It would be politically naive to suggest that India should not join any international trade block. What is important is whether India is joining any such initiative with the position of strength and whether such joining will lead to the economic wellbeing of its millions of deprived citizens.
After around 26 Secretarial level and 15 Ministerial level rounds of discussions, Regional Comprehensive Economic Partnership (RCEP), a proposed trade block of sixteen countries, appears to have reached its concluding phase. In order to adhere to the self-imposed deadline of December 2019, the heads of states of all the 16 (prospective) partner countries are scheduled to meet in Bangkok on November 4th to sign off the treaty and to sort out those thorny issues which remained unresolved by their Ministers. Our Prime Minister Shri Narendra Modi will also be participating in this meeting.
Most of the sixteen members have largely resolved the thorny issues and reached a broad consensus. However, India has been consistently bringing on negotiating table, the country-specific as also general and procedural issues. India, for obvious reasons, is extremely wary of likely flood of imports of Chinese goods, which may partially kill Indian production capacities. There is an immense pressure on India to fall in line, and do not cause pushing the agreed deadline of December 2019.
Keeping in mind the seriousness of the potential impact on the Indian economy in case India signs RCEP in near future, many individuals, political fora have started raising voices. Notable among them is Swadeshi Jagran Manch (SJM), affiliated to RSS as also the Congress party.
Here is a small note laying down the few relevant points, may not be an exhaustive list and more in the form of “draft for discussions”
RCEP: An Overview
Ten South East Asian countries, viz. Philippines, Malaysia, Thailand, Singapore etc are bonded themselves, from the sixties, in a trade block called ASIAN (Association of Southeast Asian Nations). ASEAN has a separate Free Trade Agreement, one each with six countries, viz, China, South Korea, Japan, Australia, Newzealand and India.
The US during Barack Obama’s regime became increasingly restless by the growing influence of China in the world economy. In order to check China, US mooted two “partnerships”, one with its “friends” on the Pacific coast and another on its Atlantic coast. These were termed as Trans-Pacific Partnership (TTP) and Trans-Atlantic Trade and Investment Partnership (TTIP) respectively. China was specifically kept out of the emerging trade arrangements.
China responded. By leveraging its ethnic bonds among ASEAN countries, China handheld ASEAN to conceptualize Regional Comprehensive Economic Partnership (RCEP). This was in 2011. The core idea was to weave all the sixteen countries, ten belonging to ASEAN group and above-mentioned six with whom ASEAN has an ongoing FTA, in a comprehensive trade and investment agreement, named as RCEP.
Rode over discontent against the international trade agreement among the US working class Donald Trump shelved TTP and TTIP immediately after becoming US President. It was not known then what will be the fate of China sponsored RCEP, in light of US-sponsored partnerships being abandoned. But RCEP went ahead and now is in the final stages of formalizing whatever has been agreed upon.
Not an “easy” decision to stay out
RCEP, if everything conceived is realized, is going to emerge as a heavy-weight block in the global economy in the coming years. With India and China, most populous countries on earth, RCEP will represent half of the global population; with China, Japan and India it will represent one-fourth of global GDP and with many active members will represent 25 % of the global trade. It is said that the Center of Gravity (COG) of the world economy will gradually shift from US/ Europe to Asia; this is very likely. Whenever it happens, it is certain that the COG of the global economy will lie somewhere around the RCEP group. Being a member of such a heavy economic group certainly has some advantages.
It is also true that a founder member, being part of the initial negotiations, enjoys an opportunity and access to the process of articulating the “rule book” of the trade group. However, it is also not true that a country, for whatever reasons, not a part of the founding group but later joins the trade group, is discriminated for not being a founding member. This can be seen from the journey of two prominent trade blocs WTO and EU
The journey of WTO and EU
Post World War-II, like many multilateral economic institutions, General Agreement on Trade and Tariff (GATT) commenced its functioning. As it caught momentum, more countries from the US camp joined. There were 128 countries following GATT guidelines when GATT culminated in World Trade Organization (WTO) in 1995; all 128 countries were automatically made members of WTO. Post 1995 till today another set of 36 new countries enrolled as WTO members, notable among them, with significant share in world trade is China (2001), Saudi Arabia (2005), Vietnam (2007) and Russia (2012).
