India shies away from free trade

singapore trade

Independent India has never been a full-blooded international trader. But then who is a free trader in these uncertain times when even the United States is putting up tariff walls faster than physical ones? Our governmental instincts veer towards protection rather than international competitiveness.

India too large, too poor

To be sure, the 1991 liberalisation changed some of that. But the collapse of multilateral trading rules has not helped. Unlike Vietnam and Bangladesh, which are good examples of smaller economies using preferential trade access to grow rapidly, we are too large to be “helped” by individual development partners along the path to competitiveness. India’s size and relative poverty. We rank 12th on per capita income (PPP) out of the 16 countries which negotiated the Regional Comprehensive Economic Partnership (RCEP) since 2013 – just below the Philippines and above Myanmar, Cambodia and Laos – work against us. India has no options except to reform itself into competitiveness. That is still a long haul.

India and the RCEP

The RCEP represents around one-third of global trade. Subtracting India from the group just reduces the aggregate trade volume by three percentage points. Nevertheless, the RCEP partners would rather have us in than out. For starters, unlike China, we present no security or economic threat to anyone. There is also the long-term prospect of sustained growth of the Indian market, well past 2040, by when China is expected to peak — if other tectonic shifts from technology and climate do not kick in earlier.

So why didn’t India have its way in getting the bloc to agree to a special dispensation for India which would keep out Chinese goods and New Zealand dairy products for an extended period; provide access for services, where India is competitive, and impose stricter rules on the origin of exports to reduce routing of exports through third parties like China is alleged to do?

Indian ambivalence

First, India’s ambivalence does not help build credibility. If we had done our homework and decided that we had more to lose than to gain from RCEP, we should have made our intentions plain a long time back — the negotiations started in 2012-13 and six years have gone by.

Dropping out also doesn’t square with the high praise which was lavished by the government on the report of a High-Level Advisory Group released just days before on October 30, which flagged joining RCEP as a must do. An econometric analysis for this report by the prestigious National Council of Applied Economic Research confirmed that there were net benefits, rather than pain, from joining the bloc. However, this conclusion is far from the domestic perception that India needs protection because of our poor infrastructure and poorly regulated factor markets for land, labour and capital, which impose an implicit tax on exports.

India and China an uncomfortable mix

Second, China is the dominant player in the bloc. It accounts for 56 per cent of the aggregate GDP (2017) and 45 per cent of the aggregate trade (exports plus imports). Japan, South Korea and Singapore together account for a one-third share in trade while Australia, Thailand, Vietnam and Malaysia together add another one-sixth.

Had India become a part of the bloc, it would have had the third highest GDP just below Japan and above South Korea, and tied with South Korea for the third highest global trade.

Since India’s primary concern is trade protection from Chinese imports and greater access for its goods and services, it was China’s call to agree. By choosing not to play ball, China has reinforced its regional dominance by passively allowing India to be excluded from a regional grouping where it is top gun. If India has played the reluctant debutant, China also seems to have given into its “imperial” instincts rather than bowed to its practical image, of judging a cat by its ability to catch mice and not its colour.

Lean West trumps Act East

Third, India’s own strategy has limited it from regional trade expansion. The “Look East” policy of the UPA and the “Act East” policy of Modi 1.0 seem to be substituted by a “Lean West” orientation. Around 60 per cent of our exports flow to the European Union, the United States and the Middle East or West Asia.

Exports to China account for just around 15 per cent, while another 11 per cent go to other destinations in East Asia.

Conversely, slightly less than 40 per cent of our imports are from East Asia, of which China alone accounts for around one half — about the same as West Asia, at 21 per cent. The Americas, Europe and Central Asia together account for 30 per cent.

An alternative, new “trade deal” with the United States and signing the free trade pact with the European Union can deepen the existing geopolitical bonhomie and economic ties. But these too will come with imported threats to dairy, agriculture and industry.

Modi 2,0 too risk averse

ossibly the lurch towards the West is just an alibi. The real reason why we shy away from trade deals is that Modi 2.0 has become risk averse and unable to summon the political capital to drive Reforms 2.0 to reallocate resources towards those producers who are efficient and away from the tired elites who have become fat on their entitlements.

Also, India remains bound by its own peculiar political architecture, which enmeshes it in near continuous state-level elections and a national election every five years. The resultant tsunami of political rhetoric drowns out all the other voices urging sustained basic reforms of the factor markets (land, labour and
capital).

India lonely in grand isolation

RCEP

It is still possible that China will chicken out and not drive India into Washington’s half open arms. But it is only a slim possibility. The other RCEP members also expect India to get over its domestic election-related tantrums over time, especially if growth revives.

In the meantime, we remain in grand isolation awaiting a suitable suitor who will not ask for much but hand over the keys of their domestic market

Adapted from the authors piece in The Asian Age, November 8, 2019 https://www.asianage.com/opinion/columnists/081119/india-dodges-rcep-but-cant-avoid-reforms-20.html

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