Three years ago, India abruptly left the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement between 15 countries, including China. The RCEP trade negotiations had been going on for almost 10 years, in which India had been an active and enthusiastic participant. The current RCEP grouping represents around 30% of global GDP and is growing. Intra-RCEP trade without India is worth $2.3 trillion. The RCEP deal finally came into effect on January 1 this year (they were waiting and hoping for India to join). This agreement encompasses wide areas of cooperation and aims to eliminate almost 90% of all tariffs, making it a kind of economic union.
India’s apprehension and decision not to join may have been due to fears that Chinese goods would enter India duty free, overwhelming the domestic market. But our trade deficit with China has grown steadily over the past three years, and even the total volume of trade has increased, despite the clash in Ladakh.
India could benefit from the “China plus one” strategy of many global investors, who are looking to set up factories outside of China, in other countries such as Vietnam, Thailand and India. But by not joining RCEP, India may have reduced its chances of attracting investment in various parts of the manufacturing supply chain in sectors like electronics, textiles and automobiles. Indeed, when investors choose to locate their investments, which span an entire value chain, and when the chain has to cross borders, they choose to be within RCEP territory to allow for the smooth flow of goods. If India is outside RCEP, it puts value chain investors at a disadvantage, while the rest of the chain is in RCEP countries. So, by focusing only on the trade deficit aspect of RCEP, India may have missed the value chain bus. Also, keep in mind that India had already entered into a free trade agreement with 12 of the 15 RCEP countries before its decision to withdraw. It has also signed a free trade agreement with Australia, the 13th of the 15 RCEP countries.
There are three major trade groupings in the world that straddle large parts of Asia. Apart from RCEP, the other two are the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the New Indo-Pacific Economic Framework (IPEF). The IPEF, launched in May, includes 14 countries, and the CPTPP includes 11 countries. Australia, New Zealand, Malaysia, Singapore, Vietnam, Japan and Brunei are members of all three groups. India is not present in two of the three. China, of course, is not part of IPEF or CPTPP, as these two groupings were brought together explicitly to keep China out.
The CPTPP is a modified version of the TPP, which was led by the United States when Barack Obama was president. But under Donald Trump, the United States withdrew from the TPP and also stayed away from the CPTPP. It was not just about a trade deal, but about influencing and shaping the emerging trade rules in the Asian region and countering the influence of China. Thus, it contains provisions that cover investment rules, labor and environmental standards, greater integration of manufacturing value chains, etc. The CPTPP is ambitious and is now enticing enough that even China is knocking on its door. South Korea and the UK could also seek entry. Note that Japan now has a free trade agreement with the European Union since 2018. This means that the EU also has a foothold.
The US is paying a price for staying out of the CPTPP (and, of course, the China-dominated RCEP), in terms of lost business opportunities and reduced geopolitical clout. This explains the aggressive initiative he took in the formation of IPEF. This grouping of 14 nations accounts for 28% of global GDP and a substantial trade volume as well. It is based on four pillars, namely trade, supply chains, taxation and anti-corruption, and clean energy. IPEF allows members to opt out of any pillar. Here too, India has shown a certain delicacy, choosing to stay out of the trade pillar. India’s Commerce Minister said that since there were issues such as labor and environmental standards, digital trade and government procurement at stake, around which there was no consensus among members. of the IPEF, India had chosen to withdraw. He also hinted that stricter labor standards imposed by countries like the United States and Japan could be detrimental to developing countries like India.
This effectively implied that India would choose to adhere to lower labor protection standards or allow “dirtier” industries with lax environmental standards to gain a competitive edge in global trade. But that era is over. And India has de facto agreed to harmonize labor and environmental standards with the West since it is also pursuing a free trade agreement with the European Union. So why stay out of the commercial pillar of IPEF?
Indeed, right after withdrawing from RCEP, India aggressively pursued bilateral free trade pacts with Australia, the UK, the UAE, Canada and the EU. Why then hesitate to join regional and multilateral groupings like IPEF?
India’s growth depends critically on its global competitiveness, in both manufacturing and services. We must also respect the principle of open international trade. Our tariffs must be moderate and we must give up frequent and instinctive protective measures to protect our national industry from global competition. And through our commitment to job creation (not just value addition), India can benefit more from global engagement.
The “China plus one” window of opportunity will not be open forever. Labor-intensive exports give us our competitive edge, whether in textiles, tourism and agribusiness, or high-end software services. It is in our interest to adopt free trade or quasi-free trade in all sectors. In a world that is slowing down due to a recession, even if our trade share increases from 3% to 4% of world trade, it would be a huge boost for the Indian economy. And this is only perfectly feasible if we are less afraid of open and free trade.
(The author is a renowned economist)