India's Trade Options

Amita Batra

The Indo-Pacific economic space continues to be open to reconfiguration, triggered as it has been by the US withdrawal from the Trans Pacific Partnership (TPP) earlier this year. There have since been many conjectures on how the region may see a China-led economic order, particularly so as the Japanese attempts for a TPP revival have not yielded any concrete positive outcomes so far. Alternatively, Japan-India relations, that have been in the forefront with Prime Minister Abe’s visit to India earlier this month, are being considered as a possible counter balancing force in the region. It is therefore relevant and worthwhile to examine the relative placement of China and Japan in India’s economic relations and discuss India’s options in the larger regional economic context.

First, while China is India’s top trading partner, Japan is not even among the top ten trading partners for India, and has not been so for almost a decade. In 2016-17, India’s trade with China was US$ 71 billion as against US$ 13 billion with Japan. Interestingly, while India incurs a trade deficit with both countries, it is the deficit with China that attracts attention, even though the deficit with both countries, as a share of total bilateral trade, is almost equal at 70 per cent. With Japan, India has a Comprehensive Economic Partnership Agreement (CEPA) that was signed in 2011. After six years of its implementation, growth in bilateral trade with Japan has been insignificant and in fact the rate of growth of exports registered a significant decline in 2016-17. In contrast, even without a preferential trading arrangement, India’s exports to China have seen a positive growth over the last year.

Importantly, in the pharmaceutical sector, Japan has been insistent on quality and regulatory standards, particularly in respect of pharmaceutical goods which is a major export category for India not just in bilateral but in global trade too. Although China also imposes trade barriers for Indian pharmaceutical exports, a significant difference is to be noted with regard to their membership of regional trade formulations – Japan is a member of both the Regional Comprehensive Economic Partnership (RCEP) and the now in-suspension TPP; China, like India, is a member only of the RCEP and not of the TPP. Japan has been very keen to revive the TPP with or without US membership.

A consequence of this differential membership is that Japan, in the spirit of TPP trade rules, seeks higher and World Trade Organisation (WTO)-plus standards in its bilateral trade transactions that would be very hard for India to comply with presently and in the near future. In fact, given that the RCEP is an ASEAN-centred pan-Asian trade arrangement with greater flexibility on trade-related issues, and that India has a differential trade liberalisation offer for its FTA and non-FTA trade partners (including China), it may be in India’s interest to work towards an accelerated finalisation of its negotiation process and to see it emerge as the predominant trade initiative in the region.

Second, growth in global trade for over a decade prior to the global financial crisis was led by trade concentration in regional production networks. Among these, China was the hub of the East Asian production networks, specialising in parts and components trade. In the last five years or so and significantly from 2011-2014, global trade has slowed down, and in 2015 global trade contracted by 10 per cent. For East Asia, the rate of decline in imports has been greater than that in exports. To a large extent this change in trade pattern reflects the consolidation and shortening of global value chains. For China and other regional economies the value chains are getting centred domestically As the East Asian regional integration process deepens, India has the opportunity to strengthen trade with China and ASEAN through the RCEP, and thereby realise its ‘Act East’ Policy. Increased trade liberalisation under the RCEP will allow for India’s integration in regional value chains. The process will involve production up-gradation, manufacturing sector growth, employment and skill enhancement – all the objectives already embodied in the ‘Make in India’ initiative.

Lastly, if the RCEP does not gain momentum it is possible that China may like to push for the Free Trade Area of the Asia Pacific (FTAAP), which draws its membership from the Asia Pacific Economic Cooperation (APEC). China proposed a roadmap towards FTAAP at the 2014 APEC summit meeting with the support and commitment of APEC members. India has not been successful, so far, in securing membership of the APEC. Strengthening India’s relations with Japan could help in this regard. However, irrespective of Japanese support, India will have to expedite implementation of the Trade Facilitation Agreement of the WTO, including the more difficult regulatory and institutional reforms, as the trade facilitation action plans of the APEC have been among its more successful programmes.

It may therefore be in India’s best interest to contribute to an early finalisation of the RCEP negotiations, consolidate its participation in the East Asian regional value chains as also further its export growth with China. The alternatives may be both long drawn out and harder to implement for India.