Domestic Compulsion And New Dimension In Trade Negotiation With US Distanced India From Joining RCEP – Analysis

Political disappointment  on  state assembly elections in Haryana and Maharashtra, on the close heel of protests from domestic industry made India a volta-face for joining RCEP. BJP’s outfits RSS and Swadeshi Jagaran Manch have already upped the ante of opposing to RCEP.

For India, FTA did  not prove boon so far. Excepting Sri Lanka , all the FTAs increased  trade deficit. Inverted duty structure was the main barrier to reap the FTA benefits. 

In addition, attempt for a new dimension in trade relation with USA, signaling FTA engagement, made the separation from RCEP a bargaining chip, says China. According to Chinese popular media, Global Times, India viewed RCEP as China-led alliance. It suspected its exit from RCEP as a bargaining chip in trade negotiation with USA and put USA above RCEP. Commerce Minister Suresh Prabhu blinked at this challenge in a recent press conference.  

India has the largest number of FTAs in Asia. Astonishingly, India had trade deficits with these countries. Trade deficit snowballed after FTAs.   USA will be the first nation, if FTA is clinched, with whom India will have  trade surplus. This reflects a new dimension in FTA engagement , with a focus on domestic industry. Hitherto, all the FTAs damaged  domestic industries. During BJP government, not  a single FTA was clinched.  

 At the present juncture, the Indian policy makers viewed  RCEP as bane since India will be a buying market. This will damage domestic industry , which is already engulfed by slump, causing loss of employment. It is poised to become the third largest consumer market after USA and China. India’s consumption spree sparked after US and  China got embroiled in trade war. USA has been the biggest buyer market for RCEP countries. Fears loomed large for trade diversification and India will be the dumping ground,  if it joins the trade block.  

Hit by feisty Trump’s protectionist measures, exports of China and ASEAN , the core members of RCEP,  were downsized largely. Indian policy makers feared that China will assert  to offset the loss by aggressive exports to India through RCEP. In the block,  China is the biggest exporter and India is the biggest consumer. 

 At present, more than  half of India’s total trade deficit is accounted by RCEP members. China is the main cause for it. It is the  biggest  stake holder in RCEP. It accounts for more than one-third of total trade  of RCEP . It was suspected to be  the game changer in the block. With  tariff barriers done away , opportunities will galore for China for bigger entry into Indian market. Eventually,  India will  witness import surge from China and its trade allies . 

China has already been  exploring Indian market through backdoor entry using China –ASEAN FTA in the coexistence  with  India -ASEAN FTA.   These FTAs became easy route for China to push its cheap products to India via ASEAN , while utilizing low or no tariffs. China signed FTA with ASEAN in 2010. Anecdotal evidences showed that  in concurrence with India signing FTA with ASEAN in  2010-11,  India’s import from ASEAN surged. It doubled as compared to India’s exports to ASEAN.  India’s imports from ASEAN increased by 93.8 in between 2010-11 and  2018-19, against its export increase by 48 percent. This exemplifies China’s aggressive entry in India.

It was because of this reason that India urged to change the Rules of Origin. Failing which , India opted for not joining the RCEP.  

Another evidence, which exemplifies China’s backdoor entry into India, was dramatic changes in the basket of imports from ASEAN. Imports of engineering and plastic goods  from ASEAN doubled in between 2009-10 to 2017-18. China has prominence  to produce cheap goods in these sectors  than ASEAN. These product groups accounted for 27 percent share in  total imports from ASEAN in 2017-18, against 23 percent in 2009-10. 

Besides, political distress castigated BJP’s initiative to join RCEP. The sudden political  setback for BJP in the recent state assembly elections in Haryana and Maharashtra resisted India to join RCEP. Fears loomed large that  had India joined RCEP,  it would give  ample opportunity to the oppositions to raise dust on BJP’s failure on Make in India and employment generation, with the aggravation of imports. In addition, Modi has faced joint oppositions from RSS and its affiliate Swadeshi Jagran Manch

In 2018-19 USA became the biggest trading partner of India, toppling China. India’s exports to USA posted a higher growth rate than its average growth of exports to world. Exports to USA increased by 9.5 against India’s overall growth of exports by 8.7 percent 

Sarcastically, while USA became the top trading partner of India , leveraging surge in export surplus for India, China has been the top trading partner, triggering imports into India. This cohesive trade relation between USA and India seemed to have generated a new dimension in India’s FTA engagement , which signaled for  trade benefits and salutary effects on domestic industry .

No doubt, India is subject to Trump protectionism. But, an analysis reveals that USA’s protectionism will have marginal impact on India’s exports. For example,  Indian exporters have been deriving nominal benefits from GSP, which was scrapped by Trump administration. It was US $ 190 million a year out of worth US $ 5.6 billion. Hence, withdrawal of GSP by USA will have slender impact on India’s exports.

So is the case with USA’s high tariff on steel and aluminum. USA accounts for only 4 percent of India’s export of steel and 6-7 percent of aluminum exports. Both these are not the principle items of India’s exports. Eventually, USA’s high tariff on the these items will have marginal  impact on India’s overall exports .

IT and BPO services are the major component of India’s service exports. Here also, USA is the major destination of India’s exports. Over half of its IT and BPO exports go to USA. Besides, USA is the potential hub for job opportunities for IT services. 

Given this, it advocates  a better bilateral trade relation with USA , while patching up  the trade disputes. India needs USA more than RCEP. India’s exit from RCEP  will thwart China’s attempt to wield trade power in Asia. To this end, India’s exit means a solace to USA. This will  pave the way for FTA engagement with USA