The unprecedented victory of Prime Minister Modi provides him plenty of political capital to take bold measures as part of a first 100 days work programme. But, the litmus test for his government will come later this month, when negotiations recommence in Australia over Regional Comprehensive Economic Partnership Agreement (RCEP), a mega regional trading block of 16 member-countries of Asia Pacific.
The current development highlights an interesting juncture where China has indicated that it is ready to push forward negotiations with ASEAN+3 (which includes the ten-member ASEAN, China, Japan and South Korea) if its proposal on liberalisation of 90 per cent tariff lines is not considered. India has already liberalised its 80 per cent tariff lines with its FTA partners and a significant volume of trade takes place under zero tariff.
For non-FTA partners such as China, Australia and New Zealand, it has proposed tariff liberalisation on 74 per cent of tariff lines and it is opposed to the industry demand of 42 per cent tariff lines. RCEP members, particularly China, are demanding zero tariffs over 90 per cent tariff lines which is a major concern for India as low cost Chinese manufacturing goods will swamp its domestic market thereby putting domestic producers on ventilator. It is evident that the size and scale of Chinese manufacturing industry backed with extensive financial and non-financial support provide a clear edge to Chinese manufacturing producers.
Pros and cons
India’s position on RCEP is fraught with multiple perspectives across government departments. Broadly, views on RCEP are divided between two schools of thought. The first believes that the RCEP is vital for India as it accounts for 25 per cent of global GDP, 30 per cent of global trade, 26 per cent of FDI flows, and 45 per cent of the total population.
Furthermore, the size and growth of the market, potential opportunities to participate in regional production networks, elimination of multiple trade agreements and a close alignment with Act East Policy make both economic and strategic sense for India to be the part of the agreement. On the contrary, the second states that India’s experience with FTAs has not been good and its trade deficit with major FTA partners has increased significantly. Therefore, India needs to be careful while getting into an agreement with large economies such as China.
Given the importance of RCEP to engineering exports of India, the Engineering Export Promotion Councils (EEPC) has tried to understand the likely implications of RCEP on the engineering sector of India. The Chart demonstrates that India’s engineering trade with RCEP countries reached $108 billion in 2018 from $79 billion in 2014. Exports increased from $15.34 billion to $17.20 billion in 2018 while imports increased from $64.28 billion to $90.95 billion. The broad trade flows analysis indicates that the Compounded Annual Growth Rate (CAGR) of imports was 9.06 per cent while for exports, it was 2.90 per cent during the period of 2014-2018, reflecting higher growth of imports than exports.
While looking at trade in engineering goods with individual members of RCEP, it is important to note that India has a trade deficit with seven RCEP countries which include China, Singapore, South Korea, Malaysia, Thailand, Japan and Australia. But, China contributes 60 per cent to the total trade deficit of engineering goods of India with the RCEP group of countries.
Product groups such as electrical machinery and equipment and parts thereof, and machinery, mechanical appliances, nuclear reactors are major contributors to India’s trade deficit in engineering goods with China. Liberalisation of tariffs under RCEP, particularly with China, may have adverse impact on India’s domestic engineering industry. Other than this, it can also disrupt existing value chain linkages with some of RCEP member-countries, thereby reducing opportunities for Indian domestic engineering firms to plug in RCEP-led engineering value chains.
Given the costs and benefits in RCEP, it is important for India to strike a balance between domestic and external interests to minimise the adverse effects of RCEP on its domestic engineering industry. At the same time, it is equally important to grasp the possible opportunities that RCEP will extend to the Indian engineering industry as some of RCEP countries, particularly China, are moving up the value chain and vacating space for other low-cost economies.
Strategy to be adopted
In order to leverage the potential benefits of RCEP, India needs to adopt a three-pronged approach. First, India should continue to maintain its position of proposed dual tariff structure in the RCEP as it will help India to protect its tariff lines which are more vulnerable to cheap Chinese imports. It must emphasise on a special and differential treatment based on stages of economic development. Additionally, India may also ask for front-loading concessions from China on those tariff lines in which it has greater interest to connect with regional value chains.
Second, it is being noted that India’s exports to China face a diverse range of non-tariff barriers. It is therefore, important for India to propose a “non-tariff ecosystem” with China to facilitate its exports. India should try to evolve a framework to negotiate sanitary and phyto-sanitary regulations, technical regulations, conformity assessment systems, sectoral regulations and their compliance frameworks. A specific annexure for non-tariff barriers with China need to be negotiated to protect our export interest to avoid the scope of disguised trade barriers.
Third, Rules of Origin (RoO) can be used as a strong instrument in RCEP to curb the free flow of Chinese goods into the domestic market. India should restrict RoO to high value-addition to prevent the imports of cheap Chinese goods, which may come to India through our existing FTA partners. This is already happening in the case of our existing Agreement on South Asia Free Trade Area (SAFTA) where many Chinese garment exporting firms are routing their products to India through Bangladesh and other South East Asian countries. Strict RoO in RCEP will provide a safety wall to domestic producers against cheap Chinese goods.
Keeping the current developments in mind, it is important for India to secure a deal that protects the interest of domestic producers and also enables the participation of domestic firms in RCEP-led value chains.
The writers are Executive Director and Senior Deputy Director, respectively, at Engineering Export Promotion Council, India. Views are personal