Getting real about trade talks, post RCEP

It is rare for international trade to grab media headlines in India. Prime Minister Modi’s bold decision of rejecting the Regional Comprehensive Economic Partnership Agreement (RCEP) has proved to be an exception. The past two months have seen a spate of articles, either supporting or opposing India’s decision to stay out of the final agreement. Some of the opinions and perspectives articulated in these articles have implications for India’s approach to future trade negotiations, going beyond the immediate context of RCEP. It is, therefore, relevant to examine a few of these views.

Some experts have lamented that by staying out of RCEP, India has missed an opportunity of triggering domestic reforms. Second, a few commentators have chided others for not having faith in Indian entrepreneurs to face import competition under the tariff-free regime of RCEP. The success of the Indian economy in the post-1991 era has been provided as evidence for this view.

Third, a couple of economists and commentators are critical of the Department of Commerce for being protectionist and not triggering trade liberalisation. As a remedy, they have suggested creating a new institutional framework for engaging in international trade negotiations.

Fourth, by not joining the RCEP bandwagon, it has been contended that India has missed the bus for plugging into global value chains. Finally, some experts have opined that India’s decision on RCEP hits consumer interest. Scratch the surface and these seemingly plausible assertions appear shaky.

Did India’s past free trade agreements, particularly with ASEAN, Japan and Korea, stimulate any domestic reform? There is little evidence of it. And for the better. For reforms to be effective, beneficial and successful, the country must have the option to choose the sector, pace and depth of reform. FTAs can hardly be the vehicle for ushering sustainable economic reforms in the country.

How successful were Indian producers in facing import competition after 1991 reforms? Let us recall that as part of these reforms, simple average customs tariff was reduced from 81 per cent in 1990 to 57 per cent in 1992. Tariffs were thereafter reduced gradually, to around 10 per cent over a span of two decades. Thus, Indian domestic producers were largely shielded from import competition. One sector that had to confront import competition at zero duty — IT hardware — floundered badly. Thus, using high economic growth in the post-1991 phase to argue for resilience of Indian entrepreneurs to face import competition under zero tariff FTA regime, may not be appropriate.

Protectionist stance?

Has the Department of Commerce been traditionally protectionist in trade negotiations? India’s position in trade negotiations, be it at the GATT/WTO, or in the FTA context, is necessarily a reflection of the domestic interests and vulnerabilities, particularly at the time of the negotiation. The Department of Commerce cannot autonomously pursue an agenda of trade liberalisation, unmindful of economic situation, advice from other ministries, and the regulatory regime in the country.

To illustrate, while India has emerged as a major exporter of IT services over the past decade, it was opposed to negotiations on services during the Uruguay Round of GATT negotiations. The logic was simple. During the 1980s and early 1990s, government was the main supplier of most services in India, with minimal presence of private players. Further, it would have been a rare economist who had the wisdom or foresight in 1991 to predict the sharp upswing in fortunes of India IT services exports. Given those realities, it was not unreasonable for India and many other developing countries to oppose services negotiations at GATT. Pursuing trade liberalisation as an end in itself cannot be a substitute for hard-headed trade negotiations based on realities of the day.

Any alternate institutional structure in India for negotiating international trade agreements would have to grapple with the same problems that have prevented the Department of Commerce from taking aggressive positions in the past — protecting our sensitivities in manufacturing and agriculture sectors. There may be little to gain from creating new institutions to handle trade negotiations. A better approach would be to strengthen existing institutional arrangements, particularly holding regular inter-ministerial and stakeholder meetings, with formally recorded minutes, to resolve conflicting interests.

What constrains Indian firms from getting linked into global value chains? The answer is not far to seek. With a few exceptions, most Indian firms in the manufacturing sector are not price competitive compared to firms in China, Vietnam and a few other developing countries. Even if Indian firms are able to source their inputs at internationally competitive prices, they would still face a cost disadvantage of at least 10-15 per cent on account of infrastructural deficiencies.

Global value chains

With lead firms on the lookout for the cheapest supplier, most Indian firms stand little chance of becoming attractive partners in global value chains until infrastructural deficiencies are fixed and logistics costs decline. Easy provision of land, water and sewerage; time-bound regulatory clearances; and support with common services in industrial areas, could be some areas for concrete domestic action, for reducing costs and facilitating integration into GVCs. Contrary to what some experts claim, India’s membership of RCEP, or for that matter of other FTAs, cannot be the magic wand for embedding Indian firms in GVCs.

A final question — does reduction in customs duties automatically translate into lower price for consumers? Most economists would respond in the affirmative. However, preliminary research at the Centre for WTO Studies appears to suggest that ASEAN exporters increased the price of exports to India after implementation of the India-ASEAN FTA. This was observed in many years in more than 50 per cent of exports in the category of raw material and intermediates on which India has granted tariff concessions under the FTA. This pricing behaviour would have reduced the gains for downstream Indian consumers. As this calls into question one of the fundamental assumptions regarding gains from FTAs, deeper research is required on it.

The debate around RCEP has unleashed many views on different dimensions of international trade negotiations. Instead of accepting the claims at face value, a detailed and critical examination is called for. This would provide inputs for India adopting a more robust approach to international trade negotiations in future.

The writer is Head, Centre for WTO Studies, IIFT-Delhi. Views are personal

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