India At 73 Needs A New Trade Legacy: Aggressive Regionalism

The Flawed Assumptions Of Passive Regionalism

Passive Regionalism rested on two key assumptions. Thanks to global economic, geopolitical, and public health developments, neither holds true anymore.

1. Multilateralism facilitates India’s economic development

The birth of the multilateral trading system was a mere 12 weeks after India’s independence, with the Oct. 30, 1947, signing—including by India and Pakistan, two of the 23 original contracting parties—of the General Agreement on Tariffs and Trade. Through eight successive rounds of GATT negotiations, culminating in the 1986-1994 Uruguay Round, India secured market access for its exports on most-favoured nation and national treatment terms, with bound tariff schedules, to an ever-increasing number of contracting parties, and ultimately 123 members of the new World Trade Organization, born on Jan. 1, 1995. India maintained the import substitution policies its Founders favored, benefitted from non-reciprocal preferences through special and differential treatment provisions in GATT-WTO treaties, and litigated trade disputes through the efficient, fair Dispute Settlement Understanding.

The WTO as a negotiating forum died in July 2008 when a major Ministerial meeting failed to produce a consensus in favor of ambitious, cross-cutting texts on liberalizing goods and services schedules, cutting farm subsidies, and disciplining remedies. As for multilateral special and differential treatment, the Trump administration canned it in July 2019, when it declared it no longer would respect self-judgments of entitlement claims to “developing” country status. The Obama and Trump administrations killed the Appellate Body, citing judicial activism and adherence to precedent.

None of today’s 164 WTO members, calculating rationally, should rely principally on multilateralism to advance its economic development goals. Japan doesn’t. It joined GATT in 1955, but since 2002 has inked no less than 17 free trade agreements (including with India in 2011). Likewise, though its Communist Party joined the WTO in January 2007, Vietnam now boasts roughly 12 FTAs. Both are founding parties to the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership.

2. Good Neighbours

In 1947, China was in the last two years of its Civil War. The Communist Party took power on Oct. 1, 1949. Within one year, Chairman Mao invaded Tibet and thereafter occupied Aksai Chin, the location of the deadly June 15, 2020, battle at the Line of Actual Control. Through a war in 1962, China consolidated its grip on the region.

Nevertheless, India’s post-independence leaders clutched the shibboleth that as a fellow poor, non-aligned nation, China could be engaged constructively. Thus, China became India’s largest source of imports. In 2019, India bought $70 billion worth of electronic goods, industrial machinery, organic chemicals, and pharmaceutical ingredients. India’s largest bilateral trade deficit is with China, shipping just $18 billion worth of merchandise to its larger neighbour.

This asymmetry poses a constraint on two drivers of India’s economic growth. India’s generic pharmaceutical companies are beholden, and its manufacturing sector exposed, to China.

And yet, starting in November 2012, India participated in the Regional Comprehensive Economic Partnership, a China-driven proposed FTA including the 10 Association of South East Asian countries, plus Australia, Japan, Korea, and New Zealand. Seven years later, when India withdrew from RCEP negotiations, it did so for the wrong reasons. India feared a flood of Chinese imports owing to Indian tariff and non-tariff barriers reductions. Yet, import surges can be dealt with through safeguards, which India could have insisted on, in RCEP. Indian officials simply didn’t want to confront domestic constituencies benefitting from those barriers.

India’s record with its westerly neighbour is worse: wars with Pakistan in 1947-1948, 1965, 1971, and 1999, and no Kashmir settlement. Yet, India hopes for closer ties with Pakistan through the unambitious, exception-riddled 2006 South Asia Free Trade Agreement.

With Pakistan unstable and potentially failing, China has a pliant vassal bound to it through the Belt and Road Initiative. It’s a Bollywood nightmare, except it might be real: India forced into a three-front confrontation, with China in the Western and Eastern Himalayan sectors, plus with Pakistan across Jammu & Kashmir, Punjab, Rajasthan, and Gujarat.

Why Aggressive Regionalism And CPTPP Work For India

The Covid-19 pandemic is spotlighting why good neighbours matter. Without broad, deep trade linkages to good neighbours further afield, such as Japan and Vietnam, India’s supply chains for medical equipment and pharmaceutical supply chains are insecure. Enter Aggressive Regionalism.

Aggressive Regionalism finds no salvation in multilateralism, diversifies away from nasty neighbours, and energetically links India to like-minded, trustworthy winners across the Indo-Pacific.

Active Regionalism puts the greatest emphasis to secure India’s export, import, foreign direct investment, and intellectual property interests on blockbuster FTAs with multiple countries, at least some of which are large, dynamic markets, and most, if not all, of which share India’s secular democratic s. CPTPP satisfies these parameters, as this columnist’s book, TPP Objectively, explains.

