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Getting comfortable

With China keen on enhancing economic ties, the informal summit has boosted an apprehensive India’s chances of joining RCEP

Getting comfortable
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The informal summit between India and China has become more effective to reset ties than the official one. Back in April 2018, the first informal summit held in Wuhan was successful to amicably settle the Doklam Standoff, bringing the two countries back on track. The second one in Mamallapuram received bigger ovation for its success in overarching both political and economic issues. India and China softened their political tiff which was erupted by China's support to Pakistan vis-à-vis abrogation of Article 370 and finding a new way to defuse the trade tension before joining RCEP.

There are two areas where the second informal summit made a successful bid in a greater way. Firstly, both leaders realised the importance of the other as a good partner for development. Both recognised that simultaneous economic development of both countries will yield mutual benefits. Secondly, both agreed to establish a High-Level Economic and Trade Dialogue which will enhance trade and commercial relation. This will act as an antidote to trade threat.

In pursuit of these, a new platform for trust-building was set up with a belief that China was not a foe. It ensured to balance the trade through this High-Level Economic and Trade Dialogue mechanism. The reverse in thinking for mutual benefits through simultaneous development will pitch for a positive negotiation to balance the trade. They also agreed on the importance of RCEP – a mutually benefited partnership, thwarting India's trade trap threat. Some analyst opined that this summit may act as a pre-test of dilution of India-China collision on trade threat before joining RCEP.

India's main concern to join RCEP is the trade trap by China. The trade deficit with China surged mainly due to China dumping goods in India. India's vulnerability in the block will be its big domestic market. Threat looms large on aggravation of trade deficit with China increasing exports, after availing duty-free entry under FTA umbrella in the block. The concerns were further mounted up by the trade war between USA and China, which will force China to shift exports to India.

High-Level Economic and Trade Dialogue, decided in the informal summit, will play a key role to taper off the trade imbalance China was already exploring in the Indian market through backdoor entry using China-ASEAN FTA and India-ASEAN FTA. These FTAs became an easy route for China to push its cheap products to India via ASEAN while utilising low tariffs. China signed FTA with ASEAN in 2010. Anecdotal evidence showed that India's trade deficit with ASEAN widened further after FTA. It increased by over four times till 2018-19.

Evidently, China was a pointer since India's basket of imports from ASEAN made dramatic changes after the ASEAN-India FTA. Imports of engineering and plastic goods from ASEAN doubled during the period. China played a key role in rejigging exports of these products to India using China-ASEAN FTA and India-ASEAN FTA routes.

In contrary, India failed to stem the benefits. Indian exporters expressed concern over Rules of Origin in some major partner countries under FTAs. According to a FICCI survey, who are mainly engaged in trade with major six countries of ASEAN, viz. Singapore, Malaysia, Indonesia, Thailand, Philippines and Vietnam, Rules of Origin were posing hurdles to Indian exporters. About 30 per cent of respondents exporting pharmaceuticals, automotive parts and chemical products to these countries highlighted the Rules of Origin as one of the main barriers to reap the benefit from FTA.

Apart from trade which exhibits trade demerits, RCEP manifests another side of impact. RCEP nations are the biggest foreign investors in India. It accounts for 47 per cent of total FDI in India.

Even though unlike trade, China is not the major foreign investor from the block, Chinese investment made a big leap since 2011. The bonhomie started with the change in the leadership in China and losing the low-cost paradise of manufacturing. Chinese investment increased ten times ever since. It increased from Rs 2.3 billion in 2011 to Rs 26.2 billion in 2018.

In pursuit of these, both leaders in the informal summit agreed to encourage mutual investment in identified sectors through the development of Manufacturing Partnership. China is the fourth biggest foreign investor in the block.

Chinese investment in mobile telephone manufacturing is a case in point. China brands now account for over 51 per cent of the smartphones sales in India. Large penetration of Chinese top brands of smartphones – Xiaomi, Oppo, One-plus, Gionee, Vivo, Huwai – is posing challenges to Koreans and Japanese brands in the country.

Speculations are ripe on a new era of Sino-Indian investment relations. Currently, on paper, India accounts a paltry share of Chinese overseas investment. But, this does not reveal the reality. The recent trend of Chinese investment in India and its growth trajectory foretell a new era of Chinese investment in India.

Pinning hope on the 'Make in India' initiative, Chinese private investors are gung-ho to invest in India's innovative digital ecosystem. A big chunk of recent Chinese investment flowed in the fields of Start-up business. India has a robust IT industry that operates at cheaper costs in India than in China. By investing in these areas, China will be in a unique position to give a challenging shape to its investment in India. India is in the threshold of building 100 smart cities by 2020 with an investment of US$ 15 billion.

India has an edge over China in terms of low-cost production. Measured by wage level, India's wages are cheaper than China. For example, during a survey in December 2018-January 2019, wages for general workers in Mumbai were half of Guanzhou (China).

Given these parameters and new thinking between India and China in the informal summit, where both leaders evaluated the bilateral relations from the perspective of mutual benefits, the summit ushers a new hope for RCEP, thwarting the threat of trade trap.

(Views expressed are strictly personal)

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