Negotiations within the 16-nation Regional Comprehensive Economic Partnership (RCEP), for which talks were held in Singapore last week, represent one of the enduring ironies of a regime that claims to be pro-business. With global trade wars hotting up and protectionism reaching high tide, Indian business has long been keen for the government to move ahead in the negotiations and finalise a deal. The RECP will open up trade to a region that represents a third of the global economy and one that is growing twice as fast as the rest of the world. So far, however, the National Democratic Alliance appears to have emulated its United Progressive Alliance predecessor in being the outlier, stalling negotiations over limited and differentiated tariffs and insisting on simultaneous talks on trade and services.
The broad reason for this go-slow so far has been an ostensible preference for the World Trade Organization (WTO) framework as opposed to Free Trade Agreement (FTA). This argument had some currency in the early days of the WTO, but experience since then has shown otherwise. As trade economists and businessmen have argued, FTAs promote preferential free trade within ever-widening and overlapping regional partnerships, ultimately moving towards achieving WTO objectives. Second, as a recent Confederation of Indian Industry (CII) study has pointed out, there is no evidence to show that FTAs have harmed Indian competitiveness or, indeed, created skewed trade imbalances. On the contrary, the trade deficit with China, with which India has no FTA, is higher than with all of Asean, Japan, South Korea, Australia and New Zealand put together. And over the past decade, India’s deficit with China has grown more rapidly than with the other 14 RCEP economies.
Yet, Indian trade policy seems to be headed in the opposite direction, with four rounds of tariff increases this year and a robust defence of the rupee. Policymakers appear to be wallowing in the outdated fear that tariff-free agreements will wipe out local industry. Recent history does not support this claim. Indeed, it is striking that the business community, which once displayed a limited appetite for global competition, is arguing for opening up Indian markets to Asian competition. Its contention is that it will force Indian manufacturers to become more competitive and innovative and widen the market for Indian goods and services.
Indeed, the fear that this China-led initiative will diminish India's position is unfounded. On the contrary, India Inc appears to be in the sweet spot as far as market access is concerned. As former CII president Naushad Forbes pointed out in this paper recently, visits of CII delegations to Southeast Asian nations, Sri Lanka and Iran revealed a desire among them for a larger presence of Indian goods and manufacturing bases in their countries. The time to exploit these opportunities can rarely be more opportune, especially after United States President Donald Trump scrapped US-led Trans-Pacific Partnership last year. With the US-China trade war likely to prompt a diversion of investment, agreements like the RCEP would place India, with its vast market and vast labour force, in a strong position to be an alternative destination for global capital. In short, the political reasons for not moving ahead with the RCEP have no basis in economics or business.