The 11 CPTPP Parties account for 14 percent of world GDP. All are in North and South East Asia, the Antipodes, and Latin America, thus stretching India beyond its troubled Himalayan and western borders. Save for Brunei and Vietnam, all are multi-party democracies, evidenced impressively in last month’s Singapore election. Even those two might be horrified by the excessively broad vagaries and extra-territorial reach of the CCP’s National Security Law for Hong Kong, and by early signs of its heavy-handed enforcement. Three CPTPP Parties—Brunei, Malaysia, and Vietnam—join the Philippines, Taiwan, and Thailand to dispute China’s Nine-Dash Line claims across the South China Sea, while a fourth (Japan) disputes China’s claims in the East China Sea.

That’s because of specific chapters in CPTPP that make this FTA more than just about just economics. Consider these examples.

Chapter 3 sets out rules of origin that incentivise the parties to integrate their supply chains amongst themselves so as to obtain duty-free, quota-free treatment, and ensure non-parties, such as China, do not qualify for this treatment via minor operations or transshipment. Chapter 10, 11, and 13 provide for non-discrimination and market access for cross-border services trade (e.g., telemedicine), increased access for financial services along with sovereign regulatory policy space, and pro-competitive rules for telecommunication services, respectively, which can help meet the ambitions of India’s potential global name brands, such as Reliance in its efforts to compete with Amazon, Walmart, and Zoom everywhere, but also account for Indian consumer interests.

Chapter 17 creates meaningful disciplines on state-owned enterprises to ensure they operate on commercial considerations or, better yet, are privatised.

Chapter 14, on e-commerce, protects software source code, while Chapter 18 protects source code while allowing for data flows with privacy protections. India’s IP sector should find such rules reasonable. Plus, there’s Chapter 21, on capacity building – surely as a developing country, India will find something in it to like.

In brief, joining CPTPP will mean that nearly three-quarters of a century after independence, India will be in a trade deal not forced on it, like Britain’s imperial preference scheme, but chosen by it with a coalition of partners.

Stop Tinkering, Please

Indian officials fondly proclaim India’s relationship with any other country is not subject to a third country, i.e., each relationship is independent of all others based on India’s rational self-interest. Poppycock. All international relations are contingent. They delude themselves with ad nauseum reminders that India has a 1.3 billion population and the only ocean named after a country. But, are these post-independence legatees somewhere between too scared and too complacent to take on inefficient domestic producers that, mollycoddled by protectionism, lack the economies of scale to compete in the Indo-Pacific region?

Indian trade officials, unable to connect the dots to national or health security, tinker episodically with half-hearted measures like impeding Chinese industrial consignments at Indian sea and airports and debating a Border Adjustment Tax under Section 3 of the Customs Act, 1975. Both are self-destructive red herrings. Non-transparent hold-ups hurt supply chains of American businesses operating in India that need those inputs, hindering India’s aspirations to be an FDI hub. The BAT would trigger counter-retaliation against Indian exports and run afoul of the GATT Article III:2 national treatment rule. Worse, the July decision of the Delhi Hotel and Restaurant Owners Association to bar Chinese travelers from its 3,000 lodging facilities, and urge its budget hotels not to use Chinese-origin furniture or kitchen equipment, smacked of racism.

Even the correct decision by the Ministry of Electronics and Information Technology to ban TikTok, WeChat, and 57 other Chinese apps—because their data compilation, mining, and profiling constituted privacy breaches “prejudicial to sovereignty and integrity of India, defence of India, security of state and public order”—appeared uncoordinated with the Ministry of Commerce and Industry. Ditto for the India-U.S.-Japan-Australia joint naval exercises in the Indian Ocean and the Philippine Sea under the 2007 Quadrilateral Security Dialogue, and the Ministry of Finance restrictions on public procurement “to strengthen the defense of India and national security.”

All resolute moves within the last few months, but none part of a bold, inter-Ministerial strategy. Would not Nehru, Gandhi, and Ambedkar have pushed for synthetic thinking across economics, defense, and health?

The Price Rises

The longer India sits out of CPTPP, the higher the price it will pay for entry. As new parties join, possibly the U.S.—under a President Biden, remember, his boss negotiated TPP—and possibly India’s former colonial ruler, the United Kingdom (it wants in), they will push India for deeper cuts to applied tariffs, broader services market access, greater transparency, and stronger IP protections (notably, the suspended Article 18:51 “5+3” rule, which might give India’s generic producers a headache). India needs those reforms, but its ability to set the pace of their implementation erodes every passing day it is passively, not aggressively, regionalist.

Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, Senior Advisor to Dentons U.S. LLP, and Member of the U.S. Department of State Speaker Program. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, Dentons or any of its clients, or the U.S. government, and do not constitute legal advice.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.