With services being about 55% of India’s GDP, agreement on the free movement of skilled personnel and related aspects of the services sector are pivotal for India.
RCEP, the Regional Comprehensive Economic Partnership, is a proposed free trade agreement (FTA) between a geographically Asian and Asia-Pacific grouping of 16 countries. Those countries are the 10 ASEAN nations of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam and the much larger six regional trading powers/economies of China, Japan, India, South Korea, Australia and New Zealand. Although India is, in purchasing power parity terms, the third-largest economy in the world, it is considerably smaller in trade terms. In Asia, the dominant trade powers are China and Japan. Hence, the RCEP is widely seen as a regional free trade agreement, in preparation, that excludes the Americas, Europe and Africa. Still, RCEP would have 45% of the world’s population and roughly 30% of the world’s GDP, currently some $23 trillion.
The trade status of India in world terms is interesting, since even Roman and Greek galleons were docking in Kerala to trade spices, particularly pepper for silver coins over two millennia ago. A large number of silver coins of Roman Emperors Augustus (63 BC to AD 14), and Tiberius (14 AD to 37 AD) found in Kerala and Tamil Nadu are unambiguous proof of the historical trade links. Indeed, one Sanskrit name for pepper was yavanesta or the “passion of the Greeks”. Muziris and the Malabar coast were central to Roman interests in India, especially for pepper, which has been found on archaeological sites all over the Roman world, including Britain and Germany. Emperor Augustus’ conquest of Egypt’s ports, especially Berenike that functioned as a hub in the long-distance trade between the Mediterranean and the Indian Ocean, also facilitated the trade with India. During that era and for hundreds of years thereafter, Europeans were reportedly consuming (in that pre-refrigeration phase) truly revolting old and near-rotting meat that then required large quantities of pepper and other spices like cinnamon and ginger to camouflage the taste.
Thus, India started off in early history on a fortunate footing, but exports have sharply declined as a percentage of GDP. Indeed, the work of OECD economic historian Angus Maddison shows that India had the highest GDP in the world when many countries were little more than tribal encampments. While colonialism definitely had a deleterious effect on India’s external trade, it is disingenuous to pin all the blame on colonialism for India’s current relatively small trade role (less than 2% of global exports), 71 years after Independence. However, India’s massive internal market consumes most goods that are produced internally (even samosas run out by the early afternoon), leaving little for export, a fact made worse by the hard-to-believe production controls and multiple permits required that have existed for decades, despite efforts at reform. Today, with China, India runs a serious trade deficit, since China exports $76 billion to India and imports only $13.3 billion. Further, India runs deficits with 10 of the 16 RCEP countries, thus making the Indian negotiating position particularly tenuous, but in fact India already as “FTAs” with ASEAN nations, Japan and Korea. With services being about 55% of India’s GDP, agreement on the free movement of skilled personnel and related aspects of the services sector are pivotal for India to turn around that situation. Indeed, the failure of progress on the Trade in Services segment at WTO may well have been an impetus for the negotiations on regional free trade agreements (FTAs). India became a member of the General Agreement on Tariffs and Trade (GATT) in 1948, a year after Independence, and GATT later morphed into WTO, with India becoming a founding member in 1995.
“Free Trade Agreements” and “Most Favoured Nation” status are in fact misnomers, and do not actually mean zero tariffs or absence of non-tariff barriers. China certainly was not a “free trade” economy as it became a global economic superpower, and even today maintains average tariff of about 9.5%, and for industrial products it is 8.5%, has export taxes on 217 items to discourage exports in primary, unprocessed form, in addition to rigid import control regulations through China Compulsory Certifications (CCC). Further, European countries themselves often imposed non-free trade terms, with military power. European scholars point out that when the Portuguese first came in force to Calicut, Kerala, they burnt alive other traders (in full view of their families) to emphasise the point that there were new traders in town.
While Economics orthodoxy proclaims that free-trade is highly correlated with prosperity, it is also a fact that India’s steel, pharma, agriculture, textiles and manufacturing sectors, among others, likely will be hard hit should there be the dramatic reductions in tariffs that some RCEP nations expect of India. Meanwhile, making it easier for India to export services, especially IT services, has not been agreed to, as yet.
Prime Minister Narendra Modi spoke at the East Asia Summit, Singapore, when his visit also coincided with the ASEAN Summit, both where the RCEP was under consideration, and asked for speedy conclusion of the negotiations. China’s Premier Li Keqiang said he hopes that RCEP will commence in 2019. However, the number of “chapters” of an RCEP Agreement yet to be concluded are in fact the most contentious.
There also appears to be absence of institutional memory in trade negotiations. All the assurances given during the WTO TRIPS Agreement negotiations on tackling epidemics, in which Indian pharma played a commendable and decisive role especially in worldwide AIDS control, appear to have been increasingly tossed into dustbins as new generations of negotiators, perhaps unfamiliar with the past or indeed the subject matter, negotiate in secrecy.
Further, given the historical presence of the US in Asia, and its increasing focus on Asia as the world’s economic centre of gravity shifts to the Asia-Pacific, from a previously Europhilic world, it is hard to imagine a trade agreement that is living and vibrant and simultaneously excludes the US, as RCEP is in fact attempting. On his recent visit to Asia, US Vice President Mike Pence reiterated his strong belief in the US-Japan alliance, and stressed that Japan is an indispensable trading partner for the United States, with two-way trade being a stunning $285 billion. He said that the United States is Japan’s top foreign direct investor, employing over 350,000 people in Japan. And last year, Japan invested almost $44 billion in the United States, for a total of nearly half a trillion dollars that support nearly a million American jobs.
Meanwhile, it is worth pointing out that while India currently has no free trade agreement with the US or China, India has a significant trade surplus with the US; India exports goods and services worth $76.7 billion and imports $49.4 billion, resulting in a trade surplus of $27.3 billion in 2017.
India’s trade surplus with the US is a reflection of its success in export of IT services, indeed the vast majority of IT services exported by India are to the US. India has offered to import oil and natural gas from the US as a means of reducing its trade surplus. Progress is also awaited on steps that China might take to reduce its trade imbalance with India that is in fact growing.
India has already pushed RCEP deadlines past the coming Indian parliamentary election in May 2019. At this time, given multiple complexities, it is uncertain if RCEP will even commence in 2019. However, expectation of vastly increased trade and investment in goods and services in a world where ever so many competitive advantages can coexist, portends an exciting future for all.
Dr Sunil Chacko is a graduate of Harvard and Columbia Universities and served in the Executive Office of the World Bank Group. He has been a faculty member in the US, Canada, Japan and India.