Shed the protectionist mindset

by November 14, 2019 0 comments

Keeping in mind the criticality of being an integral part of the global supply chain to achieve a $5 trillion economy, India needs to reconsider its decision on RCEP

The Regional Comprehensive Economic Partnership (RCEP) is a conglomeration of 10 members of the Association of South East Asian Nations (ASEAN) viz. Malaysia, Indonesia, Thailand, Vietnam, Singapore, The Philippines, Myanmar, Brunei, Laos and Cambodia plus six others viz. Australia, New Zealand, Japan, South Korea, China and India. If it really sees the light of day with all 16 members intact, the group will cover 3.6 billion people or almost 50 per cent of the world’s population and account for nearly 40 per cent of the global GDP (Gross Domestic Product).

India is aiming to double its GDP to $5 trillion by 2024-25. To achieve this, it is looking inter alia to doubling its exports from the current over $500 billion to $1 trillion and increasing agricultural exports 2.5 times from $40 billion to $100 billion. In this backdrop, the RCEP with a combined GDP of $30 trillion presents, at least on paper, a huge opportunity that the country can’t afford to miss.

Since 2012 (when the RCEP was mooted), 29 rounds of negotiations have already been held. During the ASEAN Summit (November 11-15, 2018), Prime Minister Narendra Modi had called for early conclusion of the process. In the recent ministerial gathering held in Bangkok (October 10-12), even as discussions reached a deadlock over a dozen contentious issues, ministers were given 10 days to iron out the differences. If, they didn’t succeed, Modi, with his famed “Midas touch” was expected to make it happen in the third RCEP leaders’ summit.

However, on November 4, Modi announced India’s decision not to join the group citing that “the present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP. It also does not address satisfactorily India’s outstanding issues and concerns”. So, what are India’s major concerns? And, are these valid?

First, India wants the reference date for undertaking tariff reduction to be extended to 2019 instead of 2014 planned initially. Since 2014, the Government has raised import duty on 3,500 items. In this backdrop, if for the purpose of phasing out duties, it were to use 2014 as a reference point, this benefit will be lost. The Indian stance is perfectly logical as the quotation date for commencement of tariff cuts has to be in sync with the date the agreement takes effect.

Second, under the Most Favored Nation (MFN) clause, the investment or service related concessions given to a trading partner under a bilateral treaty have to be automatically extended to all other members of the group without any time gap. India was not inclined to accept this. This stance is illogical. MFN is a cardinal principle governing World Trade Organisation (WTO) — the international body dealing with global rules of trade. India should not be seen as taking a stance which is inconsistent with WTO rules.

Third, India wanted an “automatic trigger safeguard mechanism.” What it really means is that in the event of import of a particular commodity exceeding a certain number (also known as threshold), this clause will automatically kick in, giving the right to the importing country (read: India) to apply higher tariff to prevent a surge. This stance is untenable as it militates against the principle of free international trade based on comparative advantage.

The rationale behind eliminating tariffs on goods moving across international borders is to enable participating countries to maximise their respective gains from trade. This overarching objective will be defeated if a member gets the right to automatically increase the duty, which will prevent the exporting country from realising the full potential of its low cost. Moreover, if India insists on this clause, others too will want it. In that scenario, all members will end up compressing the market for each other.

Additionally, there will be practical problems in determining the threshold level (each member would like to keep it at the lowest level possible for extracting maximum mileage) and the number of commodities to be covered by this dispensation (each member will insist on having a large number). They will end up denying access to the market for each other instead of expansion, which is the overriding consideration behind forging a free market area.

India should shun the idea of automatic trigger safeguard mechanism. Instead, it needs to focus more on requiring member countries to refrain from giving subsidies, including “hidden” (as China does by making fuel, power and other inputs subsidised for enterprises) so that a situation of selling commodities at below cost (or dumping in plain words) in other members’ markets is avoided. Further, it should insist on stricter and transparent rules of origin to ensure that China does not use other members’ territories to flood the Indian market (it is learnt that our negotiators have not done enough home work in this area).

Fourth, India is opposing the demand of other members to seek trade concessions in its domestic space. Termed as “ratchet” in trade terminology, the concept implies that any policy changes will be automatically committed under RCEP agreement to all members after a fixed period. While, India is willing to give concessions in the services and investment segment, developed countries are pushing for similar concessions in goods trade as well.

Fifth, India is also not comfortable with the “standstill” clause, which binds a member to the current level of domestic liberalisation in services; hence can’t be reversed in future. For instance, if the Modi Government wishes to withdraw the 51 per cent Foreign Direct Investment (FDI) in multi-brand retail, which was allowed earlier in 2012 by the UPA dispensation, it won’t be able to do so.

Having taken a policy decision in the overall interest of our economy, there is nothing wrong in staying with it to ensure stability of the policy environment.

Finally, India has offered to phase out Customs Duty on imports from China on nearly 74 per cent of the tariff lines (jargon for a product as defined in lists of tariff rates; products can be sub-divided, the level of detail reflected in the number of digits in the Harmonised System code used to identify the product) as against 90 per cent of tariff lines on imports from all other members. China refused to join negotiations on this offer which it considers highly restrictive.

To sum up, India’s approach to negotiations on RCEP is overly protectionist. Barring shifting the reference date for undertaking tariff phase out to 2019, in all other areas, the Government’s stand is not tenable. It is borne out of the fear that joining the group will devastate our farmers and small-scale industries at the current juncture when the economy is in the grip of a slowdown. Its worry is more on account of a flood of imports from China. This fear is unfounded.

First, under the agreement, tariff elimination is mooted over a reasonably long period of up to 20 years and it should be possible to backload most of it, especially on sensitive items. Any apprehension of an adverse effect in the near-term is misplaced. The Government should not allow its decision to be obliterated by the present state of the economy.

Second, the handicap of domestic industry is more due to local factors such as the high cost of power, fuel (currently, neither is under the Goods and Services Tax, which means suppliers are not eligible for Input Tax Credit  resulting in a cascading effect on cost. Besides, the excise duty and Value Added Tax are also high), logistics, capital and so on. If only these costs are lowered, “Made in India” products can compete with the lowest priced goods from anywhere in the world.

Third, we also need to look at the potential that China offers for boosting India’s exports. The Chinese economy is undergoing a metaphorical transformation from export-driven (until hitherto) to domestic consumption and from industry to services. According to an estimate, China has plans to import goods and services worth $12 trillion over five years. India should tap this potential market.

Keeping in mind the criticality of being an integral part of the global supply chain to achieve a $5 trillion economy, India needs to reconsider its decision. The Government should shed its present tough stance on MFN, safeguard mechanism, “standstill” and “ratchet.” On the offer to China, this may be improved to 80-85 per cent (from the 74 per cent already on the table). With a flexible mindset, it should consider joining RCEP which is expected to be sealed in March 2020.

Writer: Uttam Gupta

Courtesy: The Pioneer

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