After no to RCEP, India must avoid protectionism at all costs

Maybe India was correct in staying out of RCEP, but now it has a lot more work to do at home.

 |  4-minute read |   17-11-2019
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In a recent article, economists Praveen Krishna and Arvind Panagriya discussed how India, during 2000-11, signed 14 preferential trade agreements (PTAs). 

Of these, 10 were bilateral agreements with individual countries (including Japan, South Korea, Malaysia and Singapore) and four were plurilateral agreements (with the Association of Southeast Asian Nations or Asean and the Southern Common Market in South America or Mercosur). 

Build trade capacity 

Krishna and Panagriya show how the effects of these agreements on trade were modest at best. My understanding from the government’s decision not to the join Regional Comprehensive Economic Partnership (RCEP) — seen as one of the largest trade partnerships (given the market and population size) — is that it must not be seen as a justification for India’s industrial project to advocate for a ‘protectionist trade outlook’ or be subject to pressures of lobbying business groups. 

Instead, it must be seen as an opportunity for the government to reflect on India’s poor competitiveness levels, especially in commodities (and their exports) and how these can be enhanced vis-à-vis other regional partners (including those in Asean).  

Ensuring higher competitiveness in production remains key to India’s ambition of expanding its market integration with other countries within the region, and of using a higher export-oriented industrial vision to boost employment in labor-intensive modes of business production. In the current economic scenario, a poor level of trade competitiveness is a culmination of two critical factors: A weak demonstrable manufacturing strength and an uncompetitive currency-pricing mechanism for the rupee (vis-à-vis other emerging market currencies).

On RCEP, one of the key issues that prevented India from joining the agreement included ‘inadequate’ protection against surges in imports. There were, of course, some other key issues involved, including: The provision for more trade in services; an assurance for better market access for Indian products in Chinese markets and making 2019 the base year for tariff-reduction calculations. India has also been trying to develop (and negotiate) an auto-trigger mechanism to raise tariffs on products in instances where a basket of imports from a given nation crosses a certain threshold, which was not accepted by many RCEP members.

Bolster the currency

The real question for Indian policymakers now is: What can be done to address the core concern of India’s poor trade competitiveness levels? This requires a coordinated effort between ‘market’ and ‘extra-market arrangements’, i.e., for India to push for higher manufacturing growth with opportunities to scale for domestic industrial enterprises.

main_rcep-2_111719111701.jpgLeaders of Asia Pacific countries at the RCEP. (Photo: Reuters)

‘Market-centric’ measures would require a set of liberalising measures with incentives for cross-border trade, and reforms in factor markets (especially land and labour), that can allow enterprises with a higher production capacity within the domestic economy.

‘Extra-market arrangements’ shall require fiscal and targeted legal interventions to make the industrial outlook more export-oriented in regional and global scales. However, it must be observed that given the complex entwined nature of production supply chains today, there is little possibility for India to experience a dynamic, rapid, export-oriented pattern of industrialisation unlike other East Asian economies like South Korea and Taiwan around the 1970s and 1980s. Still, there is a critical economic case for the Indian government to continue pushing for a stronger manufacturing capacity for trade that will further accrue positive returns on domestic employment creation, while attracting foreign direct investment into manufacturing as well.

Compete to succeed

Meanwhile, a strong manufacturing capacity requires a more competitive Indian rupee. We can observe how India’s exchange rate has appreciated over time, while China has managed to maintain an undervalued Renminbi to make its currency (and its products) cheaper and more competitive in export markets. 

The underlying factors affecting the volatility of exchange rates may differ from one country to another. However, it is possible for India to strategically manage exchange rates and keep them in alignment with the country’s production patterns, as seen in the case of China, among other countries. Going forward, it will be vital for both the Indian government and the Reserve Bank of India (RBI) to ensure a more favorable exchange rate between the rupee and US dollar for goals of higher trade competitiveness.

Trade agreements must represent mutually beneficial terms of trade and, perhaps, India was correct in staying out of RCEP at this juncture. Still, without a competitive Indian rupee and a strong manufacturing sector (enabled through structural reforms guided by market principles), it is more likely that India’s performance in exports and overall current account position is may weaken in years ahead.

A weak trade competitiveness level will only make India’s economic vision and market integration strategy more ‘exclusionary’ and ‘skeptical’ when it comes to joining critical regional (or plurilateral) trade partnerships. 

(Courtesy of Mail Today)

Also read: Why Modi's decision on not joining RCEP makes a lot of sense

Writer

Deepanshu Mohan Deepanshu Mohan @prats1810

Assistant Professor of Economics, OP Jindal University; Director, Centre for New Economics Studies; Visiting Professor, Department of Economics, Carleton University

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