Headline : RCEP as winning strategy Editorial 17th Sep
Trade war impact on multilateral trade regime:
- The multilateral trade regime which saw trade flourish for seventy years following the Second World War faces an existential threat today.
- A trade war has broken out between the two largest economies, the United States and China.
- From being the principal architect of the system, the US has come to view itself a victim of it.
Brings regional trade agreements to the fore:
- Therefore, in the medium run, we are likely to be left with regional trade agreements as the only game in town.
- This fact makes a successful conclusion of the Regional Comprehensive Economic Partnership (RCEP) agreement among its sixteen partner countries critically important.
Regional Comprehensive Economic Partnership (RCEP):
- The proposed mega-FTA called the Regional Comprehensive Economic Partnership (RCEP) involves the 10-member ASEAN bloc and its six FTA partners including India, China, Japan, South Korea, Australia and New Zealand.
- RCEP will have a broad coverage including trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement and other issues.
Understanding imports and exports:
- Conventionally, trade negotiators view imports as a cost and exports as a benefit.
- But in economic terms, true gains come from imports while exports represent the cost of obtaining those imports.
- No nation would export its products to another nation if they did not allow it to import something more valuable in return.
- As Nobel laureate Milton Friedman once said, we can eat imports but not exports. Once shipped out, exports are no longer available to us.
India’s fears from RCEP:
Trade deficit with China:
- One particular import-related fear that has shaped the actions of India’s RCEP negotiators is the prospect of an already large trade deficit with China turning yet larger.
Can be used to negotiate better terms:
- It is a good negotiating tactic to use this bilateral trade deficit as a bargaining chip to maximise access for our exports to the Chinese market.
- All major nations with bargaining power negotiate hard to maximise access for their exports in return for the access they give to imports in their markets.
- So India should not be criticized for negotiating hard.
But the fear should not undermine the negotiations:
- We can use trade deficit to negotiate better terms, but it is not good economics to let this fear determine the fate of the negotiations.
Balance of Trade must override Bilateral Trade deficit fears:
- While there are good reasons for a country to care about its overall balance of trade in goods and services, the same is not true of bilateral trade deficit.
- A country must sell its exports to trading partners that offer it the highest prices for those exports.
- And it should buy its imports from partners that charge the lowest prices for them.
- When this is done, it is normal that the resulting trade flows fail to balance bilaterally.
- Basically, we can have trade surplus with one country and trade deficit with another but the overall balance of trade with all countries is in good state.
Example of India’s trade with the US and China:
- Trade surplus with US:
- For instance, the US pays high prices for many products that India exports but it also charges high prices for many products that India imports.
- This leads India to sell a large volume of its exports to the US and to avoid buying an equally large volume of imports from it.
- Consequently, India runs a bilateral trade surplus with the US.
- Trade deficit with China:
- The situation with China is the reverse, leading India to run a bilateral trade deficit with it.
- Trade balance overall is healthy:
- But India maintains a healthy trade balance overall and thus avoids accumulating unduly large foreign currency debt.
Benefits from the RCEP agreement:
Multinational enterprises moving to India:
- India’s large domestic market, large pool of labour and relatively low wages combine to make India a progressively attractive production base for multinational enterprises.
- Advantages from RCEP: Membership in the large RCEP market would multiply this attractiveness manifold for two reasons.
- The membership will give multinationals locating in India tariff-free access to the vast RCEP market.
- Movement of inputs without tariffs and other frictions across borders of sixteen member countries would make the multinationals doubly competitive.
- Such movement is especially important in modern times because supply chain management requires inputs to cross international borders multiple times before being assembled into the final product.
India’s focus in RCEP negotiations on services liberalisation and movement of IT workers:
- In the negotiations, India has made services liberalisation and freer movement of information technology workers a make or break issue.
But these areas need not be a priority:
- While India has strength in these areas, it must take two qualifications into consideration.
- One, our success in services exports to RCEP markets is likely to be limited due to language and cultural barriers that a free trade agreement cannot overcome.
- And second, preoccupation with services and freer movement of workers can result in underestimation of benefits India stands to reap in manufactures.
Way forward – Indian negotiations must focus on manufacturing:
- With half of India’s farms less than half hectare in size, many of its farmers need decent jobs to escape poverty.
- Historically, labour intensive manufactures have been the principal engine of growth in such jobs in every successful country. RCEP offers India the same opportunity.
- For example, With a population of 3.5 billion, the volume of garments (like shirts, blouses, trousers, towels, bed sheets etc.) that RCEP membership would buy in the next several decades is beyond measure.
- If India can become the dominant supplier of labour intensive products like these, then RCEP will become a winning strategy.
GS Paper III: Economy