Economy

India Loses Faith in Trade

A major pan-Asian deal looks increasingly at risk.

Vision needed.

Photographer: Dan Kitwood/Getty

Till fairly recently, it looked like two massive new agreements would compete to define the future of world trade. The Trans-Pacific Partnership, backed by the U.S., would try to move the global trade architecture toward new norms, with harmonized regulations at its center. Meanwhile, the Regional Comprehensive Economic Partnership, backed by China, would drastically reduce remaining tariffs across a swathe of Asia and push the existing model of trade and manufacturing as far as it could go.

The TPP is now history, thanks to Donald Trump. But the RCEP can't exactly declare victory yet. The 16 countries involved -- China, Japan, Korea, Australia, New Zealand and much of Southeast Asia -- have discovered a familiar hurdle in their path: India.

QuickTake India's Aspirations

India has a long history of grumbling about trade agreements. In the past, it has almost single-handedly held up consensus at various World Trade Organization meetings. But it seemed much of that was changing in the past decade or so. Under its previous prime minister, Manmohan Singh, an understanding had begun to develop in New Delhi that trade agreements aren't just about the mechanics of who gains and loses; they're about international relations, and how to tie countries and economies closer together. Under Singh, India negotiated dozens of free-trade agreements -- including one with the Association of Southeast Asian Nations, which he hoped would lead to a "pan-Asian" agreement.

But he never won over his bureaucrats or even many within his own party. And his successors seem far less enthusiastic about the possibilities of free trade. Partly that's because of India's experience with the ASEAN deal, which began in 2010. It infuriated domestic industry and farmers' organizations. One chamber of commerce claimed that, since 2010, India's exports to ASEAN had stagnated, while imports had grown by a third. Farmers in the south, meanwhile, have argued that they can't compete with spices and vegetable oil from Southeast Asia. The government failed to stand up to these voices; it announced a "review" of existing trade deals early on in Narendra Modi's tenure, and there was the strong suggestion that new ones would be frowned on -- effectively ending Singh's policy of economic integration.

This same skepticism seems to be guiding the government's behavior at the RCEP negotiations. If ASEAN decimated Indian plantation farming and caused Indian companies to struggle, the argument goes, just imagine what free trade with China could do. India has been worried about Chinese overcapacity and its tendency to dump goods for awhile.

Thus, when Malaysian Prime Minister Najib Razak flew to New Delhi last week, he was prepared to push hard on behalf of RCEP. But it didn't quite work. Modi, standing next to Najib, never even mentioned the negotiations. Other Indian officials made all the right noises, but it was clear that the only sort of agreement they were willing to countenance was a very weak one indeed. India is hoping to drive a wedge between China and ASEAN -- for instance, by offering the latter deeper tariff cuts than China would receive -- though it seems Indian diplomats found few takers for their cunning plan.

Unless New Delhi feels it has more levers to keep Chinese imports out, it appears that it will simply not agree to any draft, and keep negotiations dragging on as long as possible. There are growing murmurs that India should just be dumped from the process altogether, and that the other countries should move on to a deal that they already largely agree on.

Modi, when he took office in 2014, declared that Singh's "Look East" policy would be replaced with an "Act East" policy of more engagement with Southeast Asia and the Pacific Rim. As is often the case with India's government, when you look behind the slogans, there's not much there. In fact, Modi's government has been moving backward on trade. This is a pity -- because Singh was right. His much-maligned deal with Southeast Asia may not have boosted exports. But tapping into foreign supplies of vegetable oils, for example, has helped ensure that consumers enjoyed low and stable prices for an essential part of their diet.

Moreover, India's engagement with the thriving commercial networks of Southeast Asia and southern China is the only way it can possibly develop an export-focused, job-generating manufacturing sector. Of course, it needs to operate in parallel with domestic reform -- freeing up labor and land markets, and further reforming taxes. The government needs to open Indian industries up to competition, give them the tools to compete and then be confident that they will. But, judging by its response to RCEP, it doesn't intend to do that at all. Is Modi's India really so much less confident than Singh's?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Mihir Sharma at m.s.sharma@gmail.com

    To contact the editor responsible for this story:
    Timothy Lavin at tlavin1@bloomberg.net

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