due to fears that India may be flooded with cheap Chinese agricultural and industrial products once it signs the deal.
Most economists, however, argue that trade deals are intrinsically about “give-and-take”, and joining the RCEP should have been favourable for the Indian economy in the long run.
Panagariya, former vice-chairman of NITI Aayog and now a professor at Columbia University, said, “I have always said that we should join RCEP, but bargain hard.”
He added, “If India’s current position on RCEP reflects the traditional position of the commerce ministry — which has been very negative — then it comes as a disappointment. I hope India eventually joins RCEP.”
Countries like Japan have sought India’s participation in the trade agreement while China has said it is “welcome” to join whenever it is ready.
Also read: India’s rejection of RCEP trade deal is a sign of weakness
Is RCEP good for the Indian economy?
Talking about the complicated nature of trade deals, economists told ThePrint that it is hard to tell the precise gains and losses without looking at the fine print of the deal. But in view of most economists, joining the RCEP would have been good for the Indian economy.
“On the one hand, access to RCEP markets is quite valuable. If we were able to negotiate gradual liberalisation in some sensitive sectors and also some automatic triggers that would protect our import competing sectors against import surges from China, for instance, I would see this as an important opportunity missed,” Pravin Krishna, professor at Johns Hopkins University in the US, told ThePrint.
“On the other hand, if no such protections were made available, I could imagine that the government may have been unwilling to take on the risk of surging imports — especially at a time when our own manufacturing sector is stagnating and job creation has been less than ideal,” added Krishna.
While at an aggregate level, free trade makes the economy better off, it intrinsically creates winners and losers.
“As always, such a decision is good for some, bad for others. Indian consumers, and urban areas, would have gained, while farmers and dairy farmers especially, would likely have suffered in ways that would have demanded state intervention,” Pelc told ThePrint.
RCEP was an easy victory India refused to grab
But RCEP was far from an ambitious trade deal. Unlike other trade deals such as the one between Canada and the European Union, or the now-defunct Trans-Pacific Partnership (TPP), RCEP didn’t enter complicated domains like setting standards.
“The RCEP was indeed a rather shallow agreement, especially when we take into consideration that it was meant as a response to the (US-led) TPP. It went little beyond tariffs, and made few ambitious cuts, with long phase-in periods,” said Pelc.
“And yet, the RCEP would have coordinated the current confusion of bilateral trade deals under a single umbrella, in ways that would have facilitated the emergence of regional supply chains, something China is especially eager to capitalise on,” added Pelc.
Also read: India quitting RCEP indicates global trade could be in for another Cold War
India’s vicious cycle of protectionism
Nearly three decades after India liberalised its economy, the persistence of trade protectionism has resulted in the country not taking full advantage of free trade.
“Many of India’s agreements have involved limited and delayed liberalisation,” said Krishna.
For instance, when we look at the India-Japan free trade agreement signed in 2011, “liberalisation of trade on about 65 per cent of tariff lines will only take place by the year 2021”, noted Krishna.
“So, yes, the impact of the agreements has been correspondingly limited — trade shares under bilateral agreements have been roughly constant over the last decade,” he added.
In theory, free trade should create more demand for it. But even while signing FTAs, protectionist lobbies have ensured that India signs shallow agreements and takes too long to implement them. As a consequence, the gains from trade pacts have been rather limited. This further restricts the public demand for more free trade.
India has struggled to increase trade with countries it has signed bilateral pacts with. As a share of its total trade, its imports and exports with these countries were at 13.3 per cent and 13.7 per cent, respectively, in 2007. A decade later, in 2017, imports fell to 11.8 per cent while exports remained nearly identical at 14 per cent, according to a paper by Krishna.
For the same period, India’s trade with ASEAN saw marginal changes. Its exports went up from 9.5 to 12 per cent while imports rose from 9.6 to 10.2 per cent, the paper added.
Also read: India should join RCEP because it needs more trade, not less
Decoding India’s protectionist mindset
The story of Indian government’s preference for protectionism seems to be more deeply rooted than most assume.
“I think you need to throw into this mix domestic lobbies, anti-trade ‘self-sufficiency’ ideologies, an inadequate conceptual and practical understanding of the benefits of freer trade as well as concern over the genuine risk of sudden competition and worker dislocation involved in undertaking large scale reforms,” Krishna told ThePrint.
Looking to explain India’s preference for protectionism, Panagariya said, at the most fundamental level, the most common confusion in India is that “all Chinese goods will flood Indian markets”.
“But you can’t export without importing. Other countries need money to pay for your exports,” said Panagariya.
The former Niti Aayog chief said import-competing lobbies have an upper hand on export-competing lobbies. “Import competing interest groups find an expression much easier in the public discourse and the export-competing interests never come forward.”
Panagariya also pointed to the Indian public discourse being overwhelmingly anti-free trade. “How many free-trade propagating economists like me are there in India? Large part of the Indian press doesn’t support free trade. This is where we are failing.”
‘Need for adjustment’
Going beyond the ideological biases of the Indian public sphere, liberalising Indian trade would require some deep structural adjustments.
“Trade protectionism is deeply baked into the Indian economy. It is the world’s most trade-reticent large economy, which is in part a reflection of its development status,” said Pelc.
“Undoing decades of protectionism entails a lot of adjustment: those powerful labour lobbies represent a great many people who would be exposed to competitive imports if trade barriers were suddenly brought down.”
Pelc argued that developed countries such as the US and the UK are increasingly facing backlash for not paying attention to “labour dislocation resulting from import competition from a country like China”.
“Modi may well be looking at these countries and deciding that now is not the time to be shaking the boat too much,” he remarked.
Also read: India stayed out of RCEP because it couldn’t risk another China-dominated ASEAN