A worker stands on the back of a truck while unloading textile products in Surat, Gujarat. (Photographer: Karen Dias/Bloomberg)

India Can’t Turn Its Back on Free Trade

(Bloomberg Opinion) -- India’s state is a mirror of its noisy, messy democracy. It’s often hard to achieve even a modest internal consensus between government departments in New Delhi: Right now, the heads of several ministries are scrambling to find a common position on the Regional Comprehensive Economic Partnership, or RCEP -- a giant trade deal that stitches together India, the Association of Southeast Asian Nations, Oceania, China, Japan and Korea. At the end of August, ministers from the 16 RCEP countries will meet in Singapore; India needs to work out a constructive stand by then. There’s a very real chance that, if New Delhi’s negotiators continue to be obstructionist, the other 15 countries will move ahead without India.

For many here, that wouldn’t be a tragedy. And, frankly, even free-traders like myself see their point. India’s goods trade deficit with China appears unsustainable: It was $63 billion in 2017-18, up from $51 billion in the previous financial year and $16 billion ten years ago. That’s 60 percent of India’s overall trade deficit. As far as Indian policymakers are concerned, much of what’s being imported is sub-standard or otherwise fair game for anti-dumping legislation. China’s the main target of Indian anti-dumping action, with 214 separate investigations opened -- and, even so, Indian legislators are worried that the measures are ineffective.

India Can’t Turn Its Back on Free Trade
India can also justly complain that the RCEP’s focus on reducing goods tariffs misses the point. First of all, services trade should be opened up simultaneously; greater freedom of movement for professionals -- a major source of foreign currency for India, through remittances -- must be part of that. Secondly, the real constraints on the growth of trade now are “behind the border” -- non-tariff barriers of one sort or another that, for example, make competing in the Chinese domestic market such a nightmare.

Less justly, specific Indian sectors are panicked about competition. Steel -- which is slowly recovering after years of pummeling thanks to Chinese overcapacity -- is one of them. Dairy producers obsess about Australia and New Zealand. Manufacturers worry about everyone.

But the validity (or otherwise) of Indian concerns is beside the point. The problem is that, at the moment, RCEP is the only game in town -- and New Delhi runs the risk of being left on the sidelines. If India doesn’t have a more positive, forward-looking approach ready by the end of the month, then it must also abandon its ambition to infiltrate global supply chains. And that would be a disaster for a country that will shortly have both the world’s largest workforce and a mere a two-percent share of world trade.

How can India move forward? Most importantly, it mustn’t let China run away with the initiative. India is hardly the only country concerned about China’s overcapacity and its ability to dump goods wherever it pleases. A regional trade agreement that prevents countries from bringing fair, transparent and temporary anti-dumping actions is in nobody’s interest -- a point India needs to make to countries like Japan.

China has cleverly used regional and bilateral trade agreements to short-cut the World Trade Organization -- just as the U.S. has in the past. RCEP shouldn’t be one of them. If and only if the deal begins to build a new and equitable architecture for trade in Asia and the Pacific does it deserve to succeed.

At the same time, India can’t afford to be the villain of the piece. The signalling would be awful; most observers would see such a move as the final culmination of a turn away from the world under the current government. India has raised tariffs on 400 products over the past two years, which officials concede is a major departure from a generation-long trend towards greater openness. It has unilaterally scrapped investor protection treaties with almost 60 countries. Even the government’s choice of economic policy advisers reflects a new distrust of the world. The American-educated economists who defined the Modi government’s initial years have been eased out, not entirely gracefully.

The government believes, perhaps, that India’s fragile status as the only mildly bright spot amid collapsing emerging markets means that it doesn’t need anything from the rest of the world. This is absurd. In fact, India needs more than ever. Investors are interested in India only because they think they can make money here. And they will make money only if Indians are more productive and have more to spend.

An India that retreats from the turnpike of world trade to the dirt road of autarky -- to borrow a metaphor from one of those American-educated economists who’s been eased out of government -- is one that will be poorer in both the medium- and long-term. If the government wants to reassure the world that India isn’t willing to put up with the dirt road, then it needs to find a way to be more positive about RCEP.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”

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