Trade integration with Asean an imperative

With the US withdrawal from the Trans-Pacific Partnership (TPP) in early 2017, many had come to believe that mega-regional trade deals had run their course and bilateralism would be the norm thereafter. However, its revival as Comprehensive and Progressive Agreement for TPP (CPTPP) by the year-end established continued relevance of mega-regional trade deals, particularly, in the wake of a floundering Doha Development Agenda and a multilateral trading system under threat. The revival of the TPP has also re-introduced competitive pressure on the other major regional trade formation in Asia, namely, the Regional Comprehensive Economic Partnership (RCEP).

The RCEP is a regional trade partnership among the sixteen founder members of the East Asia Summit (EAS) established in 2005 with the primary objective of creating an Asian Economic Community (AEC). The EAS has since expanded to include the US and Russia as members and adopted a broader working agenda. The AEC objective, meanwhile, was sought to be achieved through the five free trade agreements (FTAs) that China, Japan, Korea, India and Australia-New Zealand established with the 10-member Asean regional grouping. In 2012, the Asean and its six FTA partners launched negotiations towards the RCEP as a means to achieve deeper economic integration. The RCEP was expected to be finalised, first in 2015 and then in 2017. But after 20 rounds, the negotiations are yet to be concluded. One reason for protracted negotiations has been India’s offer of tariff concessions lower than the other members and differentiated in terms of number of tariff lines and time schedule for its FTA and non-FTA partners, especially China. This has been resisted by other member countries. More recently, India has shown willingness to drop the offer of a differentiated schedule subject to getting concessions in services liberalisation, in particular, in mode 4. This could further slowdown the RCEP negotiations as the intra-Asean services trade liberalisation is limited except in traditional sectors like transport, tourism and, to some extent, financial services. 

Illustration by Binay Sinha
In fact, it is in India’s interest to ensure an accelerated pace of RCEP negotiations. This is particularly so, as the CPTPP membership is a subset of the Asia-Pacific Economic Cooperation or APEC and future accession of non-APEC economies, while possible, would be subject to approval of existing members. India is not a member of the APEC and its long-standing application for membership of the APEC has not been approved so far. Also, as against the revived CPTPP which, even in its diluted version, will be negotiating “WTO-Plus” provisions, including regulatory reform, the RCEP has undertaken negotiations sequentially, with goods trade liberalisation first on the agenda. Most significantly, the RCEP is Asean-centric, ensuring thereby comfortable equations among its FTA partners in the negotiation dynamics. But Asean centrality of the RCEP also necessitates that India’s trade integration with Asean be strengthened. The existing India-Asean trade relationship has made some gains but also faces several challenges.

The India-Asean trade relationship was institutionalised in 2010 with the implementation of an FTA agreement. From a pre-FTA level of $45 billion in 2008-09, trade with Asean has increased to $71 billion in 2016-17.But pre and post FTA, trade with Asean accounts for an almost constant share, 10-11 per cent, of India’s total trade. Within this, the share of exports (in India’s total exports) has remained roughly constant at 10 per cent throughout, with a slight increase to 11.2 per cent in 2016-17. More importantly, the composition of India’s trade with Asean shows little increase in manufactures trade. Post FTA, maximum gains have been registered in the import share of palm oil and the export share of meat and meat products. Commodity categories like mechanical appliances, electronics and electrical equipment, that are leading sectors in Asean trade with the world, have registered a fall in import and export shares, respectively, in India’s trade with Asean post FTA.

Asean trade in these categories is built through its participation in global value chains (GVCs). Asean participation in GVCs through backward linkages, as indicated by import content of exports, has remained high over the past decade, at more than 50 per cent in categories like machinery and appliances and transport equipment and subcategories like motor vehicles, and almost 60 per cent for electrical and electronic equipment. In comparison, India’s backward linkage with GVCs is comparatively lower with the import content at 20-30 per cent in 2011. India’s forward linkages with Asean, as a source of value addition in Asean exports in these industries, are insignificant. The origin of value added in Asean exports is mainly other Asean and APEC economies1. Not surprisingly therefore, India’s share in Asean total trade remains below 3 per cent. Trade enhancement with Asean, in particular, export enhancement can happen only if India enhances its value chain integration with Asean. RCEP would facilitate this integration process.

If India continues to remain inflexible in the negotiation process, other countries may choose to bring in more difficult provisions in the RCEP, as has been the case in Australia’s argument for undertaking liberalisation in terms of trade value rather than number of tariff lines. India’s persistence with mode 4 services liberalisation may be countered by demands for e-commerce and investment liberalisation or stricter intellectual property provisions, areas where India is uncomfortable. India also needs to appreciate that Asean countries have the option of joining both major trade arrangements (RCEP and CPTPP) , and, as is true of Vietnam, may also be willing to accede to and undertake reforms in line with the CPTPP as these help strengthen the value chain production that is at the core of Asean trade.

Given the dismal state of multilateral trading system, India thus risks losing opportunities for trade integration at both, the global and regional level. To overcome these challenges and enhance the value chain integration process with Asean, Indian policymakers must show more flexibility in regional trade negotiations and Indian industry has to be willing to face competition and shed their overly protective attitudes.
of Economics, School of International Studies, JNU and author of “Regional Economic Integration in South Asia”. 
exclude Cambodia, Laos and Myanmar

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