The future of trade

India must increase its ambition

On New Year’s Day, the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free-trade agreement, or FTA, came into force. It was signed in November 2020, and involves the member states of the Association of Southeast Asian Nations, or Asean, alongside the People’s Republic of China, Japan, Australia, and New Zealand. South Korea is also a signatory, and will join the pact at the end of this month. The RCEP’s arrival is a reminder that the future of the international trading architecture increasingly seems to be coalitions of the willing — plurilateral or regional trade pacts. India was part of the RCEP process but eventually pulled out of joining. It has thus missed out on the opening of trading opportunities available to the other members. There have been few credible public statements about India’s dropping out, which has upset its partners. Part of it may certainly be a broad unwillingness to join an FTA which appears in many ways to be centred on the Chinese economy. Yet broader pessimism about trade may also be an underlying reason —which would be a mistake.

In recent months, there has been some softening of official statements from New Delhi about the benefits of trading agreements. This thawing has mainly taken the form of the renewal of discussion on FTAs, such as with the European Union, movement with some smaller nations like Israel and the United Arab Emirates, and attempts at “early harvest” agreements with larger and more problematic trading partners like the UK which aim to side-step sectors in which there is failure to achieve a consensus. Thus, these ambitions are themselves relatively limited and they have not borne any real fruit so far. Certainly, in terms of furthering the trade integration agenda, they do not come close to a real attempt to join a large pact such as the RCEP.

If the new openness to trade and integration in New Delhi is thus to be turned into something of genuine benefit to the Indian economy, it will have to raise the stakes. Certainly, India’s continued observer status in the RCEP might be utilised to examine whether in fact it would be a net negative for the Indian economy to join. But even if not, the government should develop a keener understanding of the domestic reforms necessary to become part of the value chains of the future. Benefiting from trade is not simply about market access and tariffs anymore; and entering diffused global supply chains is not the same as providing subsidies for onshoring of production. There is an entire menu of reforms and tariff rationalisation that will be necessary if India is indeed to gain from the ongoing realignment of global trade and supply. 

New-age trade agreements are as much about “behind the border” adjustments such as regulatory harmonisation as they are about tariffs. Understanding this, and making the domestic changes necessary, will require deeper commitment from the government than a few conciliatory statements about trade. It will also mean that the tendency to increase tariffs on average in the Union Budget must end. It has been promised that trade policy will be an important part of the forthcoming Budget. If so, the provisions must be forward-looking, and prepare India to be part of the trading blocs of the future.