View: Staying out of RCEP is not in India’s economic interests

Earlier this week, India announced that it was dropping out of the Regional Comprehensive Economic Partnership (RCEP). Its exit came amid a wide array of assertions from commentators — with some claiming that India’s past trade agreements had harmed its economy and that RCEP would do worse, others going further to demand a return to the inglorious days of ‘selfsufficiency’, and yet others insisting that the withdrawal reflected the weakness of the government against the efforts of protectionist lobbies.

What were the actual outcomes under India’s past trade agreements? Did they hurt the Indian economy? What lessons do they hold for India with respect to RCEP or other future trade deals?

No Push, No Shove

During 2000-11, India signed 14 preferential trade agreements (PTAs), 10 of which were bilateral agreements with individual countries (which included Japan, South Korea, Malaysia and Singapore) and four were plurilateral agreements (including with the Association of Southeast Asian Nations (Asean) and the Southern Common Market (Mercosur) in South America).

What will likely come as a surprise to most is the fact that the effects of these agreements on trade have been modest. Thus, while India’s imports from its 10 bilateral partners added up to 13.3% of its overall imports in 2007, that number actually fell slightly to 11.8% in 2017. Similarly, exports to these 10 partners added up to 13.7% in 2007, and stayed nearly the same at 14% in 2017. India’s imports under the Asean pact, its most significant plurilateral agreement, inched up from 9.6% in 2007 to 10.2% in 2017, while exports expanded modestly faster from 9.5% to 12%.

What about trade deficit? Many analysts have erroneously derided India’s trade agreements by pointing to increased bilateral trade deficit in dollar terms. They miss the obvious point that a significant rise in all nominal magnitudes must accompany the approximate doubling of India’s economy over the relevant years.

When we examine the size-corrected appropriate measure — the share of the trade deficit contributed by India’s agreements — it turns out that India actually improved its bilateral position vis-à-vis its free trade agreement (FTA) partners during 2007-17.

Furthermore, it is not the case that large parts of the Indian economy have come under stress because of intensified import competition under these agreements. During 2007-17, the sectors in which imports under trade agreements had grown faster than overall imports from all trading partners by even just 25% accounted for only 6-7% of overall imports.

Admittedly, liberalisation under many of these agreements was ‘phased in’ and, in some cases, is yet to be completed. But the argument that India’s agreements have already strained its economy, and that they offer a cautionary tale against future agreements, finds no support whatsoever in data.

What about RCEP? First, the positives. RCEP covers over three billion people and over 20% of global GDP.

Access to this market on a ‘frictionless’ duty-free basis would have provided tremendous advantages to India’s exports. In the absence of trade barriers on its imports (imposed by itself) and its exports (imposed by partner countries), India would have had an excellent opportunity to integrate itself into regional and global value-chains, where India’s participation has been low. India would have been more easily able to attract foreign direct investment (FDI) and to also take over production in sectors that China is now vacating.

Your Call is on Hold

Finally, RCEP would have been an easier agreement for India to sign, as compared to any potential agreements with the US or the EU, because its focus was on trade liberalisation.

In contrast, agreements such as the Trans-Pacific Partnership (TPP) pose a greater challenge, since they require concessions over a range of contentious non-trade issues, such as environmental and labour regulations, intellectual property (IP) protection, and the operations of State-owned enterprises.

On the flip side: India’s trade deficit with China is large. It accounts for about 40% of its overall deficit. Signing RCEP would have exposed India to risk of surging imports from China and an even wider deficit. However, if these were India’s primary concerns it could have negotiated hard for expansion of market access in the Chinese market in areas of its comparative strength, such as pharmaceuticals and IT services.

On the import side, it could have sought exclusions of especially sensitive sectors and a more gradual liberalisation schedule. This would have allowed India to simultaneously exploit greater market integration with Asia, while giving itself time and economic space to adjust.

Where do we go from here? Statements by commerce minister Piyush Goyal that he now proposes to turn west to the US and EU may be read to imply that he plans to abandon RCEP permanently. As eternal optimists, we do not believe this interpretation and view India’s current decision as a bargaining tactic aimed at extracting further concessions from other RCEP members and cutting a more favourable deal for India. It is unlikely that Prime Minister Narendra Modi would walk away from his ‘Act East’ policy and leave India wholly disadvantaged.

Krishna is professor of international economics and business, Johns Hopkins University, Washington DC, US, and Panagariya is professor of economics, Columbia University, New York, US