India not joining RCEP might not be in its best interests

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The deal for India to join proposed Regional Comprehensive Economic Partnership (RCEP) has split the 16-member grouping at the Bangkok meet between those who want to toe the Chinese line to close the deal regardless of what India does and those who want India in to balance Chinese dominance.

Malaysian Prime Minister Mahathir Bin Mohamad, a pro-China voice, who recently targeted India over the Kashmir issue, went to the extent of giving the negotiation logjam an American twist. He reportedly said he was in no doubt that the ASEAN bloc was now being targeted by the US administration with a hostile trade policy designed to ‘bully’ individual countries into granting better access for US exporters. He warned that ASEAN unity was the only answer even if it meant closer economic ties with China.

After negotiating for about seven years, India decided to opt out of the Regional Comprehensive Economic Partnership (RCEP) earlier this month. One argument used to justify the pull-out is that free trade agreements (FTAs) don’t amount to free trade.

Unlike unilateral trade liberalization that results only in trade creation, an FTA leads to both trade creation and trade diversion, the latter being diversion of imports from more efficient FTA non-members to its members that now face lower tariffs within this group. This latter element is the protectionist part of an FTA, while the former is the free trade component.

Overall, an FTA will lead to freer trade if trade creation is greater than trade diversion. When initial tariffs are low, with the exception of a small number of industries, trade diversion should be relatively small.

US President Donald Trump has been warring with many countries, including India, on America’s trade deficit with them. China is a bug bear for the US because of its trade deficit of $378.7 billion. China has also turned out to be a problem for India, but our deficit with it is about $60 billion. We logged out of the long negotiated Regional Comprehensive Economic Partnership (RCEP) agreement as we were afraid of being swamped with cheap Chinese goods and were worried that our existing trade deficit with China will increase and that such a deal would result in some of our factories shutting down. Alas, the calculus is not so cut and dried and we are making a big mistake by not joining RCEP because we need low-barrier export markets and faster economic growth.

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