Introduction
India has always been a key player in terms of regional dominance, be it in economic terms or political terms. Time and again it has followed different policies in terms of regional trade. But this trade has always been moderated keeping in mind the interest of local producers as well. India being a developing nation has tried to protect its domestic market and has taken certain measures in order to maintain a balance between the open economy and the interests of the domestic market. This has made India an economy that sui generis. However, it has also suffered various challenges and issues in this pursuit of maintaining a smooth equilibrium between the two. Therefore, it is expedient to deal with certain contemporary instances in order to revisit India’s regional trade policy.
RCEP and India’s Potential Growth in Regional Trade
The Regional Comprehensive Economic Partnership (“RCEP”) is a peculiar kind of free trade agreement between the members of the Association of South East Asian Nations (ASEAN), which are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam and their five Free Trade Agreement (“FTA”) partners, namely, Australia, China, New Zealand, Japan and the Republic of Korea. The agreement aimed at simplifying trade related to goods, services, and investment along with establishing a new Intellectual Property Rights (“IPR”) Regime as well as taking into consideration the disparities and realities of the less-developed ASEAN economies. After 8 years of negotiations, RCEP concluded in 2020 during the 37th ASEAN Summit in Hanoi, Vietnam; but India withdrew from the China-backed trade agreement in 2019 because its main concerns were not addressed during discussions. This pertinently involved the inclusion of fair-trade agreement to address the challenges posed by deficits in trade and service liberalization, as well as risks associated with circumvention of rules of origin that were created due to differential tariff. About 80% to 90% of the commodities would have had import levies reduced as part of the agreement, which also included easing service and investment regulations. Players in the Indian manufacturing sector were concerned that the reduction in customs duties would cause a rapid flow of imports, particularly from the Chinese front, where India already has a huge trade deficit. India's trade deficit was also expanding with the RCEP nations. The numbers suggest that the deficit has risen specifically from $9 billion in 2005 to about $83 billion in 2017, out of which China accounts for 60%. Additionally, refraining from joining RCEP will support the "Make in India" drive and safeguard the nation's economic priorities, because it promotes the idea of self-reliance and aims at channelizing the boom in Indian startups so that the local manufacturers and industries get an edge in expanding their wings in the domestic marketplace. In order to protect the industry and agricultural sector against an increase in imports, particularly from China, India sought additional safeguards from the RCEP countries.
Though this decision has resulted in keeping India devoid of a major trade pact which almost comprises 1/3rd of the world’s trade, however, India has clearly established its stance of prioritizing the interests of the manufacturers within the country. Many Indian industries have come together and certain organizations such as the Confederation of Indian Industry (CII) have clarified that they will work in tandem with the government in pursuance of its efforts to join the world economy through favorable trade deals. India welcomed the joint statement from the RCEP leaders acknowledging its valid concerns but expressed the hope that the issues would be resolved expeditiously to the satisfaction of all RCEP countries.
Potential Benefits of India Joining the RCEP
Micro-level considerations aside, India’s exports would have greatly benefited from “frictionless”, duty-free access to the market created by the RCEP Economies, which is home to nearly 2.3 billion people and accounts for around 30% of the global GDP. Further, noting that India would have had a great opportunity to integrate itself into regional and global value chains, where India's involvement has been low. In the absence of trade restrictions on its imports (imposed by itself) and its exports (imposed by partner nations), India would have had an easier time luring foreign direct investment (“FDI”) and taking over production in the fields that China is currently leaving vacant.
One only needs to look at the relative trade balance of India vis-a-vis China in recent years by Standard International Trade Classification (SITC) category (which is a standard to classify products developed by the United Nations, particularly to assess export and import values in pursuance to international comparisons in commodities and manufactured goods), to understand that the Ricardian comparative advantage process can be either advantageous or detrimental. As is evident, as the depth of the trade relationship increased, there has been a shift towards the importation of high-skill and technologically advanced manufactured goods from China, while India's exports have largely consisted of commodities. The political and socioeconomic ramifications arising from this ought to be clear. India’s soft power in the world or the political stand of India of not joining the RCEP will definitely help in commanding respect and support from the US-led alliance, due to the ongoing tussle between the US and China, however, there is another side to this. Jurisdictions including Australia, New Zealand, and Japan, who are core US allies, have preferred trade advantages by joining RCEP over taking into consideration the US’s enmity with China. Further, in the socioeconomic domain, whether the protectionist policy will be able to muster the support of the ‘developed world’ is still a big question. Therefore, problems of trade deficit and protectionism in terms of the domestic market have always remained major issues for the Indian economy.
