When PM Narendra Modi and Chinese President Xi Jinping met in Mamallapuram last week, they had another shy at a question that has been confronting Indian policymakers for over a decade now: should India have a free trade pact with China?
Ten years ago, the question was whether India and China should sign a bilateral free trade agreement (FTA). Today, it is whether India should join the Regional Comprehensive Economic Partnership (RCEP), a proposed trading bloc that brings together 16 countries of the Indo-Pacific region, minus Donald Trump’s United States, that not only constitute almost half the world’s population, but also over 40 per cent of international trade.
Joining the RCEP would effectively mean a free trade arrangement with China because if the members of the bloc agree to eliminate tariffs on imports from other member countries, Chinese goods will enjoy unrestricted entry to the Indian market, and, in theory, vice versa. However, China makes for a highly asymmetric member in the proposed bloc due to the acute export-focus of the Chinese economy, and the loss of the US markets as a result of the trade war.
Little wonder that there is widespread opinion in India against joining the RCEP. The two extremities of the political spectrum have converged on the same point in the economic spectrum: both the pro-BJP Swadeshi Jagran Manch and the anti-BJP Communists oppose the RCEP.
But, can India afford to be excluded from a bloc that consists of some of its most important economic partners?
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China’s domineering stand
Dealing with China can be a difficult task given that it is hard to determine where the boundary of a private Chinese firm ends and the Communist Party of China begins. It would be a mistake to look at China from the conventional perspective on free trade. For instance, Huawei is not quite like Cisco, Fujitsu or Ericsson, which do not have umbilical cords and networks of capillaries connecting them to their countries’ governments.
Beijing’s domestic policies work as effective trade barriers too: The Great Firewall that cuts off the Chinese from the rest of the world also prevents foreign technology companies from operating and competing in China. Since “services” tend to be outside the purview of most free trade agreements that focus mostly on goods, Indian technology companies find it hard, if not impossible, to sell products in the Chinese market. So, the question of China casts a long shadow over the RCEP.
There are, thus, two different but interconnected issues: the dominance of Chinese manufacturers in the export of goods; and the impenetrability of the Chinese market to Indian and other foreign companies.
If all else remains the same and India joins the RCEP, we can expect Chinese firms to swamp the Indian market, driving many Indian firms out of business.
This won’t always be a fair game because Chinese firms enjoy subsidised credit, are sometimes linked to the government and the Party. What’s more is that if you believe the US government, Beijing is a “currency manipulator” that undervalues the yuan to make Chinese exports cheaper than they ought to be.
Now, it is natural for domestic manufacturers to seek protection from cheap imports. However, in the case of China, they have cause to argue that reducing trade barriers will result in an unfair erosion of the country’s domestic industry and cause job losses.
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Arguments against joining RCEP
In September 2011, when the Manmohan Singh government was contemplating an FTA with China, my former colleagues V. Anantha Nageswaran and Ritwick Ghosh co-authored a report arguing against the proposal. They pointed out that the “time is not yet ripe for an India-China free-trade agreement…(as) at this stage, a free-trade agreement with China would largely confer one-sided benefits to China as has already been happening in the bilateral trade relations without the FTA.”
They contended that reforms liberalising India’s economy were a prerequisite, without which “an FTA with a manufacturing behemoth like China may lead to a destruction of its domestic industrial architecture and probably have a detrimental effect on poverty through loss of worker-oriented industries.”
There have been only a few reforms since then, while there is increasing evidence of China not being a “normal” player in international trade. So, Nageswaran and Ghosh’s assessment holds true even now in October 2019. Yes, India failed to push forward on reforms, but can that be reason enough to leap into a deal that can harm our industries and agriculture?
A 2017 Niti Aayog paper warns against FTAs and the RCEP. Against this formidable coalition of RCEP opponents that includes pretty much the entire political spectrum stands the valiant, lonely figure of Mihir Sharma.
As Sharma contends, the biggest reason to join the RCEP is that the opportunity costs of not joining might be higher than the costs of joining.
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Striking the balance
If economics is a basis of geopolitics, will India cut itself off from its key partners like Japan, Australia, Vietnam and Singapore, whose links with China will only strengthen over time? Moreover, will staying out of the RCEP create incentives for greater protectionism, reversal of the 1992 reforms, and take India back to the 1970s?
On the other hand, joining the RCEP might compel New Delhi to launch the second-generation economic reforms that have been pending since the Atal Bihari Vajpayee era, and are anyway necessary to get us out of the current economic slump.
One possible solution to the dilemma would be to create a middle path, as seems to have been hinted during the Modi-Xi summit in Mamallapuram: for India to join the RCEP but with special provisions regarding China.
As my colleague Manoj Kewalramani recommended in a detailed note on the Modi-Xi summit, India and China could bilaterally agree on a timetable to fix the trade imbalance, and ensure reciprocity in technology and services.
Also read: Modi & Xi don’t need to sign a dozen trade pacts to make second informal summit a success
It’s unclear if Xi Jinping agreed, but even if he did, the remaining 14 countries in the RCEP bloc must also accept it. They’ve resisted the idea so far, but might just have to accept it as the price of keeping India in the tent.
The author is the director of the Takshashila Institution, an independent centre for research and education in public policy. Views are personal.
I agree with comments by Vish, That apart, Modi is indeed working hard on making RCEP acceptable for India. We ought to join it and go ahead with big bang all pervasive once for all reforms so that our manufacturing becomes world competitive We should keep issue of fiscal deficit aside for next 3 years and bring about a total overhaul of the fiscal and economic management. Modi can and should take this as a political decision and sell it to the people explaining various scenarios and their consequences. People will back him as they backed his demonitization initiative.
The core competency of Indian companies is in managing government policy. Constantly seeking tariff protection, Indian companies seek a captive consumer for their highly priced shoddy goods and services. By restricting free trade, the government ensures that the ordinary consumer is impoverished. In the name of national interest, the only losers are the vast majority of common Indians.
If Indian companies have specific problems in accessing the Chinese market, for either goods or services, life does not begin and end with the RCEP / FTA. A new mechanism has been created for our FM and her Chinese counterpart to oversee issues pertaining to trade and investment. That would be an appropriate forum to deal with genuine hurdles that are placed in the way of our experts to China. 2. What exactly is holding up the next generation of reforms ? Read the recent comments of Nobel laureate Dr Abhijit Banerjee on where the Indian economy is headed.
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