Swadeshi Jagran Manch Is Right. The RCEP Is Not For India, At Least Not As Yet

Pressure has been building on India to make up its mind on joining the Regional Comprehensive Economic Partnership (RCEP), which is essentially a proposed free trade agreement (FTA) between the 10-member ASEAN (Association of South East Asian Nations) and six of its biggest trading partners – China, India, Japan, South Korea, Australia and New Zealand.

The Swadeshi Jagran Manch, a Rashtriya Swayamsevak Sangh affiliate, has been vigorously lobbying against RCEP, and in this case it is taking the right stand. The reality is that India has not derived equal benefits from any FTA it has entered into so far with any country. Most FTAs, or even Comprehensive Economic Cooperation Agreements (CECA), have indeed boosted trade turnover, but they have simultaneously managed to push India into deeper trade deficits with our trading partners.

This is true not only of India and ASEAN, but also India and South Korea, India and Japan, with our imports rising significantly faster than our exports (read this comprehensive analysis here). Put simply, India has been unable to benefit significantly from these trade agreements.

There are two reasons why FTAs have not worked for India. One is India’s essential lack of competitiveness in most areas of manufacturing, with our exports being concentrated either in bulk commodities and/or imports in value-added products. The other, and more important reason, is that FTAs are loaded against services, in which India has real competitive strengths.

If, for example, the FTA with the European Union (EU) has been discussed since 2007 with no significant progress being made, it is because the EU wants significant duty concessions in manufactured products it is strong in (automobiles, wines and spirits), but will not liberalise trade in software services, which includes the movement of natural persons. India does not want to keep tariffs on automobiles and liquor down when the EU will not allow Indian software professionals to gain easy entry to the Union to execute contracts.

India has a huge trade deficit of over $50 billion with China precisely because of this. We export only low-value added products, while we import higher-value products, and our services industry has been kept out substantially through non-tariff barriers.

Coming back to RCEP, which includes all the countries and trade groupings with which we have made no headway in exports (relative to imports), any premature entry without preparing our own gameplan for taking advantage of the FTA will end up worsening our trade balance.

India often enters into trade agreements and FTAs without considering how it is going to benefit from it, and without understanding the structural weaknesses of the Indian export economy outside software services.

If our trading partners want FTAs in merchandise, but will turn mercantilist in services, it does not work to our advantage. This is a good reason not to enter into FTAs, especially the one planned with RCEP. It is a recipe for disaster.

Very often, we get into bad deals because of the fear of being left out in the cold. But FTAs are not an either/or option for us. We can substitute FTAs with bilateral deals that are renegotiable based on actual results over the coming years. These can later be converted to FTAs once the benefits are seen as two-way.

RCEP, if it is not equally welcoming of services, will essentially turn out to be yet another trap for us – with China running off with the cream.

In theory, FTAs are good for everybody; in practice, they are often tilted towards manufacturing powers to the detriment of services powers.

The way forward for India on FTAs should be the following:

First, do bilateral deals with individual countries, where the scope for monitoring performance is simple, and relative competitive strengths can be discerned easily.

Second, focus on creating friction-free export processing zones where no regulations will be imposed beyond the bare minimum. If these turn out to be export successes, joining FTAs and even RCEP could be considered.

Third, we must always insist that FTAs ought to cover services that we are interested in. No services, no deal.

It is better to stay isolated and do bilateral deals that strengthen us than to get into FTAs that work to our disadvantage.