Membership of the Regional Comprehensive Economic Partnership would allow India to overcome its stunted trading relationship with its neighbours, writes Sourish Mohan Mitra
Every country requires economic partnerships to grow its businesses and economy. India has a fairly balanced portfolio of partnerships with individual countries, and associations of countries, via bilateral trade agreements and free trade agreements (FTAs). What eludes us is being part of strong and effective country-level associations. While India is a member of the South Asian Association for Regional Co-operation (SAARC) and South Asian Free Trade Area (SAFTA), trade relations have not materialized significantly in these forums due to a lack of trust and transparency in the region.
However, another regional forum has been on the horizon for the past several years. The Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement in the Asia-Pacific region between the 10 member states of the Association of Southeast Asian Nations (ASEAN), namely, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, and their five FTA partners, Australia, China, Japan, New Zealand and South Korea. Until recently, India, also an FTA partner of ASEAN, was part of negotiations to consummate its association.
But even though the negotiations by India were ongoing since 2012, they could not be concluded successfully. Consequently, on 4 November 2019, Prime Minister Narendra Modi announced during an RCEP summit in Bangkok that the present form of the RCEP agreement does not fully reflect the basic spirt and the agreed guiding principles of the RCEP. Since it also did not address satisfactorily India’s outstanding issues and concerns, it was not possible for India to join.
Soon after, Japan, Thailand, Australia and China also raised concerns and expressed interest in keeping the channel open for India to come back to the negotiating table. The ASEAN secretariat invited India to a recent meeting of the RCEP in Bali in the first week of February – which it skipped. External Affairs Minister S Jaishankar mentioned that India had not closed its doors to the RCEP and would carry out a cost-benefit analysis to evaluate its merit.
The RCEP is a forum which, when formed, will be a large trading organization consisting of Asia-Pacific nations. The forum is keen to have India join it and has been quite vocal about its desires, and this is not the time for India to behave haughtily with prospective suitors relentlessly pursuing it.
The RCEP is touted to be a powerful organization as it potentially includes more than three billion people, or 45% of the world’s population, and a combined GDP of about US$21.3 trillion, accounting for about 40% of world trade. India’s decision not to join the RCEP has reduced its impact in the region significantly.
Playing hard to get
What could have been so compelling for India to withdraw from the RCEP negotiations? Commerce and Industry Minister Piyush Goyal had subsequently informed the parliament that India decided to stay out of the trade agreement as its concerns and outstanding issues were not being fully addressed in the pact.
He told the Rajya Sabha, India’s upper house of parliament, that the RCEP did not “adequately” address India’s concerns over issues like non-tariff barriers to trade, and opaqueness in subsidy regimes in some countries, and that these forced the country to back out from the trade deal.
India, he said, continued to focus on its core demand of a level playing field, fair trade practices, transparency and market access during the trade negotiations. There was lack of reciprocity on its key demands on services market access, safeguards for import surge, and circumvention of origin rules because of tariff differentials. The biggest fear seems to stem from China’s inclusion in the RCEP and the possibility of dumping of cheaper Chinese goods in India through the free trade channel.
Historically and geographically, India’s relationships with neighbours with which it shares borders have not exactly been cordial. This has hampered its ability to form multilateral trade forums and derive mutual benefit. These trade barriers have in fact been more harmful to its economy, as it has to depend on agreements with countries far away, which not only increases cost but also adds to the vulnerabilities of long trade routes.
Limited trade with neighbours
The World Bank, in its 2018 report titled A Glass Half Full: The Promise of Regional Trade in South Asia, states that trade has played a critical role in global poverty reduction. In harnessing the potential of trade, some of the most successful countries, such as economies in East Asia, Europe and North America, have developed strong trade relationships with their neighbours.
Intraregional trade accounts for 50% of total trade in East Asia and the Pacific, and 22% in sub-Saharan Africa, while it accounts for a little more than 5% of South Asia’s total trade. Even in the case of the US, a large continental economic power, its two largest trading partners are its immediate neighbours, Canada and Mexico. Using economic size as the denominator does not alter the result.
Intraregional trade as a share of regional gross domestic product (GDP) hovers at about only 1% in South Asia, versus 2.6% in sub-Saharan Africa and about 11% in East Asia and the Pacific, reflecting low levels of trade within the South Asian region relative to the size of the economies.
In South Asia, both nature and man have contrived to fragment the region, denying countries and people the benefits of proximity. Gravity models show that total goods trade within South Asia could be worth US$67 billion rather than the actual trade figure of just US$23 billion. Formal trade between India and Pakistan could, for instance, be 15 times more than current levels.
The report mentions that South Asian trade regimes discriminate against neighbours. In South Asia, protection is greater, in the case of imports from within the South Asia region, than from the rest of the world, as reflected in the overall trade restrictiveness index. This index measures the uniform tariff equivalent of a country’s tariff and non-tariff barriers that would generate the same level of import value for the country in a given year.
Potential of e-commerce
E-commerce can become a driver of growth across South Asia and boost trade between the region’s countries, but its potential remains largely untapped, says another recent World Bank report. The report, titled Unleashing E-Commerce for South Asian Integration, notes that although e-commerce has grown significantly in South Asia, online sales accounted for a mere 1.6% and 0.7% of total retail sales in India and Bangladesh, compared to 15% in China and about 14% globally. Increasing the use of e-commerce in South Asia could potentially help increase competition and productivity, and encourage diversification of production and exports, the report adds.
A few empirical papers have also formally established a link between the internet and digital commerce on one side, and consumer welfare and other measures of economic benefits on the other. These studies suggest that e-commerce and online business activity stimulate non-negligible consumer gains, entrepreneurship, job growth, international trade, GDP, revenues and productivity.
India’s regional trade and growth potential remains largely untapped and suffers from concerns on cross-border deals with its immediate neighbours. This puts the country in a tight spot, especially when the chips are down and the country is facing a massive economic slowdown. The current GDP growth forecasts by international financial institutions, as well as Indian government organizations, are the lowest of the past 11 years.
The World Bank recently released its January 2020 Global Economic Prospects Report, and in the South Asia chapter mentioned that South Asia’s growth outlook has deteriorated considerably in the past six months. Risks to the growth outlook remain tilted to the downside and relate primarily to financial sector vulnerabilities, geopolitical tensions, and a lack of progress on reforms.
Although recent tensions between India and Pakistan have abated, a re-escalation would damage confidence and weigh on investment in the region. The report highlighted that low trade openness remains a major constraint for productivity growth in South Asia.
It is clear from this that regional economic barriers in South Asia significantly hamper the economies of the countries in the region. India, being the largest, is obviously impacted. Until 2018, India was one of the fastest growing economies in the world, despite these trade barriers. Accordingly, it could afford to dictate its terms in trade negotiations and walk away if the same were not concluded to its satisfaction.
But in just over a year the tables have turned, and India is at the receiving end of the economic downturn. In such situations, the primary focus should be on reviving the economy by exploring opportunities to increase GDP.
The above-mentioned World Bank reports clearly indicate that there is a huge potential for cost-effective trade in South Asia. If we were to consider political hindrances to creating trade routes with India’s immediate neighbours, then there is no reason to stop looking a little beyond. It has already endured enough economic losses from limited trading with its immediate neighbours. Does it want to further burn its fingers by refusing yet another regional trade forum?
Sourish Mohan Mitra is an India-qualified lawyer and works in the in-house team of a global technology research and advisory firm in New Delhi. The views he expresses are personal.