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Economy

The China Factor Behind India’s Pullout from RCEP

Feb 04 , 2020

The 16-nation Regional Comprehensive Economic Partnership (RCEP) was supposed to establish the world’s largest trading bloc, covering half of the global population. But India’s abrupt withdrawal from the RCEP has undercut that goal. The decision came soon after the latest “informal” summit between Chinese President Xi Jinping and Indian Prime Minister Narendra Modi, during which Xi acknowledged India’s China-related concerns over the RCEP and pledged to address them. 

New Delhi’s entry into the RCEP would effectively create a China-India free trade agreement (FTA) via the backdoor, at a time when Chinese exports are already swamping the Indian market and questions are being raised domestically on Modi’s management of the economy. 

The China factor was central to India’s pullout from the RCEP. India already has FTAs with 12 of the other 15 participating RCEP countries and is negotiating an FTA with Australia. Therefore, the main beneficiary of India’s entry into the RCEP would have been China. 

Xi’s two “informal” summits with Modi since April 2018 have yielded little progress in the trade, border, and political issues dividing the world’s two most-populous countries. Indeed, at the second summit, held in the Indian coastal town of Mamallapuram in October, Xi sought to rope India into the RCEP in an effort to shield his country’s burgeoning trade surplus with New Delhi. 

When the summit concluded, Indian Foreign Secretary Vijay Gokhale said, “President Xi has assured us that India’s concerns over the RCEP will be duly discussed. Although both Modi and Xi emphasized on the importance of having a rules-based global trading system, the Indian prime minister clarified to China that a deal should be balanced and equitable. China said it has heard India’s concerns and has agreed that there are still issues that need addressing.” 

At the summit, Modi agreed to starting bilateral talks between the Chinese vice premier and the Indian finance minister over India’s uneven trade relationship with China, which is weighted heavily in Beijing’s favor. China’s trade surplus with India has jumped from less than $2.5 billion a month in 2014 when Modi took office to more than $5 billion a month. 

The Indian commitment to bilateral trade talks represented a diplomatic win for Beijing, allowing it to initiate what it is good at: endless negotiations, as its 38-year-long border talks with India illustrate. Ever since the talks to settle the border disputes began in 1981, China has taken India round and round the mulberry bush. 

However, only three weeks after the Xi-Modi summit, India pulled out of the RCEP. And the bilateral trade talks that were agreed upon at the summit have yet to begin. 

In November, the other 15 participating RCEP countries concluded text-based negotiations and sent the agreement to the legal team for cleanup. A joint statement following the conclusion of the negotiations in Bangkok said, “India has significant outstanding issues, which remain unresolved. All RCEP participating countries will work together to resolve these outstanding issues in a mutually satisfactory way. India’s final decision will depend on satisfactory resolution of these issues.” 

It will not be easy to resolve India’s concerns. At a time of slowing Indian growth, India’s entry into the RCEP could exacerbate the country’s economic problems by opening the floodgates to the entry of cheap Chinese goods. 

China, while exploiting India’s rule of law to engage in large-scale dumping and other unfair practices, keeps whole sectors of its economy off-limits to Indian businesses, including India’s $181-billion information technology industry. Beijing has also dragged its feet on dismantling regulatory barriers to the import of Indian agricultural and pharmaceutical products. 

Modi, in the hope of spurring greater foreign direct investment (FDI) from China, removed it from the official list as a “country of concern” for India. However, instead of greater FDI, the step invited greater Chinese dumping. 

China’s cumulative FDI in India remains a fraction of its yearly trade surplus with the country. In fact, in the list of countries with which China has the highest trade surpluses, India now ranks second behind America. 

China’s surplus with the U.S., of course, is massive. But as a percentage of total bilateral trade or as a percentage of national gross domestic product (GDP), India’s trade deficit with China is greater than America’s. India’s trade deficit with China in 2018 accounted for 2.2% of its GDP. 

China’s unfair trade practices are systematically undermining Indian manufacturing and competitiveness, with the result that Modi’s vaunted “Make in India” initiative has yet to seriously take off. Indeed, China’s annual trade surplus with India is significantly larger than India’s total defense spending, underscoring the extent to which India is underwriting Chinese hostility. 

Against this background, India’s concerns are unlikely to be addressed in time for it to join the other participating countries at the RCEP signing ceremony in Hanoi next year. 

Let’s be clear: unlike most other participating countries in the RCEP, India is not an export-driven economy. Rather, like the U.S., it is an import-dependent economy whose growth is largely driven by domestic consumption. 

The U.S. and India have big trade deficits in goods with the rest of the world. Through bilateral or trilateral trade deals, they can leverage outsiders’ access to their huge markets to help shape trade norms and practices. This is already the approach of U.S. President Donald Trump’s administration. 

Make no mistake – India needs to become more competitive in its own right because no barrier can be high enough to protect it from China’s trade prowess. But it also true that India cannot become more competitive without curbing China’s dumping and other rapacious trade practices. 

An RCEP without India could create an imbalance within that trading bloc, just as Japan, Australia, and the ASEAN states have feared. It now seems likely that China will dominate the world’s largest free trade arrangement.

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