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https://scmp.com/comment/opinion/article/3015459/china-wants-india-be-part-its-asian-free-trade-pact-flexibility Comment
China wants India to be part of its Asian free-trade pact – flexibility on liberalisation may be an acceptable price
- The Regional Comprehensive Economic Partnership is China’s chance to forge a Trump-proof trade deal that can accommodate the Belt and Road Initiative. Patience with India, which wants to protect domestic manufacturing, may be the way forward
Chinese President Xi Jinping and Indian Prime Minister Narendra Modi talk as they visit the Hubei Provincial Museum in Wuhan, China, on April 27, 2018. China wants an integrated Asian trading bloc and may be willing to accommodate India, which has prioritised domestic manufacturing. Photo: China Daily via Reuters
Global attention has understandably been fixed on the US-China trade dispute, with the spotlight occasionally turning to places as far apart as Mexico, Europe and Japan. By comparison, trade relations between China and the rest of Asia have been a sideshow – but maybe not for much longer.
The Regional Comprehensive Economic Partnership (RCEP) agreement, in the likely event that it comes to fruition later this year, will marry China’s economy with 13 other Asian economies, plus Australia and New Zealand, promising to be more of a game changer than is commonly supposed.
The free-trade agreement is less “high-level” and sophisticated than the Trans-Pacific Partnership (TPP) which the US pushed under the Obama-era “pivot to Asia”, only to dump under the bilateral-deal-inclined Trump administration. But it is moving towards realisation at a critical time for Asia.
Even if a trade-war truce is agreed when US President Donald Trump and Chinese President Xi Jinping meet in Osaka at the G20 summit this week, US economic relations – not only with China but with other key members of RCEP – have moved to a very nervous footing.
In this uncertain situation, not easily assuaged given Trump’s increasingly erratic behaviour, a new trade grouping offering manufacturing and agricultural market access, and immune from further Trump tantrums, is an appealing prospect.
Consisting of the 10 members of Asean plus China, Japan, India, South Korea, Australia and New Zealand, RCEP partners collectively account for 45 per cent of the world’s population with a combined gross domestic product of more than US$21 trillion, and make up 40 per cent of global trade.
The critical absence from this line-up is the US. While Washington’s exit from the TPP threatened to break that agreement, the US absence from RCEP could “make” it. Meanwhile, a potentially very important member of RCEP’s cast (not least from China’s point of view) is India.
As Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings, puts it: “China desperately wants and needs RCEP. I think it is willing to make some compromises to bring India on board.” The main compromise will be allowing India time to adjust to lower manufacturing tariffs.
India is afraid of its manufacturing sector getting “wiped out” by Chinese competition within a common trading bloc (just as some Association of Southeast Asian Nations states are fearful of invasion by Indian IT software products and engineers once RCEP is formed).
A worker stands examines steel tubes in the finished goods scrapyard at the Jindal Stainless factory in Hisar, India, in May 2018. India’s leaders have concerns that opening its markets to foreign competition, particularly from China, would snuff out its manufacturing sector. Photo: Bloomberg
China is also not anxious to see some of its nascent service industries come under invasion from Indian software technologies. Given mutual protectionist fears, it may appear unlikely that RCEP will get off the ground any time soon, all things being equal. But all things are not equal.
As Hung Tran, a former official at the Institute of International Finance, observes: “Given escalating tension created by the US against major trading partners, as well as the rules-based global trading system, it is imperative for countries active in international trade to form regional trading arrangements to secure stable trading rules for themselves.”
Facing Trump’s trade war, involving tariffs and restrictions on technology trade and investment, China “sees RCEP in a wider strategic perspective”, Tran suggests. It “creates a vital economic and trading space for [China] and complements its effort to roll out the Belt and Road Initiative”.
The main stumbling block is India’s fear of a surge in Chinese imports hurting its manufacturing as well as metals industries. Of particular concern is the transshipment of Chinese goods through countries having low or no duties, such as textile and clothing through Sri Lanka and Bangladesh.
India already has a trade deficit with 11 of the RCEP negotiating countries – and a deficit of around US$60 billion a year with China alone. A possible flood of Chinese imports could jeopardise the Delhi’s “Make in India” development strategy.
But given the lure of a huge new all-Asia (plus Australasia) market for its goods, China can afford to be patient with India on manufacturing trade liberalisation.
Other potential RCEP signatories are also pushing for an accommodating approach towards India. As Roache observes, “A lot of India’s trade partners want India on board. It ensures that RCEP is less dominated by China and it truly becomes an Asia trade deal.”
RCEP, which has been under negotiation for six years, could be finalised during the annual Asean summit in November. It may not be a marriage made in heaven but it is a marriage of economic convenience at a time when the US is proving to be an unreliable trading partner. Trump may have cause to cry at the wedding.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs