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RCEP Without India Paves Way For USA-India Free Trade Agreement – Analysis

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The Regional Comprehensive Economic Partnership (RCEP) is ready for launching. Fifteen nations (ASEAN 10, China, Japan, South Korea, Australia  and New Zealand) signed the trade deal in Vietnam on November 15, 2020. For its part, India, even though the trade block is Asian based, opted out of the agreement in 2019. It will be the biggest trade block in the world, until USA joins TPP under the new regime of President Joe Biden.

India viewed RCEP as an obstacle to its export and a new gateway for imports from China. Xenophobia loomed large as India will act as a buying market. It is the fourth largest market in the trade block. As it is a China-backed free trade block, it will have larger stake in decision making. India  has its widest trade deficit with China. India’s participation in the trade block would accelerate China’s export with the duty free entry facilities.

China does not have an FTA with India. RCEP would have been a new gateway for China’s duty free entry in India, had India joined it. So far, China made backdoor entry through its ASEAN-China FTA. India alleged that the Rules of Origin in RCEP was loose and has not taken much care to check the abuse of value addition norm, which is likely to be perpetuated by China. Trade deficit is another issue which was not addressed. India was disappointed for not opening the IT sector in the block.  

India has FTAs with many of the member countries in RCEP, such as  ASEAN, Japan and South Korea. But, in none of the deals, India could enjoy  windfalls. Evidences show that India faced larger flow of imports from these countries, in particular ASEAN in the post FTA, which damaged its  domestic industries. This triggered vehement protests against RCEP.

For years, India shot down the FTA with USA. USA was eager and India was cool. Former US Ambassador to India Kennth Juster mulled an FTA with India. Situation made a volte-face, after USA became the biggest trading partner of India in 2018-19. Hitherto, China was the biggest trading partner of India for over five years. The difference was that while trade buoyancy with USA was driven by India exporting more and importing less, in case of China it was more import by India and less export to China. 

This demonstrates that FTA with USA would be more beneficial for India. Export has become imperative to  rejuvenate the economy in Modi 2 period. India targets US$5 trillion economy by 2024-25. To achieve this, India targeted export at US $660 billion by 2024-25. To this end, Commerce Minister Piyush Goyal’s endeavor to embrace a new trade deal with the USA is justified, despite several niggling issues. In US-India Strategic Partnership Forum, he decoded that both countries have agreed to broad contours of proposed trade packages, after closing the pending gaps. 

India was embroiled in trade confrontation during Trump regime. The USA’s withdrawal of GSP benefits and high tariffs on steel and aluminum were hyped to dent the heyday of India-US trade relation. Notwithstanding, its exports to USA rose in 2019-20. 

Basket of exports to USA is another important parameter which edge out the other nations with whom India has FTAS.  USA is the biggest importer of ready made garments, marine products, diamonds, which generate big employment in the country. Both World Bank and Peterson Institutes studies have predicted significant gains for both USA and India, if a free trade agreement is concluded. In addition, the USA is the biggest importer of India IT services. 

Given these, ethical wisdom suggests that India should advocate FTA with USA. This will not only bring two countries closer to each other, but will also dilute the trade confrontation which erupted during Trump administration. Further, USA- India FTA will leverage a greater scope for India’s exports to USA against stiff competition from member countries, had USA rejoin FTA. 

Export of garment is a case in point. Textile, including garment, is the single major item of India’s export. The USA alone accounts for 40 percent of India’s total export of textiles. Vietnam, as a member of TPP,  is the toughest  competitor to India. It is the second biggest exporter of readymade garments to the USA (after China). Against this backdrop,  India’s FTA with USA will largely dilute Vietnamese trade competitiveness to USA. 

With tariffs done away under FTA, trade related investment will witness a better scope. The USA has the advantages of technology and financial muscles and India has an edge in providing low cost production base and big domestic demand. FTA will encourage US investors to invest in India in lure of low cost production, while importing high tech products duty free as inputs. Eventually, it will help in reducing trade deficit.

Even though President-elect Joe Biden did not mention any plan to rejoin TPP (Trans-Pacific Partnership) during his Presidential election campaign, it does not mean that he may not have a second thought on it. During the Obama Presidency, Biden, as Vice President, was an active promoter of TPP. In his election campaign he warned that, “either China is going to  write rules of the road for 21st century on trade or are we”. President Donald Trump too, after a year of exiting from TPP, pondered rejoining the trade block.

Subrata Majumder

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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