The American Prospect (tapped_xml) wrote,
The American Prospect
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Narendra Modi’s Free-Trade Dilemma

https://prospect.org/article/narendra-modis-free-trade-dilemma

Manish Swarup/AP Photo

Indian Prime Minister Narendra Modi and Chinese President Xi Jinping at the BRICS summit in Goa, India, 2016.

As the United States and China continue their trade war, Beijing has turned its attention to wrapping up the Regional Comprehensive Economic Partnership (RCEP), a massive free-trade deal that would integrate the largest economies in the Asia-Pacific region. The deal is an underreported example of China’s geopolitical and geo-economic expansion, and it is forcing India to ask tough questions about its stance on free trade and industrial policy.

Delhi must decide whether to go ahead with the domestically unpopular deal or back out altogether, potentially forgoing a chance to build its influence in Asian economic and security affairs.

In the face of Trump’s one-man teardown of the international trade regime, all ten members of the Association of Southeast Asian Nations (ASEAN), as well as China, India, Japan, South Korea, Australia, and New Zealand, are racing to conclude RCEP with the hope that it will stabilize the global trading order.

The most recent negotiations wrapped up in Beijing on August 3 with China driving the deal forward, hoping to finalize it by the end of the year and create the world’s largest trade bloc, accounting for one-third of global GDP and almost 50 percent of the world’s population.

Beijing’s motives for accelerating RCEP are clear. In light of recent escalations of the U.S.-China trade war, the agreement would provide China with better access to some of the world’s most vibrant markets. Perhaps more importantly, the deal would allow Beijing to exert more influence on the flows of goods and services in Asia, an effort made simpler by Trump’s withdrawal from the Trans-Pacific Partnership.

Despite Beijing’s desire to push ahead, India’s concerns about the deal remain the largest stumbling block to finalizing RCEP. Various Indian industry groups have voiced concerns that tariff reductions would allow cheap Chinese goods to inundate the Indian market, exposing its struggling manufacturing sector to increased competition; Indian industrialists fear South Korea and Japan could also further entrench themselves in the domestic electronics and steel markets; farmers are worried the deal might lead to a collapse in dairy prices due to an influx of low-cost products from Australia and New Zealand.

After largely agreeing to cut import tariffs as part of the deal, India has recently hardened its stance, demanding that other RCEP countries allow the free movement of Indian technology and services professionals and take steps to reduce bilateral trade deficits; Delhi has asked Beijing to import more pharmaceuticals, sugar, and rice, among other Indian goods and services.

Though India has requested these concessions, it remains unclear which, if any, will be agreed to, and time might be running out. China is losing patience with the process, having mooted the possibility of pushing the deal ahead without India, as well as Australia and New Zealand, the latter two due to their concerns about the agreement’s lack of environmental and labor safeguards.

If its demands go unmet, India will be forced to decide whether to accept a deal that many citizens oppose or back out altogether, missing an opportunity to further integrate into the region’s economic networks and expand its influence in East and Southeast Asian affairs.

 

SINCE THE BEGINNING of negotiations in 2012, the Indian government has been an enthusiastic supporter of RCEP, for reasons related to both economics and security. The agreement fits neatly into Prime Minister Narendra Modi’s Act East policy, which aims to improve security and economic ties with Southeast Asia in order to expand Delhi’s influence in the Indo-Pacific and counter China’s rise.

By building on previously agreed trade deals with ASEAN, South Korea, and Japan, RCEP could help streamline trade and investment regulations—and integrate India into Asian production networks and value chains. It would also further open markets for India’s IT and technology companies, business interests with which Modi, though elected through a combination of populism and Hindu nationalism, has aligned himself. Furthermore, some in the Indian political establishment hail RCEP as a framework through which to push necessary domestic economic reforms that would lessen the private sector’s dependence on government support and increase its global competitiveness.

Increased economic tie-ins would also benefit Delhi’s security agenda, as India wants to work closely with Vietnam, Japan, and Australia to deter Chinese military expansionism in the Indo-Pacific. Despite the Doklam crisis, a China-India military standoff in a disputed border region, and recent events in Kashmir, Chinese President Xi Jinping and Modi have shown they can cooperate, as evidenced by their amicable informal meeting last year in Wuhan. The agreement could further integrate the Indian and Chinese economies and potentially dampen the potential for conflict.

But RCEP continues to be a tough sell to Indian citizens. Despite promising to be a pro-farmer and pro-business leader, Modi has failed to fundamentally reform India’s economy. Many of his more ambitious initiatives, especially those having to do with agriculture, have largely failed or been abandoned.

Modi famously promised to double farmers’ incomes by 2022 and recently dedicated his electoral victory to this long-suffering constituency, but most of India’s hundreds of millions of agriculturists still live in poverty. While more than half of the subcontinent’s citizens depend in one way or another on agriculture, farming makes up just 17 percent of the national economy.

Rural voters, despite Modi’s heretofore hollow promises, seemed willing to give him a pass for the failures of his first term, hoping that he could turn their fortunes around if re-elected. Farmers, however, view RCEP as a betrayal of their trust, as many influential unions have pushed back against RCEP, worried about ceding their control over seeds and the dairy sector’s ability to compete with low- or no-tariff imported milk products.

Things look similarly bleak on the domestic manufacturing front. As increased trade between the U.S. and manufacturing powerhouses like China has led to deindustrialization in the United States, Indian industry, already very weak, worries that RCEP’s relaxation or elimination of high import tariffs could expose it to potentially debilitating competition.

The current picture isn’t pretty, as India’s automakers recently reduced production targets and cut thousands of jobs, while the manufacturing sector lost 3.5 million jobs between 2011 and 2018. Some economists are calling for an industrial policy that would build up manufacturing, but the last such policy, approved in 2011, was never implemented.

Strong market protections, coupled with robust investment and growth in manufacturing capacity, were vital to the speedy development of South Korea, Taiwan, and mainland China. Despite high import tariffs and investments in the sector, India’s manufacturing has not taken off. As of 2017, manufacturing made up about 15 percent of India’s GDP, a figure that has not changed significantly since 1991. Conversely, manufacturing accounted for around 29 percent of GDP in China and 28 percent in South Korea that same year. RCEP’s stipulations could undermine Delhi’s efforts to boost manufacturing, thereby ruling out one tried-and-true development strategy.

 

IF DELHI CAN win the aforementioned concessions and protect its agriculture and manufacturing industries, joining RCEP would likely be a boon for India. However, if the other countries push back, Modi will have to decide whether his international goals or domestic economic policies are more important to him and to India.

His nationalism and desire to play a larger role in Asia have led to deeper engagement with India’s neighbors, a trend which RCEP would continue. But the debate around the agreement also shows that Delhi might need to get its own economic house in order before it can undertake broader international strategic initiatives.

While India’s economy is massive, it is still heavily rural and largely unprepared for competition from abroad. Unemployment stands at a 40-year high. For the common citizen, domestic economic policies that guarantee better livelihoods likely trump the allure of competition with China or enlarging India’s regional footprint.

Though he was just re-elected in historic fashion, Modi may weaken his own mandate by signing a less-than-ideal free-trade agreement, and with it both his domestic and international ambitions.

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