BackIndia’s stop-and-go approach to free trade doesn’t help
The country needs greater coherence in its trade policy after forgoing various regional arrangements
PremiumIn November 2019, India abruptly walked out of the Regional Comprehensive Economic Partnership (RCEP), a mega free trade deal with 15 other nations that it had actively pursued for eight years. Mind you, of the 15, it already had in place a free trade agreement with 12 member countries, and a 13th (Australia) was in the making. Soon after exiting the RCEP, India aggressively sought to sign free trade agreements with Australia (a member of RCEP), Canada, the UAE, EU and even the US. Did New Delhi walk away from the RCEP because of the China bogey? Indo-China trade has continued to grow in the past three years, the Ladakh clash of 2020 notwithstanding, and crossed $125 billion in 2021. From April to August, China was India’s second-largest export destination. Why was India apprehensive about the RCEP? It seems that the biggest factor was worsening trade deficits with ASEAN as well as China. This can change dynamically. But what was missed out is that RCEP’s ambition was not just trade, but also investment. It is about locating entire supply value chains within its free-trade territory. So, if India stays out, future investors will think twice about locating a part of their value chain in a country that’s outside the RCEP zone, for doing so could thwart the seamless movement across multiple borders of the chain’s various constituent elements. A loss of potential investment is a bigger concern than worsening trade deficits, since the latter can be made up by bilateral surpluses with other trading partners. Also, as Western companies think about their China-plus-one strategy for new investment locations to diversify away from China, a location within RCEP might seem more attractive. Witness the success that Vietnam has had. The RCEP saga shows that over the years, even though the benefits of free trade, opening up borders and lowering tariffs have been amply demonstrated, India’s commitment to openness remains ambivalent. Perhaps this is because of competing domestic interests and the influence of smaller but more vociferous opponents.
Some recent decisions are another case in point, highlighting India’s reluctance to sign up for full-blast free trade. First, in May, the government abruptly announced a ban on the export of wheat. This was barely six weeks after an assurance to the world that India would be a reliable supplier and stand in for wheat shortages created by the war in Ukraine. India was expected to export a record 10 million tonnes. Its ban caused the Chicago benchmark wheat index to jump 6% and caused great dismay among importer countries. Second, just a fortnight after that wheat export ban, the government announced another ban, on the export of sugar. This is from a country that is the world’s largest producer of sugar, which had a 14% increase in production last year, and is looking at a further record production of 35.5 million tonnes this year. These bans reflect domestic concerns about price inflation but are undeniably interventions in free trade. Third, another telling incident was a warning from India’s trade minister to automakers not to “force" their component makers to import. Never mind that India’s auto-component industry is a net exporter and recorded $19 billion of exports last year. The industry has matured far beyond expectations and won many international quality awards like the Deming Award. Presumably the relationship between automakers and their suppliers is akin to one between consenting adults, and “forcing" automakers to localize their component content should be decided freely on market considerations.
Fourth, this past week, India decided to opt out of the “trade" pillar of the Indo-Pacific Economic Framework, the only nation to do so among 13 others. The IPEF is an ambitious US-led grouping whose agenda goes beyond free trade, and includes building supply chain resilience, clean energy, taxation and anti-corruption. India’s hesitation is driven by concerns about digital trade, labour and environmental standards and public procurement. Each of these poses domestic complexities. Surely India’s competitiveness in global trade does not derive from lax domestic standards of labour or environmental protection. Indeed, India has shown a readiness to harmonize its domestic policies with global best regulatory practices in its negotiations with the EU for a free trade agreement. So, there is no need to be squeamish in signing up to these so-called trade-unrelated conditionalities. India is now out of two mega trade treaties in the Asian region, namely RCEP and the Comprehensive and Progressive agreement for Trans-Pacific Partnership (CPTPP). The latter was formed when the US exited the TPP under President Donald Trump; China, Taiwan, South Korea and even the UK are knocking on its doors now. It would be ironic that a grouping (TPP) formed expressly to counter the clout of China ends up admitting it.
In the days ahead, geopolitics and geo-economics will be increasingly intertwined, so India’s commitment to open and free trade will be tested. Frequent tariff tweaks to protect domestic vested interests and periodic trade bans should be resisted. A moderate and uniform tariff structure across the board is optimal, while differential rates can cause harm. The anomalies of inverted duties, for example, injure our trade competitiveness. Our uneven and often high import tariffs are in addition to higher costs imposed by logistics, energy and taxes. Achieving high and sustainable economic growth requires us to tap global markets more deeply, which calls for an unwavering fidelity to trade openness.
Ajit Ranade is a Pune-based economist
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