Re-examine trade pacts: India must consider entering CPTPP, RCEP

Speaking at a forum hosted by an industry body in New Delhi last week, the chief executive officer (CEO) of the government think tank, NITI Aayog, spoke in favour of India reconsidering its options with regard to joining plurilateral trade blocs such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This takes on additional significance because NITI Aayog CEO B V R Subrahmanyam had served as commerce secretary. It can be hoped that this statement indicates that the tides are turning in New Delhi when it comes to evaluating the benefits of large trade blocs such as the RCEP and CPTPP.

 

Mr Subrahmanyam’s argument is simple. Becoming part of such large trade blocs is important, particularly for micro, small, and medium enterprises (MSMEs), which comprise 40 per cent of India’s exports. He pointed out large corporations based in India were underperforming on exports. It is certainly the case historically that smaller companies do well when they are exposed to larger markets, because they are more nimble and able to adjust to new forms of demand. In fact, such trade openness is often necessary for them to grow and break into stable corporate structures dominated by large domestic firms. This effect is magnified when the domestic market is large and profitable, as in India. Companies are tempted to compete over reducing access to their own market, rather than on increasing market share abroad. This might be in their individual interests but does not enhance broader welfare or push domestic value added and growth. Being part of such trade agreements also becomes necessary to get into the global value chain, which is extremely important for increasing the scope of opportunities for Indian firms.

 

The two stumbling blocks for entry into the RCEP and CPTPP are, respectively, China and domestic reform. The RCEP includes several nations with which India has free-trade agreements (FTAs) already, but also adds the People’s Republic of China. There is a healthy fear among Indian policymakers of being swamped by Chinese exports. But there are two straightforward reasons why this fear should not be allowed to rule all policy decisions. First, the RCEP already exists — and significant Chinese value-added will almost certainly exist in all Indian imports from RCEP nations, whether Southeast Asia or South Korea. The second reason is that even RCEP nations are able to take action against other members of the trade pact — witness China’s unilateral action against Australia as part of a broader geopolitical dispute in recent years.

 

The CPTPP question might be slightly more complex. This trade agreement is a “gold standard” in that it includes “behind the border” regulatory harmonisation as one of its principles. In other words, it is not only about tariffs but also the reduction of non-tariff barriers. The amount of initial work required is therefore higher. But, that said, India’s past complaints about FTAs have often focused on the fact that non-tariff barriers still exist to Indian exports even to FTA countries. Meeting CPTPP requirements is a good way to ensure that such barriers are removed. Given the change in climate with regard to trade — and even when it comes to India-China relations — Mr Subrahmanyam’s intervention is well-timed. His suggestion should be taken up at the highest levels of the Indian government.