RCEP and the China factor

Inscrutable China

Cambodia's Prime Minister Hun Sen, New Zealand's Prime Minister Jacinda Ardern, India's Prime Minister Narendra Modi, Chinese Premier Li Keqiang and Thai Prime Minister Prayuth Chan-Ocha shake hands at the 3rd Regional Comprehensive Economic Partnership (RCEP) summit in Bangkok, Thailand. (Reuters Photo)

For the time being, India has put on hold the initiative to join the Regional Comprehensive Economic Partnership (RCEP), while the other 15 countries have decided to go ahead with economic integration. India said that despite intense negotiations with them, it was not possible to achieve a “balanced” and “fair” deal, nor any assurances on market access and non-tariff barriers against Indian products were given, exposing India to debilitating imports from abroad.

In the Indian decision to abstain from the RCEP, a number of factors are at play but the dominant one is China. Eighteen years ago, faced with a similar dilemma in 2001, China jumped in to join the World Trade Organisation, promising to lower tariffs and, as its leader, Deng Xiaoping once commented, “pocketing a small insult” for the larger good. China’s trade, which stood at a meagre $200 billion then, has jumped to over $4 trillion, with exports increasing substantially and the country at one boasting of foreign exchange reserves at one time of $4.2 trillion.

Today, somewhat strangely, China is the champion of globalisation and against trade protectionism. At the January 2017 Davos meeting, President Xi Jinping went so far as to suggest that China would now “lead” globalisation.

Of course, while China accepted some market principles, its Communist Party-dominated system successfully circumvented many WTO rules to its advantage on tariffs, market access, subsidising its state-owned enterprises and currency manipulation – all issues that have become contentious in the current round of trade conflict with the United States.

For India, a similar breathing space is not available to reorganise its domestic market. A democratic political system is more vulnerable to suicide deaths in the debt-stricken countryside, while corporate interest groups exert mounting pressures on the Indian decision-making processes. This is a politically sensitive issue in India as the recent outcome in state elections in Haryana and Maharashtra indicated.

Secondly, while a fortnight ago, India was willing to open up the market to the detriment of the domestic constituencies, including resistance from the all-powerful ‘Mumbai Club’, it developed cold feet following no commensurate and credible assurances on reciprocal access to the big markets. India’s trade deficits with China, Japan, South Korea and the Southeast Asian countries have been mounting. However, except China, other countries have become some of the main investors, offsetting trade losses. In the case of China, India today is staring at its whopping $750 billion trade deficit over the last decade, with a paltry $8 billion in investments in India from that country. The Wuhan and Chennai informal summits hardly contributed anything substantial to remedy the situation, despite a few cosmetic measures. The RCEP agreement provided China a chance as well to circumvent rules of origin to enter in big margins in the Indian market. The writing on the wall was clear to India.

Thirdly, while the other 15 RCEP countries have an overarching interest in trade in goods, India’s services sector, which constitutes more than half of its economy, hardly found space in the RCEP negotiations. Clearly, many in the RCEP are unwilling to accommodate India’s suggestions on this issue.

Fourthly, unlike the other 15 RCEP countries, India sports a major strategic asset -- it's over 400 million middle-class consumers could be a guarantor for any sustainable economic growth in these times of regional and global economic crises. India warded off challenges to its grip on this factor by imposing anti-dumping duties (mainly on Chinese products) and protectionist measures. At the moment, Delhi is dangling this advantage and may explore the more contentious markets of the European Union and the US in the near future.

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