There’s no reciprocation in RCEP

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The Economic Times - 30 May 2019

There’s no reciprocation in RCEP
By- Najib Shah

While the new government gets down to work, it needs to take a hard look at the proposed Regional Comprehensive Economic Partnership (RCEP) agreement. This is a free trade agreement (FTA) that could nullify all the gains made by the goods and services tax (GST).

RCEP is an FTA involving the 10 Asean (Association of Southeast Asian Nations) member states and Asean’s six FTA partners that include India. It involves nearly 40% of the entire global trade spread over a geography that contributes 35% of global GDP.

An FTA, in its simplest sense, means that subject to fulfilment of the rules of origin that establish the nationality of a product, preferential rates of duty are extended to an item when imported from the country to another with which there is such an agreement. For instance, in terms of the India-Asean FTA, for TV sets of various screen sizes up to 105cm, the basic Customs duty is nil, opposed to 10% when imported from elsewhere. So, it’s little surprise that nearly 40% of all imports from Asean countries are under FTA.

But then, why would anybody want to manufacture in India when we can import the same product under FTA at reduced or zero rates of duties? Set-top boxes, earlier manufactured in India, are now almost entirely imported under FTA. Apart from the obvious loss of revenue across goods and sectors, it also results in loss of manufacturing and jobs in India.

So, why does India enter into FTAs? In the fond hope that just as foreign manufacturers exploit the preferential market access and enter the vast Indian market, the Indian exporter, too, would do so in markets elsewhere.

But policymakers constantly brush aside the fact that while our reduction in import duties are substantial, the corresponding reduction in other countries is minimal — most rates of duties being already very low there.

Yet another logic given is that India needs to be in the global value chain (GVC). This argument, too, is specious and does no justice to India’s economic strength and the sheer market size we offer. The external affairs ministry sees FTAs as triumphs of economic diplomacy while the commerce ministry views them as expanding the Indian exporter’s scope. No cost benefit analysis of the 16 existing FTAs has been undertaken — at least, it isn’t available in the public domain. The closest we have is a NITI Aayog paper, ‘A Note on Free Trade Agreements and Their Costs’ (bit.do/eTKCC)’, which, as the disclaimer makes amply clear, is a reflection of the authors’ views, not that of the institution.

Any FTA is beneficial only for a developed trade partner. Which is why India’s FTAs with South Asian countries has been beneficial for us. Given this background, one would have expected that India would have proceeded very cautiously before setting foot in an RCEP trap. However, since 2015, we have been actively participating in the negotiations. India already has independent FTAs with Asean, Japan and South Korea, and is actively pursuing similar agreements with Australia and New Zealand.

Even without a FTA, Chinese goods swamp Indian markets. Our dependence on them is such that China need not wage a war with India to hurt us — it just has to stop exporting goods to India for a month. It’s not clear yet how China’s tariff war with the US will play out. But Beijing desperately needs to have preferential access to markets such as India to keep China’s economic engine purring. This is a major driving force behind RCEP.

India has a trade deficit with 11of the 16 countries in the proposed FTA, with China at about $50 billion being the highest. It is, from all accounts, making no headway in the one area we are strong in: services. Yet, we’re pursuing RCEP.

Our exports need protection. As one badly FTA-singed manufacturer told me, our response should be cautious and the reduction in import duties done in a measured, calibrated manner. The auto sector is a classic example. If not for the tariff barriers India erected, Indian car manufacturers would not have become the powerhouse they are today. Exports will happen once the domestic sector is strong, never the other way around.

The previous government had tasked think tanks for their views on RCEP. These reports should now be made public so that industry associations can react and give their inputs. The new government should act fast and not get pushed into signing yet another FTA that only benefits others.

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