Boycott Trend and China
According to industry executives and experts, the outcome of such decisions is dependent on the refusal of Chinese goods by Indian consumers. This could potentially change how Indian consumers make choices, as they are usually concerned about prices due to their decreasing incomes.
The inner state of an economy is very different from the diplomatic stands taken by it in public. The below-mentioned stats further explain the actual trade scenario between India and China. During the pandemic, there was a rise in the number of Chinese goods in India. The share of Chinese products in India's overall imports has also increased by 3%, and it crossed 16% in 2020-21 after falling in the previous two years. The share of these goods was 16.6% in 2020-21, up from 13.7% in both 2019-20 and 2018-19. As a result, there has been a boycott tendency for Chinese goods on one end while trade has increased on the other. This has hampered the innovative 'Vocal for Local' initiative, a project that encourages local industries (handicrafts, toys, car components, etc.) to make as many things as possible in India. According to data supplied by the Indian Ministry of Commerce and the Chinese government's trade data distribution authority, the proportion of China’s share in India's total exports climbed to 7.3% in 2020-21 from 5.3% in 2019-20.
China is a major supplier of goods to India. Some of these supplies include raw materials, such as minerals and steel. Others include finished goods. India might be able to stop the import of finished items. This might not be profitable economically but it might at least be feasible. Imports, however, cannot be controlled when it comes to basic resources like steel and minerals. It could be feasible to change the country of origin of imports coming from China. Reduced imports of less expensive capital goods will increase production costs, raising the price of goods for consumers and reducing the availability of affordable goods for Indian consumers. India imports a lot of electrical goods, which may have an impact on the price of smartphones and other electrical equipment. Over $26 billion worth of Chinese smartphones are sold in India, and Chinese manufacturers like Xiaomi, Oppo, Vivo, and OnePlus nearly control 75% of the total market.
But despite all such concerns a pertinent question to raise is that to what extent can India base its dependence upon China for all such products. At one time or the other India has to become ‘Atmanirbhar’. It might take time to reach that stage, but India is one of the biggest developing economies, the 3rd biggest economy in terms of Purchasing Power Parity, and the 5th biggest economy in terms of GDP, somehow needs to devise its own ways of manufacturing products with cheap and skilled labor. This will not only boost India’s regional trade but will also make the nation more prominent in the global domain.
Sinking Economies Causing Instability in the Neighborhood
The sinking economies in our neighborhood are changing regional trade as well as strategic equations. China already owns the Hambantota port of Sri Lanka. Such equations further provide it an opportunity to increase its stakes in the region. Sri Lanka is currently going through a grave economic crisis. The tourism sector has been severely impacted by the coronavirus pandemic, which accounts for nearly 5% of the nation's GDP and generates foreign cash. As a consequence, the forex reserves to settle the deficits of the Sri Lankan government shrank from $6.9 billion in 2018 to about $2.2 billion this year. Due to a decrease in the supply of foreign currency, it is now more expensive for Sri Lankans to get the foreign money needed to purchase products. The value of the Sri Lankan rupee has dropped by about 7.3% in 2021. For tourism all airports and ports are necessary (especially for Sri Lanka, considering the fact that it is an island). Therefore, if a country such as China in accordance with its strategy of ‘Pearl of String’ acquires the major ports and airports of Sri Lanka, then it can automatically control the inflow of people and can affect the major decisions of the tourism sector, which is a major contributor in Sri Lankan economy.
The above map shows the ‘Pearl of Strings’ that China is forming around India and other significant countries to acquire strategic points in terms of geopolitics as well as trade. The objective of this policy is to devise Indian resources for defense and security-related expenditures. This could exacerbate the volatility already present in India and the entire east and southeast region. India has always been an important trade partner for Sri Lanka and Bangladesh. But in the recent past, there have been attempts by China to become a closer ally of these developing countries, by contributing incessantly in terms of projects and initiatives. This condition of the sinking of economies in our neighborhood is giving a chance to countries such as China to propagate their strategic relationships. Therefore, to counter China’s strategic attempts India has developed its own ‘Necklace of Diamonds’ policy. This policy calls for the development of ports, the installation of advanced Coastal Surveillance Radar (CSR) systems to keep an eye on Chinese warships and submarines, the importation of cutting-edge surveillance planes that can find Chinese submarines, the operation of an airport in the neighboring nation to keep an eye on the Chinese port and the enhancement of defense connections. It also calls for the enhancement of ties between South Asian countries and island countries that are in the Indian Ocean region.