In Europe, France and Germany, along with other four countries, founded the European Economic Community (EEC) in 1957. Other European countries joined EEC at their chosen timings, viz., Denmark and Britain (1973), Greece (1981) and Spain and Portugal (1986). By the time EEC culminated in the European Union in 1993, the strength grew to 28.
The point to be noted is that there are no reports indicating discrimination prevalent among trade organizations between two sets of its member countries, viz. founders and those who joined later. In fact the “timing” chosen by China is noteworthy. China implemented a set of economic reforms from 1978 till 2001 aimed at enhancing the productivity of labour, ensuring reliable quality of infrastructure services and more importantly making the export-oriented industries within China more competitive. The rest is history. China made the best use of WTO rule book, even not being a founder member, and acquired economic muscles. So much so that US President Donald Trump has conceded that it was a mistake to allow China to join the WTO.
These are useful insights for India to decide when exactly to join multilateral trade blocks like RCEP.
India’s tariff-related concerns
India’s tariff-related concerns are genuine. Among the 15 prospective partners in RCEP, India runs a trade deficit for successive years; i.e. imports in dollar terms from each of these countries is more than the dollar worth of Indian exports to each one of them. RCEP proposes that each country identifies 90% of the goods and services presently being imported by it from each of the 15 partners, and undertake that the import duties of each of these items be reduced to zero over a period of 15 years.
Even on its face value, this proposition sounds serious. One may become nervous as one collects finer details about the “exports” strengths of each of the partners and the likely impact on the existing Indian producers/manufacturers. If dairy and allied products are allowed to be imported at zero import duty from New Zealand, it will wipe out Indian milk producers, largely from rural areas, numbering around 5 crores. If heavy and light industrial machinery from China, Japan and South Korea lands on Indian shores without any safeguards it will be death-knell for many industrial units in organized sector. Labour intensive items, like garment making, imported from China, Vietnam and Indonesia will put many Indian SMEs out of business if there is no protection by way of import duties.
Yes, there is one sector in which India is likely be benefited by joining RCEP and that is “services sector” Information and IT enables services, management consultancy, accountancy and costing, media and entertainment, human resources and training; the list is quite impressive in which India has acquired strengths.
India’s non-tariff concerns
Other than core concerns related to low tariffs ruining our own economy, India has also raised a few non-tariff concerns as under:
Base year: India demands that the base year to calculate the reduction in tariffs should be 2019 and not 2014 as firmed up by RCEP. India has, during the period 2014 to 2019, raised the import duties in the range of 13% to 18% on diverse goods. Should the base year be 2019, it will get more breathing time to spruce up domestic industries likely to be exposed to stiffer competition.
Roots of Origin: Which good to be included in the list of goods entitled for concessional import duties is left to be decided to the respective importing country. Such lists will be country specific. What it means is “garments” imported from China may not be offered concessional import duties, but garments from (say) Thailand may enjoy concessional duty. In order to circumvent this situation, it is possible for an exporter to import garments from China to Thailand and later re-export the same consignment to India so as to enjoy the concessional duty. This is how the laid down system can be beaten. India demands stricter measures to ensure principles of Roots of Origin are adhered to.
Auto Trigger: This provision is expected to empower the host country to down its shutters when its own economy is flooded with the disproportionately higher volumes of a particular good at cheaper prices. This will come handy for India to calibrate imports from China
Application of “Ratchet” Principle: Ratchet means a screw which turns only in one direction, up or down and not both ways. This concept is proposed to be applied in RCEP which will disallow the member country to scale up import duties, once reduced. Such restrictions will disarm India’s ability to respond to uncertain situations needed to strike a balance between commitments under RCEP with its domestic economic compulsions.
