Are we really ready for RCEP?
I had blogged a year ago about our approach to RCEP. My views at that time is reflected in this article of Business standard. At that time, the debate in the media was not vibrant about the RCEP topic. Now it has heated up. To sum up, from various articles here, here and here:
- India has taken the normal approach of hard-negotiating behind high tariff walls.
- India doesn't have much choice as we are, among the RCEP nations, stuck with high tariff barriers due to legacy revenue generation issues. India has calculated that it stands to lose 1.6% of GDP in revenue if she gives up on some of these high tariff barriers.
- It pinches India to give up these high tariff barriers when other countries don't have much to return due to their already low tariff barriers.
- Therefore, in return to reduction in tariff barriers in goods, India is expecting others to reciprocate in services.
I have been, through this blog, an ardent supporter of open borders and low tariffs. The argument I usually make can be summed up as:
- The world has moved away from segregated model of manufacturing to global value chains in last 20 years, especially in electronics and complex engineering items. This means that manufacturing has been discretised and spread across countries. (This value chain model would be revisited by firms in future and the model would evolve towards consolidation into bigger markets as trade wars threaten cross border movements. Expect ASEAN to drop out gradually and firms moving into India and China as their main manufacturing bases by 2025s.)
- It is difficult to integrate into current value chains if we stay behind tariff barriers, or non-tariff barriers arising due to poor infrastructure (especially ports), red-tape, lack of skilled labour etc.
- Integrating into value chains pulls you up in terms of technology, scientific know-how, processes and creates a demand for trained labour.
- The revenue lost due to reduced tariffs can be made up through corporate tax that arises due to higher manufacturing activities and profits.
- At times low tariff on imports, especially in electronics and IT hardware, feeds as input into IT services and therefore it helps another sector to compete better internationally.
- Other usual 'yay-free-trade' arguments based on trade theories.
After careful consideration (rather re-consideration), and based on evolving trends in International trade area, I now think that it might not be in India's interest to get into RCEP.
Or into any free trade agreement bilaterally or regionally.
Basically, I am carefully retracting from 'yay-free-trade' to 'wait and watch' mode.
My argument flows below:
The international trade dynamics are fast evolving. Some of the salient points are:
- World-over, the appetite to cooperate on matters of free trade is on wane. It has mainly to do with the continued subdued growth over last few years. The slow growth has hit the domestic appetite in developed parts, especially in Europe and US.
- The world trade has not grown as expected over last few years. The international trade growth has stagnated. The dry baltic index is languishing at the bottom for some time now. This might be an indication that trade has stagnated at last. Discretisation and china model has probably peaked and will either stagnate or deteriorate in future. While one may point at low commodity prices to be a factor, it cannot explain all the slowdown. And low commodity prices itself is a result of global slowdown, again pointing to a subdued sentiment.
- The evolving politics is not free trade friendly. The recently concluded Trans Pacific Partnership was opposed both by Republican (Trump) and Democrat (Hillary) front runners. While the speeches might not reflect what the candidates might do once in office, but it can be fairly surmised that they would not exactly be willing to use their fast-track powers, if renewed by congress.
- Non-tariff measures are on an increase in the last decade (India being one of the leading imposers of NTMs) as tariff measures have been negotiated away through WTO and Regional agreements. There seems no point in concluding more agreements when the intent is blunted through NTMs.
- There are countries that continue to operate under tacit subsidies, mainly China and US. The amount of support, both direct and indirect, to their industry that comes through cheap loans, better infrastructure, better government support through subsidies cannot be matched easily. The economies of scale Chinese enjoy due to this support in last couple of decades makes entry barriers steep for others. This leaves the competitors crippled. US (and farm sector of EU) is loathe to reduce their subsidies, while urging others to curb theirs.
- Lastly, the trade issues in goods have moved beyond the tariff reduction and comparative advantage. It is now more about regulatory and IP matter. While tariffs do contribute to much of the noise, the actual scenario in latest rounds of FTAs (TPP, TTIP) was more about arriving at regulatory coherence to ensure common quality and technical standards, common intellectual property regimes and common technology in order to arrive at better value chains. The idea, mooted by MNCs who want seamless experience while moving across countries, has gained traction. While there are fears that regulatory coherence of this type undermines multilateral (WTO) agreement, it needs to be seen rightly as next step of evolution in trading across borders. India still sticks to old school and is not comfortable with evolving IP regimes at regional levels, and is yet to get over the WTO IP agreement shock.
