East Asian Economic Strategies

Keeping India in East Asia’s economic pact

Visiting Scholar

The economic rules-based order that underpins global and regional prosperity is under threat from the US–China trade war and President Trump's ‘America First’ protectionist agenda.

These shocks to global trade have stirred what once might have been considered an improbable response in Asia. Leaders of the Regional Comprehensive Economic Partnership (RCEP) (Note 1) agreement, have concluded their agreement after 7 years of negotiation — with India unable to get itself over the line.

For now RCEP moves ahead minus India but with the door wide open for eventual participation by the South Asian giant.

Leaders declared that ‘the completion of the RCEP negotiations will demonstrate our collective commitment to an open trade and investment environment across the region.’

With the global uncertainty from the U.S.–China trade war and rising protectionism in the United States and parts of Europe, RCEP countries have agreed to lift barriers to trade and investment and open markets to each other. That's a boost to confidence and certainty in Asia that is a strong push back against the global economic headwinds.

In the post-war period, much unresolved history, lack of political trust and many political differences have been managed around, and overwhelmed by, a shared commitment to the benefits of free trade under those same rules. If confidence in those rules is lost, political differences are likely to come to dominate relations between states, including those in Asia, and undermine economic and political security.

There are no better examples of how this works than the contrast between China and Japan, where adherence to the global rules sustains the third largest trade relationship in the world despite fractious political relations, and India and Pakistan where, absent bilateral adherence to global trade rules, political fractiousness dominates the South Asian relationship.

The uncertainty now fomenting around the hostile international economic policy environment is affecting global investment and growth and there are few positive signs on the horizon. Indeed, all signs point to a worsening of trade tensions, increased protectionism and the collapse of economic growth.

It is within this climate that Asian countries were able to conclude RCEP and restore some certainty to global trade. This boosts Asian growth potential but because of the worsening global economic headwinds, the RCEP agreement takes on heightened strategic significance.

RCEP is centred on the ten ASEAN states of Southeast Asia and also includes China, Japan, South Korea, Australia, New Zealand and India. Should the negotiations succeed this year, RCEP will be the largest regional grouping in terms of both economic weight and population ever to have been concluded.

The broad regional arrangement for freeing trade gives cover for trade liberalisation among countries that otherwise wouldn't be able to make progress bilaterally. China, Japan and South Korea have shown they need a broader framework than bilateral negotiations to achieve deeper cooperation. Importantly, RCEP also offers a way for India to join and expand the East Asian supply chains at a time when both India and East Asia desperately need the boost.

The main obstacle to concluding agreement had been India's hesitation to commit to credible liberalisation and reform. That is a product of pervasive anxiety about Chinese industrial competitiveness and failure to accept and articulate the critical gains for industrial employment and income growth from trade liberalisation connected to its domestic reform priorities.

India earlier played the role of spoiler by wielding its veto power in the World Trade Organization and it has avoided using trade or economic agreements strategically to further its own reform. This time India only vetoed itself out of the agreement as Indian negotiators opened up issues that had already been negotiated at the last minute, forcing the remaining 15 leaders to move ahead without India.

Indian Prime Minister Narendra Modi's Act East strategy, seeking to go beyond the previous government's Look East policy, has been strong on rhetoric but lacks effective follow through. It has been an ‘At Ease’ stance, reflecting reluctance to bite the bullet on difficult reform commitments.

Yet the Indian economy is slowing rapidly, buffeted by mishandled reforms like demonetisation. And while India's relationship with the United States is looking up, the two countries still have significant unresolved trade problems symbolised by President Trumps' removal of India's trade concessions associated with its developing country status.

Global economic uncertainties, domestic economic troubles and India's ambition to define its own space in a more multipolar world have changed India's international economic policy calculations. There is a growing sense of urgency and strategic opportunity that seems now to drive India's international policy choices.

It would seem it's only a matter of time before India gets over the line in its RCEP commitments. Although India was slow to grasp the strategic significance of RCEP — like ASEAN, Japan and other countries — the fact it got close to being part of the 16-member conclusion demonstrates Mr. Modi has now elevated early conclusion of RCEP as a foundational element in its quest for a new multipolar global order and embrace of Asia's dynamism.

The RCEP negotiations dragged on for so long, with India the main but not only problem, that the idea of concluding the agreement without India has long been floating around. But when key ASEAN members leant towards leaving India behind, China and Japan did not waver from the strategic importance of keeping India in.

For India, RCEP provides a way to align and lock in reforms that help it join the global value chains in East Asia and integrate into the global economy. More open trade and investment, connected to India's strengths in services, will open East Asian as well as global markets for India. The agreement provides important cover for progressing bilateral economic relations with China.

A main worry in India is that opening up to China will decimate Indian industry. All of India's trade agreements with other East Asian countries have led to increased Indian trade deficits, the argument goes. But India's trade deficits have been growing in other trading relationships too and it's not clear that the agreements have anything to do with this trend. And it's certainly not clear that the Trump-like focus on trade deficits is a relevant problem to worry about. India's trade deficit is just the flip side of its capital imports, which are crucial to fuelling faster investment growth in its huge economy with faster than average population growth.

ASEAN and many other countries have benefited from opening up to China. With China climbing the value-add ladder, there is a much clearer difference in comparative advantage between the two Asian giants now and what could be a massive complementary relationship. The adjustment in India to Chinese and other competition has to be managed with appropriate safeguards, but large imports of Chinese intermediate goods and components are essential to lift India's industrial competitiveness.

A concluded RCEP with India will help it manage its economic relationship with China, not bilaterally but in partnership with Japan, Australia and all of Southeast Asia. Opening up to trade and international commerce helps to lift living standards and productivity and lower costs. As former WTO Director-General Pascal Lamy often observes, ‘trade works because it is painful, and it is painful because it works’.

Like other ASEAN economic arrangements, RCEP is not merely another free trade agreement — it is an economic cooperation arrangement. The interest in East Asia is to work with India in fulfilling its commitments and to socialise the ideas of openness and economic reform that have brought prosperity to East Asia in a living, dynamic agreement.

The economic cooperation agenda has an important externality that will serve India and East Asia well in the current international climate. Like all ASEAN-centred economic cooperation arrangements in Asia, such arrangements are founded on political cooperation and underpin political security.

East Asia has finally got its act together and concluded RCEP, spurred by its need to weather the global economic storm but also to lift its own growth potential. The next step is to make sure India and South Asia can do the same.

  1. ^ RCEP consists of 16 countries, Japan, China, Korea, ASEAN, Australia, New Zealand and India, and accounts for about half of the world population and 40 percent of the world's GDP(PPP).

November 18, 2019

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