Flawed strategy

Regional FTAs are out, but bilateral ones are as tough

The government’s decision to stay out of the Regional Comprehensive Economic Partnership (RCEP), which includes 15 other countries, including the manufacturing hubs of East Asia as well as Australia and New Zealand, is being justified as being part of a strategy of remaining open to trade while ensuring that Indian manufacturers are not exposed to unfair co-operation from China. This is, as a broad-brush strategy goes, not hard to defend. There is much that is problematic about Beijing’s approach to international trade, and if the RCEP did not build in the appropriate controls for Chinese exports, then it might well have cost India too much. However, what are the implications if this is indeed the strategy that the government intends to follow?

While multilateral trade rules through the World Trade Organization (WTO) are, of course, the gold standard and India should do its best to ensure that the WTO is revived — especially its dispute-settlement wing — New Delhi’s rejection of multilateral and regional agreements like the RCEP means that it is otherwise reduced to bilateral trade agreements with various countries if it wishes to ensure that its exporters have market access. But it should be clear from the RCEP negotiations and the political fallout of those efforts that such bilateral agreements will not be easy to sign.

Consider just the countries that were also part of the RCEP but with which, unlike the Association of Southeast Asian Nations, India does not currently have a trade agreement. Countries like Australia and New Zealand are big exporters of dairy products, for which India is an untapped market as far as they are concerned. Naturally, they will expect market access for their dairy sector as part of any trade agreement. But protecting dairy producers and co-operatives is one of the stated reasons for not signing the RCEP, so how can a bilateral agreement with these nations be signed? Australia, in addition, will want greater access to agriculture more generally, but that appears to be a red line for the Indian government in spite of the benefits for consumers. 

Even India’s trading relations with the rest of the RCEP countries should be looked at sceptically in this context. It has already put into place some restrictions on the import of palm oil, a commodity in which trade has escalated sharply after the signing of the India-Asean trade agreement. While India’s trade deficit with China may be substantial, so is its deficit with the rest of the RCEP countries. Thus, the problem with uncompetitive Indian production is not solved simply by avoiding giving Chinese producers market access. Nor is there much hope from trade negotiations with either the European Union or the United States. The former has been stalled for years, following demands for protection by domestic industry lobbies like auto and — again — dairy. The latter will expect reversals of recent Indian state action on price control in areas such as medical equipment and pharmaceuticals and an end to subsidies and preferences for Indian producers in sectors such as electronics or solar panels. In other words, this new strategy will not amount to much — unless it is only another name for open protectionism.