No good tidings
RCEP paves the way for China to offset trade loss, but India could turn out to be the biggest loser
Never before has any trade block felt heat as Regional Comprehensive Economic Partnership (RCEP) warrants. Trade blocks are always created to reduce trade costs by removing tariff and reducing logistic costs. But in the case of RCEP, the reverse seems to be true. High tariff imposed by Trump administration made China hurry up the deal.
After the trade war intensified, China bargained for an early RCEP deal, despite the fact that there was no consensus on issues like E-commerce, competition, and investment. The reason for China to hurry up with the deal is that RCEP could help counter-balance its trade losses in US.
The US is the biggest export destination for China, accounting for one-fifth of its global exports. USA's high tariff dented nearly half of China's exports to that country. The Trump administration imposed 10 per cent tariff on the $200 billion worth of exports from China. In addition, it imposed 25 per cent tariff on $50 billion Chinese exports. The total export of China to US was $430 billion in 2017.
In this context, RCEP could prove to be a savior to China. The trade block accounts for one-fourth of China's global exports. With duty-free entry of goods, the intra-regional trade in the block will open new opportunities for China to raise its exports. This will help China diversify its exports in the trade block substantially.
Hence, China will be the major beneficiary of the block. In contrast, India will be the loser. There are two factors that will mar India's trade prospects in the block. First, India provides the biggest market in the trade block and secondly lowering of India's high tariff will damage the domestic industry. Both these factors will favour China to push exports to India. In RCEP China will be the biggest exporter and India the biggest importer.
In the light of these, three ministries are reportedly seeking the inclusion of steel, textiles and automobile in the negative list. They have cited the examples of FTAs with South Korea and Japan and argued that though FTAs envisaged promotion of trade, both prove one-sided.
RCEP is a major cause for India's trade deficit. The block accounted for 64.4 per cent of India's global deficit in 2017-18. China alone accounted for 60 per cent of trade deficit with RCEP. Against this backdrop, India's entry into the block warrants a vulnerability to its trade structure. It will be the net looser instead of being a gainer.
China is the biggest stake holder in RCEP, which includes ASEAN 10+6 (China, Japan, Australia, South Korea, New Zealand, and India). Its predominance will make it a game changer in the block. Concurrently, it will impart an adverse impact on India with Chinese diversifying from US to India. Till now, China was making a backdoor entry into India through China–ASEAN FTA. India has FTA with ASEAN. These FTAs became easy route for China to push its cheap products to India via ASEAN since India does not have FTA with China.
There is another face of RCEP, which might have prompted Prime Minister Narendra Modi for early conclusion of RCEP. In the summit he reiterated that "India was committed to early conclusion of high quality, comprehensive and balanced regional economic partnership agreement".
RCEP is significant to India, both from the angle of geostrategic and geo-economy. Today, Indian economy is globally integrated. It looks for GVC (Global Value Chain) operation, as an important tool for Make in India initiative through Act East policy. RCEP could become a vibrant platform to propel the Make in India initiative.
Trade war also has a positive impact on India's exports to China under the umbrella of RCEP. With the tariff reduction in RCEP, big scope will emerge for India's exports of agricultural and animal husbandry products to China.
USA has been the main exporter of agricultural products to China. With the imposition of high tariff on USA's agricultural products by China as a retaliatory measure, India's market accessibility of agricultural products in China will surge. For instance, China is the biggest importer of soybean in the world and USA is the biggest exporter of it to China. Given that US exports are shrinking due to high tariff by China, new space will be created for India's export to China, owing to duty reduction under RCEP. India is the fourth biggest exporter of soybean meal in the world.
RCEP can pave the way for Act East policy initiative. It can help India to be integrated into "regional production networks", or say, GVC operation in manufacturing. With low labour cost in the country and duty preferences in RCEP, India can provide a base for value chain supply of cheap component and parts to the assembled units in the trade block. Automobile and electronic industries are the areas, where India can gain prominence with the advantage of duty preferences and low labour cost.
Given the dichotomy, where both boon and bane co-exist, India should cautiously peddle the negative list in RCEP, particularly for China and tighten the noose for Rules of Origin.
(The views expressed are strictly personal)