No reason to fear China-led trade pact

Negotiations for a 16-member free trade pact called the Regional Comprehensive Economic Partnership comprising 10 Asean countries along with Australia, New Zealand, China, Japan, India and South Korea, which was launched in May 2013, are most likely to be completed by December 2015. The main idea is to integrate the Asean and non-Asean economies of the Asia-Pacific region which have several existing free trade pacts amongst themselves with varied rules of trade that are open to multiple interpretations. This adds to the cost of compliance and impedes rather than helps intra-regional trade in the Asia-Pacific.

Once successfully completed, RCEP is expected to generate substantial economic gains for member countries from the creation of a free trade area with a combined GDP of $23 billion and population of over 3 billion. RCEP countries as a whole account for 30 per cent of the global trade.

From a macro perspective, India has its own commercial and geo-political reasons to join the RCEP party. India’s key commercial considerations include access to a large market and the opportunity to join a regional production network given its low participation in the global value chain. India would also be looking to leverage the huge capital reserves lying with China and Japan to supplement its domestic savings, in order to push investment and grow faster. Given its complex border equation with China, India also aims to counter the growing Chinese influence in the Asia-Pacific region.

The actual gains from this mega trade pact will vary depending on the depth of the trade and investment liberalisation achieved as well as the domestic preparedness of individual countries. Member countries differ in terms of their levels of economic development and receptivity to freer trade. Thus, it would not be easy to integrate advanced and poor member economies into one large free-trade bloc.

On the other hand, because of the overwhelming presence of China, and the continuing surge of low-priced Chinese imports such as steel, tyre, electronics and power equipment into India (that is likely to continue in near future given the unutilised factory capacities in China), import competing Indian manufacturers are nervous.

Maybe this is why Indian trade negotiators are treading cautiously on RCEP. The ministry of commerce has been trying its best to organise as many industry consultations as possible in different parts of the country to take informed negotiating positions in light of India Inc’s long-term offensive and defensive interests.

The big question is: What’s in it for India Inc? It is important to realise that any trade pact is a matter of give and take. As a result, after the conclusion of RCEP, some sectors will benefit at the cost of others. The best course for India would be to strive for maximising the gains from the trade deal by securing improved market access for its top exports. Safeguarding vulnerable items from the onslaught of duty free imports by putting them in sensitive lists (permitted under any free trade pact without inviting WTO sanction) would be the top priority of India’s trade negotiators.

The popular notion that every industrial sector is going to suffer from cheaper and freer imports from China does not hold true. China imports many commodities such as copper and articles made of copper from India. Therefore, any reduction in Chinese import duties on copper items will improve India’s exports. On the other hand, manufacturers of steel and tyres will have to face increased competition from imports.

Given India’s comparative advantage in cotton-based yarn, denim fabrics and garments, these sectors can benefit immensely from increased Chinese focus on consumption. Again, the relocation of some Chinese fabrics manufacturing facilities to the Asean region — for example, Vietnam — will boost India’s export of cotton yarn. With rising wages in China, any reduction in Chinese import duties on apparel items which are higher than those in India, can give a boost to India’s apparel exports to China. RCEP can also open up the $11 billion worth Australian apparel import market for Indian manufacturers.

Vulnerable items such as synthetic yarn and polyester viscose fabrics can be kept under India’s sensitive list. Tighter product-specific rules of origin on the lines of the India-Japan comprehensive economic partnership agreement can further safeguard vulnerable segments of India’s textile sector from freer imports. Having a separate tariff schedule for China is another option for taking care of India’s manufacturing sensitivities, especially those with implications for MSMEs.

Further, RCEP can be used as a pretext to address the problem of inverted duties — higher import duties on raw material and lower duties on finished products — that are hurting domestic manufacturing, especially in textile and electronics, and going against the Make in India initiative.

India needs to go for a progressive increase in import duties along with level of processing so that value addition and employment generation happens. Duties should be imposed in the following manner: 0 per cent for fibres, 5 for yarn and 10 for fabrics and garments. This will also help align India’s fibre consumption with global trends. Without this India will never be able to increase its global export share in textiles from below 5 per cent to 10 per cent in the next 5 to 10 years.

The RCEP negotiating platform can be used to tackle non-tariff barriers that limit access to Chinese markets and impede India’s export of items such as rice or pharmaceutical products needed to reduce India’s trade deficit with China. With European and North American markets saturated, RCEP can also be used as a platform to push the export of IT and ITES services to largely untapped Asia-Pacific markets.

Above all, given the growing linkage between trade and investment, RCEP can facilitate India’s strong entry into the regional and global production network if India is able to improve its trade facilitation regime, and tap surplus capital lying with China and Japan, both looking for better investment opportunities. India can be that opportunity.

However, tapping the beneficial possibilities of RCEP calls for setting right our own problems of serious infrastructural gap vis-à-vis China. That requires well-coordinated actions from ministries and departments other than commerce. That’s the real challenge.

Singh is a Mumbai-based corporate economic advisor. Kumar is a trade economist for a corporate house. The views are personal

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