On domestic front, India has some specific challenges which warrants a re-think on our readiness to get into complex Free Trade Agreements.
Some of them are:
- India doesn't appear to be in a position to take advantage of any Free Trade Agreement that it negotiates right now. The existing FTAs can be written off as useless due to their abysmal usage in bilateral trade. What is the assurance that a new FTA, negotiated on similar lines, will be useful now. The very reasons that make the current FTAs unusable will continue to operate with RCEP and others.
- India lacks the infrastructure required to cater to increasing trade. Most of the ports are handled inefficiently and few of them are extremely congested. The roads are not yet world class. The industrial clusters languish in apathy. The red-tape and bureaucratic hurdles make things difficult. The contract laws and enforcement is poor. In short, doing business is difficult in India. This, is not the ideal conditions with which we can engage in international trade. We need to build the basics first. Till then, the WTO deal is good enough.
- There is a feeling in trade community that we have opened up our market with every FTA we have signed, and have got little in return. Therefore, FTAs don't make sense unless we get an incremental and meaningful market (over MFN status from WTO) for our goods in return. That's the general feeling and the point is moot, but clearly we are not moving in a direction that caters to the need of our industries through these FTAs. Hence the feeling. There is a need to develop a framework where the negotiating team involves industry and consumers, beyond seminars and touch-and-go interactions with commerce officials. The current touch and go interactions bring forth only the vested interests, with negative consequence of narrow protectionism.
- Our industry loves to stay infant. A 100 years old Tata rallies with a 50 year old Jindal and asks for anti-dumping on Chinese steel. We oblige. The industry loves tariff walls. We keep them.
- We have multiple market failures (monopolies/cartels, lack of pubic goods etc) and institutional weaknesses in our system. Our farm sector suffers from inefficient Govt. subsidy and procurement issues. Our policymakers still think of subsidies as the best way to address market failure.
- We lack good data on services. RBI, a central bank, is our data provider in this area. We are, in RCEP negotiations, leaning on something called 'mode 4' of services. Mode 4, for lay readers in simple terms, is sending our techies abroad to do coding kind of stuff. We have too many of them here. Our Wipros and TCSes have already reached wherever they could, even in China. We are asking for further ease of mode 4 movement. And we want easy visa with less fee. We are trying to get more mode 4 access in return for reducing tariff. It would have made a good joke but for a serious nation like India. If this is the line of argument, I infer that we have no idea how to negotiate with people whose tariffs are already almost zero, while ours is sky high in comparison. We change the goal-posts, and we want everyone to be in our game.
- Finally, our import tariffs generate a revenue of around 15% of total Government revenue. Now, I don't think there is any rationale to reduce it at any FTA, given our industry's lack of capacity to capture further markets abroad. While we better our infra, better our technology, better our labour, better our abilities, it is best to sit tight and not let others eat away our domestic market. Let our incompetents survive till they become worthy. Killing them by subjecting them to China or Korea is criminal. US thinks the same way about their industries now. UK too is forced to think similar. We need to think on the same lines too.
Given the above, there is a need to re-look at the way we negotiate. The politico-bureaucratic setup currently is not designed to maintain continuity. While the political masters involved in negotiations change with elections, the bureaucrats change with central deputation postings. There is no permanent body at commerce that acts as institutional memory. The is a lack of knowledge management. It is upto individual bright sparks, who choose to come on central deputation, either to escape a bad cadre or due to genuine interest, to carry the baton. This approach, while manageable in last century, is no longer workable. There needs to be a permanent set of people whose career is trade matters and trade negotiations. The commerce department under-utilises its captive cadre of Indian Trade Service. A relook is in order.
Till we put our house in order, and get a clarity on trade matters, I believe going into RCEP is not a wise idea. There is hardly any incremental advantage that we would get. We may as well put it on hold or walk away. The cost might only be diplomatic. The trade cost seems almost nil in present circumstances. While the Govt. has put a number to revenue loss in case we agree to reduce tariffs (1.6% of GDP), it has failed to tell the public as to what would be the gain from this agreement in terms of numbers. We know how much we will lose, but we don't know what we would gain. That, according to me, is a poor start.