Opinion | Reforms could result in export optimism2 min read . Updated: 11 Sep 2019, 11:20 PM IST
India faces a dilemma over whether to sign a free trade pact that would cover much of the East, including China. Caution is warranted, but an isolationist turn would do us no good
There are few tasks more complex than formulating an international trade policy in a world splitting apart into a jumble of trading blocs, even as the World Trade Organization’s vision of a barrier-free global economy seems to recede by the day. Since a consensus from pole to pole is hard to achieve, regional deals have been filling the breach. India already has a variety of free trade agreements (FTAs), many of them overlapping, some of them forgotten, and a few of them talked about less for the gains made than the pains caused. On Tuesday, India announced its decision to review its FTA with the Association of Southeast Nations (Asean), since the country’s trade balance with this group has been tilting in the latter’s favour. By year-end, New Delhi must decide on whether to join an eastern hemisphere grouping under the proposed Regional Comprehensive Economic Partnership (RCEP). This would involve signing up for an FTA among Asean’s 10 countries plus Japan, South Korea, Australia, New Zealand and the one country that could make anybody do a double-take, China.
The inclusion of China in the RCEP poses India a dilemma. An FTA typically requires its participants to grant easier access to each other’s markets by lowering import tariffs all around. This is done on the logic that each would benefit by specializing in what it is better at and exporting it to others. It also lets trans-border value chains operate smoothly. India’s experience of FTAs, however, has not been encouraging, and if New Delhi is wary of an eastern trading bloc, it’s because Chinese dominance of it is more or less assured. In any case, India runs a trade deficit with most RCEP members, most starkly with China, whose exports to us exceeded its imports from here by about $58 billion in 2018. Lowering duties, many fear, could result in an inward avalanche of cheap Chinese goods, throwing our overall trade balance off-kilter. Theory demands that our local industries get into shape, slash costs and compete with imports, but if Chinese exporters have heavy state backing in the form of various hidden subsidies, as analysts suspect, then such an Indian effort would be futile. Also, Beijing is not averse to the use of unfair trade practices, such as dumping, by which excess output is sold in export markets below its true cost of production. It doesn’t help that China’s statist export push has resulted in cost opacity.
Another risk worth bearing in mind is that the RCEP might be an attempt by Beijing to consolidate an “Asian order" under its economic might. Yet, it may go against Indian interests to stay aloof from Asia’s emerging pacts. The proposed group’s share of world trade and the global economy is on a steep incline, and a policy of isolation may deny India the advantages of being part of a dynamic bloc. In recent years, India has been raising import tariffs—for explicitly protectionist reasons in many cases. This suggests a country in retreat from the global arena of competition, under-confident of giving foreign producers a run for their money. The question of joining the RCEP offers us an opportunity to rethink our tariffs and work out a broad strategy that would push domestic producers to prepare for global rivalry, even as a bold set of reforms are carried out to enable this. That would turn our export pessimists into optimists. And do our economy a good turn.