Application of Investors to State Dispute Settlement (ISDS) mechanism: There are bound to be disputes between the foreign investors and the counterparties belonging to private or public sectors in host countries. The question arises about what shall be an appropriate resolution mechanism. Under multilateral trade and investment agreements, a third party forum is normally provided for to resolve such disputes. This means that the relevant laws and judiciary in force in the host country will no longer be able to step in such situations. This needs to be resisted. All the parties in any disputed economic relationship should be subjected to the law of the land.
Theoretical premises stand exposed
The international trade in general and trade bloc format, in particular, is premised on a few theoretical frames. Four decades is an adequate period is to assess their veracity.
Comparative Advantage: This states that each country need not produce each and every good and service being consumed in its economy. Instead, each country, leveraging its bestowed or acquired strengths, like natural resources, climatic conditions, skilled manpower etc, should manufacture that good or service in surplus than its own requirement and export it to other countries. If each country adheres to these principles, all will be benefitted as all the goods and services will be available at optimal prices and desired qualities. The only condition needs to be fulfilled to realise this is the physical restrictions on import and import duties imposed by the importing country.
This sounds good. Nonetheless, the economy is much more holistic than merely making goods and services available at cheaper prices. This does not answer many fundamental questions such as: how a country is supposed to ensure adequate purchasing power in the hands of its citizens to buy those goods and services being sold at “market-determined” prices?
It is not about employment and self-employment leading to reasonable monthly income to the families, but the employment and self-employment avenues are also needed to provide productive engagements for the citizens. In the absence of such productive engagements, citizens, particularly the youth, may engage themselves in many undesirable activities. Lack of productive engagements combined with lack of adequate incomes creates a fertile ground for narrow social groupings and identity politics. The non-financial costs of such social-political fallouts are enormous and are not factored in while calculating narrow economic gains of cheap imports. The policymakers are throwing up newer ideas like handing out Universal Basic Incomes to address the issue of weak purchasing power. But it is the society that will have to decide whether purchasing power is to be created through the productive engagements or creating passive recipients of the doles among its citizens.
Lose some, Gain some: There is another related narration propagating liberal international trade. It does take into account loss of employment and GDP when cheaper goods are imported from another country; it adds in the same breath that the country can gain in employment and GDP is some other sectors of the economy which succeed in capturing export markets made accessible by the same trade agreement.
The country is not an individual engaged in two distinct but correlated transactions; one in which s/he may lose and in other gains; making the composite transaction gainful. This narrative glosses over the fact that the sections of society likely to be benefitted by getting access to the foreign export markets will be altogether different from those who suffer, lose livelihood, because of cheaper imports under the same trade agreements. For example under RCEP, largely it will be, already well-off urban middle-class professionals and their firms who will multiply their revenues and incomes, whereas the population which will lose their already frugal livelihood belong to rural and informal sectors.
The tectonic plates on which global trade has rested for the last few decades are shifting. BREXIT in Britain and the emergence of Trump in US, both happened three years back, are essentially an expression of discontent among large sections of the working class in the respective countries against the commitments made by their nations to the international trade treaties. The issues are thrown up then are not country-specific and are surfacing in many other countries in diverse ways. It will take many more years, probably, for the world to forge alternate formats and terms of relationships. We are undergoing a transition period. It will be unwise for India to commit itself to a quasi-permanent trade relationship such as RCEP.
On the other hand India is in a position to dictate the terms of trade and investments to the foreign entities, be it multinational corporates, foreign investors, countries or trade blocs. There are many factors that have contributed to India’s “strengths”, chiefly among them is the vast, unparalleled domestic market for a multitude of goods and appetite for investable capital in its industrial and infrastructure sectors. Again it will be unwise for India, not to leverage its this strength in deciding terms and timing of joining trade blocs like RCEP.
Sanjeev Chandorkar is Associate Professor at Tata Institute of Social Sciences, Mumbai