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Way forward for RCEP: Need to focus on eliminating problems plaguing manufacturing sector and exports

Prachi Priya
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By Prachi Priya
& Aniruddha Ghosh

The Regional Comprehensive Economic Partnership (RCEP) the proposed free trade agreement between 10 ASEAN member states and their six FTA partners, namely India, Australia, China, Japan, New Zealand and South Korea talks have been under way for over six years now, with over 25 rounds of negotiations between all FTA partner countries. The 16 member countries have now set a deadline of end-2019 to conclude the negotiations. The trade bloc comprising the ASEAN, Australia, China, India, Japan, South Korea and New Zealand accounts for 25% of global GDP, 30% of global trade, 26% of FDI flows, and 45% of the total population. From India s point of view, RCEP is critical. RCEP countries account for almost 27% of India s total trade. Exports to RCEP countries account for about 15% of India s total exports, and imports from RCEP countries comprise 35% of India s total imports.

The negotiations, until now, have been fraught with difficulties, with India accused of being conservative in its approach towards tariff negotiations, according to media reports. A final decision on RCEP is expected to come only post-elections under a new government at the Centre.

Both Indian negotiators and the domestic industry have been vocal about their discomfort with respect to opening up of the domestic market to Chinese exports. This is understandable, given the massive Chinese overcapacity in key manufacturing industries, and major support programmes in the form of financial, non-financial and trade measures for the domestic industry, which give an edge to Chinese producers over other trade partners.

In order to do an independent assessment of the impact of RCEP on the Indian industry, the government has roped in three premier think tanks to prepare the way forward for RCEP negotiations, which is a step in the right direction. A NITI Aayog note (A Note on Free Trade Agreements and Their Costs, Dr Saraswat, Priya, Ghosh 2018) co-authored by the writers of this article had earlier highlighted that India s combined trade deficit with FTA partners like the ASEAN, Japan and South Korea has almost doubled in the last eight years. India s trade deficit with the RCEP bloc of over $100 billion is almost 64% of its total trade deficit, of which China alone accounts for over 60% of the deficit. The report also highlighted that the quality of trade has deteriorated under the ASEAN-India FTA. According to the UN s Harmonised system of product classification, products can be grouped into 99 chapters and further into 21 sections like textiles, chemicals, vegetable products, base metals, gems and jewellery, etc (similar to sector classification). The analysis shows that trade balance has worsened (deficit increased or surplus reduced) for 13 out of 21 sectors. This also includes value-added sectors like chemicals and allied, plastics and rubber, minerals, leather, textiles, gems and jewellery, metals, vehicles, medical instruments and miscellaneous manufactured items. Sectors in which trade deficit has worsened account for about 75% of India s exports to the ASEAN.

Apart from this, we would like to highlight some issues that need consideration of the policymakers and independent agencies undertaking the assessment. First, China s manufacturing surplus and dumping of goods across the world is quite well known. China is the recipient of the highest number of Anti-Dumping Duty (ADD) measures in the world, with 926 ADD measures against it (1995-2017), which amounts to almost a quarter of all ADD measures globally. Most of these measures are concentrated in sectors where China has overcapacity, with more than a quarter of investigations in base metals (272), followed by chemicals (192), machinery and electric equipment (104), and textiles (75). Concomitantly, China s penetration in the Indian market has been massive. China dominates both in terms of value-added import items as well as labour-intensive industry imports. Overall, India imports almost 20% of its non-oil imports from China. Almost 60% of India s electric machinery imports, 36% of machinery and equipment imports, and 37% of organic chemical imports are from China. Due to its massive overcapacity and financial and non-financial government support, China is able to create a significant edge over its trading partners. A recent OECD report (2019) highlights that the Chinese aluminium industry received the highest amount of financial and non-financial support (from 2013-17), far ahead of its other global peers.

Against this backdrop, India must have a plan to deal with this massive support that China offers its industries, leading to overcapacity and price undercutting post-RCEP. Therefore, we suggest that appropriate safeguard clauses need to be put in place within RCEP in case injury to domestic industry is found. A clause on provisional safeguard measures should also be introduced. Within the FTA, provision should be made for safeguard measures to be invoked if a volume or price trigger for the concerned products is reached.

Second, given the current state of Indian industry, phased elimination of tariffs is necessary, especially with respect to some key manufacturing industries that have long gestation periods until they start running on full capacity. An example of this kind of negotiation was the India-Japan FTA where India negotiated for most of its tariff lines under sensitive track (almost 63% under sensitive track, 14% under exclusion). This was in contrast to the ASEAN-India FTA wherein 76% of the tariff lines were opened up for complete duty elimination. Therefore, at least a 15-25 years tariff elimination schedule should be negotiated for key sectors like chemicals, metals, automobiles, machinery, food products and textiles, which individually contribute more than 5% to India s manufacturing GDP and employment, respectively. Thus, as suggested, phased elimination of few key manufacturing industries is absolutely essential with respect to China.

Third, policymakers should be cognisant of the use of non- tariff barriers (NTBs) by China. According to reports, even though China has agreed to open almost 92% of their tariff lines, expecting India to reciprocate in the same manner, India s concerns over China s NTBs merit serious attention. China s usage of NTBs like complex product certification process, labelling standards, custom clearance, pre-shipment inspection and import licensing has hindered India s access to their markets. Dealing with NTBs is costly and, therefore, we must factor in this associated barrier before we move ahead with trade pacts, RCEP in particular.

While our negotiators bargain hard for an inclusive and balanced RCEP, domestically we must fiercely focus on eliminating niggles our manufacturing sector and exports are facing. The first phase of Make in India has been promising. We have seen eagerness from foreign companies setting up plants and assembly units in India, bringing in valuable foreign capital and technical know-how. The next phase may well focus on transforming this initiative to Make for India where the needs of the external market, but more importantly the domestic market, are met through production in India. Not only will this produce meaningful jobs, but also add to India s heft in trade treaties. These transformational plans will require support in the form of a new industrial policy that creates the necessary incentives for MSMEs to be an active part of this process. These are necessary complements for ensuring maximum leverage out of our trade deals, especially RCEP.

Priya is a Mumbai-based economist and Ghosh is a Phd candidate at Johns Hopkins, US