As the war in West Asia escalates, India has more to worry about its trade (re-routing the Red Sea trade through the Horn of Africa increases time and cost) and also about its decision to keep out of the world’s largest trading bloc in its backyard – China-led RCEP.

The RCEP comprises of 10 ASEAN and its FTA partners – China, Japan, Korea, Australia and New Zealand – together accounting for 28.8% global trade and 30% global GDP. It would grow even larger as Sri Lanka, Hong Kong and Chile are in queue to join.

Besides, being part of the RCEP means escaping disruptions in trade through both the Red Sea and Black Sea (Russia-Ukraine war).

Sure, India trades with all the RCEP members but being part of RCEP amounts to preferential access (MFN) to all group members’ markets for several goods at lesser cost and uniform trade rules for all.

Why fresh debate over RCEP?

India withdrew from the RCEP in 2019 – after prolonged negotiations that started in 2012. A fresh debate has been sparked by the World Bank’s “India Development Update” report (September 2024) which advised India to “re-evaluate its approach to trade integration, including the options on RCEP” and put “more emphasis on plurilateral multilateral cooperation”.

India dismissed it.

On September 22, 2024, Commerce and Industry Minister Piyush Goyal explained: “It was not in our farmers’ interest, RCEP did not reflect the aspirations of our small and micro medium industries and sector, and in some form, was nothing but a free trade agreement with China.” On September 30, 2024, he added: “China, very comfortably, is able to move a lot of its production to ASEAN countries and enjoy the fruits of our FTA with ASEAN.”

In short, India’s position remains the same as in 2019. But more important to note, it reflects India’s policy shift from free trade to protectionism that began in 2014 – and first flagged by then CEA Arvind Subramanian (2014-2018) in a October 2020 paper, “India’s Inward (Re)Turn”.

The shift was made through tariff barriers in bits and pieces. It drew attention only after the Prime Minister launched “AatmaNirbhar Bharat” mission on May 12, 2020 with “local for vocal” and “vocal for global” slogans.

It continues today. In 2024 alone, 30 antidumping measures against China and several more against Vietnam and Korea have been announced.

Here is a historical perspective.

Ahead of the 6^th round of RCEP negotiations in India in December 2014, India’s trade philosophy was: “In the context of comprehensive regional trading arrangements across the globe, TPP would cover the western flank with TTIP as the central flank and RCEP as the eastern flank. Therefore, RCEP is of strategic importance for India both in the context of its look East policy and the comprehensive nature of the engagement.” This was spelt out in the Commerce and Industry Ministry’s “Brief on Regional Comprehensive Economic Partnership (RCEP)”.

A decade later in 2024, the philosophy has turned on its head.

India didn’t sign the RCEP in 2019, signed the IPEF in 2022 but kept out of its trade pillar and didn’t seek membership in the TPP (renamed CPTPP and operationalised in 2018) or the TTIP (the US-EU) which was abandoned in 2019.

Thus, India has exposed all its flanks – western, central and eastern – by keeping out of trading blocs accounting for 68% of global trade and 82% of global GDP (RCEP’s share of 28.8% trade, 30% GDP; IPEF’s 28% trade, 40% GDP and CPTPP’s 15% trade, 12% GDP).

So, it isn’t only about China or RCEP. It is much more.

Self-created problems: Shift to protectionism and arbitrariness

Firstly, India’s trade policy shifted in 2014 – before the RCEP was abandoned and before de-globalisation got going with Brexit (2016) and Donald Trump’s Presidentship (2016).

1. In 2014, India started imposing tariff barriers – 3,200 tariff increases during 2014 and 2020 alone – and continues in 2024.

Then came non-tariff barriers.

2. In 2017, India unilaterally cancelled 68 bilateral investment treaties (BITs) linked to bilateral FTAs – while liberalising FDI. Renegotiations of BITs are work-in-progress.