Conclusions and Findings
It can be safely concluded that after elaborating upon the research objectives and research questions :
Finding 1- Though withdrawing from RCEP has protected the domestic market and has encouraged domestic producers to a certain extent, it has also resulted in negative implications for India’s regional trade. India has been successful in showing trust in its own market and in mustering soft power, but the RCEP being a huge organization, its existence cannot be rightly ignored.
Finding 2- The boycott trend has also affected the flow of regional trade to a certain extent. This is because whenever there is a tussle between two or more nations, the boycott of goods of one’s country can affect the trade flow within the entire region or even across the globe. If we talk in the context of India and China, the trade was a bit affected, and even mobile companies and companies manufacturing software parts were hit.
Finding 3- India progressed towards the idea of an ‘Atmanirbhar Bharat’, without having to place much reliance on other countries for manufactured products. This self-reliance will boost the growth of MSMEs in India, thus, contributing to the growth of exports from the country.
Finding 4- Due to sinking economies in the region, superpowers and dominant players such as China are getting an opportunity to acquire strategic locations by making significant investments in the neighboring economies. This is in accordance with China’s policy of ‘String of Pearls’.
Policy Implications
As India is in a state of recovering its economy after the Coronavirus outbreak, the withdrawal from RCEP brings in both challenges and possibilities for the country in terms of policy-making, with the influence of socio-economic and political factors. India has to expand its local manufacturing base through a well-thought-out industrial policy and benefit from any potential market access that partner nations may offer. The RCEP, which primarily focuses on establishing uniform tariffs throughout the area and opening up markets for services and investments, could be advantageous for regional multilateral commerce if India looks up to that opportunity. It is fortunate that the RCEP provides a route for India to engage in cooperative efforts while it is a candidate for membership as well as a fast-track accession option should it decide to do so in the future. Globalization proponents can always hold out hope that India will take advantage of these choices. The opting-out decision can be viewed as a strategic choice within the realm of limited possibilities, reflecting a nuanced approach to safeguarding key domestic industries and nurturing self-reliance.
The brighter side is that India is no longer going to become China’s dumping ground, in light of the enormous subsidized products that China would have flooded into India and other countries as part of the RCEP. This also comes as a positive step in tackling China’s dominating presence in the region.
As a result of the changes in global trade policy, Indian authorities are compelled to make some difficult decisions. The policy's goals and implementation methods must be internally consistent and in harmony. It is not conceivable to wish that increasing India's share of global commerce and generating millions of jobs can be achieved by ignoring trade policy or relying on a trade strategy that excludes India from the key trading arrangements that are currently taking shape on a global scale. The domestic trade policy should be coordinated with foreign policies.
Since 2007, the process of negotiating an FTA with the European Union has been stalled. The European Union, India's largest trading partner, accounts for 10.8% of all commodities and services traded between the two. The reinforcement of foreign trade policies is a good indicator of the country's external engagements. In any case, whether the RCEP is implemented or not, India should continue with its reform to double exports, adopt a well-crafted FTA plan, set up a reliable regulatory import mechanism, and, following a prompt restructure, reduce recently raised tariffs to their previous levels. Giving up on RCEP is a wake-up call. The status quo cannot be maintained.[¹]
India's role out of the RCEP illustrates the challenging process of establishing common ground between domestic trade policies and more general foreign policy goals, illuminating the fine line between national interests and regional cooperation. India needs to progress towards ensuring that its goods and services meet international standards for technical trade barriers, clearance, packaging, sanitary and phytosanitary regulations, labeling, and freight procedures, customs, as well as the best or next-best environmental and labour regulations. This will ensure that the decision to opt out of RCEP is in the best interests of the country.
[1] V. S. Seshadri, RCEP and India, 14 IFAJ 87, 102 (2019).
This blog has been co-authored by Arya Mishra and Rudraksh Pathak, students of law at the Maharashtra National Law University. This blog is a part of RSRR’s Blog Series on 'Emerging Trends in Indian Approach to Trade & Investment: Treaties & Agreements', in collaboration with the Centre for Trade and Investment Law.