Trade tantrums

Perhaps exasperated by the slow progress over RCEP talks, China has once again floated its ‘ASEAN plus 3’ idea (ASEAN, Japan, China and South Korea). The move, which leaves out India, Australia and New Zealand, is a clear message to India, which has resisted RCEP demands on tariff reduction, to ‘like it or lump it’. India apprehends that, given its $60-billion trade deficit with China, the RCEP demand to reduce tariffs on 90 per cent of the traded goods to zero will have a disastrous effect on its already struggling MSME sector. India’s FTA experience with ASEAN, Japan and South Korea has been a mixed one. The Economic Survey 2015-16 notes: “We find that the average effect of an FTA is to increase overall trade by about 50 per cent over roughly four years. We also find that the ASEAN FTA has had the greatest impact, possibly because tariff reduction by India has been greater under it. The results also suggest a bigger impact on metals on the importing side and textiles on the exporting side.” Apart from being reluctant to slash tariffs for political economy reasons, India has expressed its reservations over inclusion of e-commerce in the RCEP talks. The RCEP draft is opposed to data localisation, while India fears the monopoly power of digital giants which includes the likes of Tencent and Alibaba. With no easy solution in sight to these issues and China threatening to pull the plug on India by junking RCEP, it would seem that India is in a tight spot.

However, the bright side of this story is that there are a number of Japanese, Korean and Chinese companies invested in the domestic market, who would, in fact, prefer a tariff wall for finished goods. Moreover, China is turning into a high cost producer, and needs lower tariffs and a softer currency in days to come. To that extent, India’s export markets in the ASEAN may not recede in a hurry. The Centre must adopt a considered approach, keeping its domestic interests in mind, while at the same time being flexible in certain areas. For instance, India can offer to liberalise foreign participation in education, accountancy and legal services. Its e-commerce rules are restrictive.

The ASEAN plus three grouping (provided Japan plays ball) is not without strategic significance. It raises China’s heft in the East. If this grouping pushes for an FTA with the EU, now facing issues with the Trump administration, it could further China’s global influence. China’s Belt and Road Initiative as well as its strides in digitisation could be leveraged here. India’s trade diplomacy needs to be reviewed, with both the US and China applying pressure to secure access to its markets. The earlier multilateral consensus has collapsed. In its place, tariff wars and arm-twisting have assumed centrestage. India must support exporters through WTO-compatible means in these uncertain times.

COMMENT NOW