3. Before shunning multilateral FTAs, beginning with 2019, India started renegotiating all FTAs. It signed four new FTAs during 2021-2024 – Mauritius, the UAE, Australia and the TEPA (four small European countries). The World Bank report (mentioned earlier) said, the “impact” of first three “remains to be determined” while dismissing the fourth as “relatively limited in scope”. Key FTAs with the US, EU and the UK are work-in-progress.

4. Unpredictable rules & licensing-permit raj. One part of this was overnight ban on imports of laptops/PCs in August 2023 and the licensing requirements – four days after Reliance’s JioBook launched China-made laptops/PCs and at a time when India was importing 90% of laptops/PCs. The US intervened, pointed at violation of the WTO rules and forced India to backtrack (revealed through the US official mails in May 2024). But, the DGFT is back with license. On September 24, 2024, its directive said: “Importers would be required to apply for fresh authorisations for the period from January 1, 2025, subject to detailed guidance to be provided shortly”.

5. DGFT’s “import management system” has frequent non-tariff barriers – to both farm and non-farm trade. Trade in wheat, rice, sugar, pulses, onions are subjected to frequent bans and restrictions. All these bans and restrictions are driven by electoral calculations or industrial lobbying.

The net result is a disabled exports engine:

(a) Decadal growth of merchandise exports fell from 18.1% during FY05-FY14 to 4.4% (a quarter) during FY15-FY24.

(b) Decadal GDP share of total exports also fell to 12.5%, from 14.5%. It became more pronounced during the second half of the 2011-12 series – 12% during FY18-FY24, from 15% during FY12-FY17.

Secondly, China is at the very top in exports, frontline technologies and manufacturing (value added) – dictating terms to all. Trade deficits are rising for India, ASEAN, Japan and Korea. The US (in trade since 2018) and the EU (headed for trade war now) reduced their deficits in 2023 but the deficits are still very large.

India’s arguments

Commerce and Industry Ministry justify shunning RCEP as follows:

Farmers’ interests are hurt by frequent flip-flops in trade practices – forcing the Economic Survey of 2023-24 to plead: “Farmers should be allowed to benefit from higher international prices.” India has failed its farmers in multiple ways: No sign of doubling of income; no legal status to MSP or C2+50% formula; even price support for pulses and oil seeds through PM-AASHA is limited to elections (no spending after or before).

(i) MSME sector’s imports from China are rising because it is battling to recover from the shocks of demonetisation, GST and Covid-19. This marks India’s failure to manufacture quality machines and intermediary products. China’s share in imports of electronics, telecom, machinery jumped to 30% in 2024, from 21% 15 years ago.

(ii) As for China taking advantage of the ASEAN, India has no escape. China has FTA with ASEAN (part of the RCEP). India is re-negotiating its FTA with the ASEAN – and also with Japan, Korea, the US, the EU and the UK. The reasons are same: “Unfavorable gains” to trade partners, “worsening” trade balances (NITI Aayog).

India had two big opportunities: (i) China’s withdrawal from “low-skill manufacturing” (labour-intensive) exports and (ii) China+1 strategy of developed nations.

About (i), the World Bank report (mentioned earlier) says, “the primary beneficiaries” were Bangladesh, Vietnam and even Germany and the Netherlands. Worse, India’s share in exports of apparel, leather, textiles and footwear (low-skill) “declined” to 3.5% in 2022 – having grown from 0.9% in 2002 to 4.5% in 2013. This is double whammy because it means direct job loss.

About (ii), India’s gains are minor. MNCs are “friend-shoring” and “near-shoring” and China is shifting (manufacturing) to Latin America to access the US market and Turkiye, Nigeria and Morocco to access the European market (Economic Survey of 2023-24).

There are sound reasons for India to embrace China for its own growth. It must be reminded of the bonhomie of pre-2017 Doklam stand-off – reflected in the commitment to build “closer developmental partnership” in the 2015 joint statement.

Food for thought 1: Trade protectionism comes with heavy price: Poor manufacturing, poor job creations and poor FDI.

Food for thought 2: IT and ITeS-led services exports driving India’s trade and generating surplus is the direct outcome of India joining the WTO’s Information Technology Agreement (ITA) in 1997.

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