In May this year, at a summit meeting in Tokyo, the United States (US) launched an Indo Pacific Economic Framework (IPEF) along with thirteen countries. IPEF included all the major economies of the Asian region (excluding China) i.e. India, Japan, Australia, New Zealand, Indonesia, South Korea, Malaysia, Thailand, Philippines, Vietnam, Singapore, Brunei and Fiji. The US saw the initiative as a reassertion of its economic leadership in Asia, and a step towards distancing Asian economies from China.
At this stage, IPEF is no more than a statement of intent. The Framework seeks to build cooperation around the four “pillars” of supply chains, tax and anti-corruption, clean energy and trade. Pushed by the US, IPEF has been moving ahead quickly to firm up its shape. A ministerial level meeting was held earlier in September for the purpose.
Following the meeting, Commerce Minister Piyush Goyal announced that India has agreed to be part of the negotiations for all the pillars except the all-important one of trade. It appears that concerns over possible commitments on environment and labour standards, digital trade and public procurement were behind the decision not to be a part of the trade discussions.
So what does it all mean? To understand this, we have to look back at the fate of a recent trade pact, the Regional Comprehensive Economic Partnership (RCEP) that had more or less the same cast of characters. However, there was an important difference in membership. The RCEP includes China, and excludes the US, while the IPEF is led by the US, and excludes China.
The RCEP is a done deal, having been signed in 2020 after being negotiated for nearly ten years. India had an opportunity to part of this Asian regional trade pact. In fact it was a founder member of RCEP. However, India chose to withdraw from RCEP in 2019.
Staying away from RCEP is likely to affect India’s bilateral trade with Asian economies in future. Indian exporters will be at a disadvantage in this region. They will face tariff barriers that member countries exporting similar products will not face. India may not even be able to derive much benefit from foreign investment that may be seeking to locate away from China for geopolitical reasons. It would be more profitable for such investors to invest in another RCEP country, and retain the advantage of preferential access to the Chinese market as well.
The RCEP withdrawal and hesitancy to engage with IPEF send mixed signals to the Asian countries. Instead of the stated “Act East,” it seems that as far as regional trade pacts are concerned, policy is veering to Looking Away from East!
The publicly stated rationales do not help clarify matters. If the China factor was a reason for not joining RCEP, then why not engage with IPEF, which excludes China? If labour and environment standards are a major concern in IPEF, then why not join RCEP, which had sidestepped these issues?
It’s not as if India is turning its back on trade agreements, although for a while it seemed so. Only, instead of looking East, India has been looking West. A Comprehensive Economic Partnership Agreement (CEPA) has recently been signed with the United Arab Emirates (UAE). FTAs are under negotiation with the Gulf Cooperation Council, Canada, United Kingdom (UK), European Union (EU), amongst others. These FTAs, when in place, may hopefully draw in some benefits for India.
Worldwide experience has shown that trade can be an engine of economic growth for a country. A liberal trade regime has been a winning formula for the prosperity of many countries, including late starters like Vietnam and Bangladesh.
But, East or West, China or no China, for a trade pact to benefit the country, building up global competitiveness is a must for domestic industry. Here, there appears to be an inherent tension in state policy between freer trade and the Atmanirbharta (self-reliance) imperative. A restrictive interpretation of Atmanirbharta apparently has the upper hand for now, with a trend of growing protectionism in recent years. For example, in the last eight years, there have been 3,200 tariff increases covering 70% of India’s imports. These have been gradually pushing up the average tariff rate.
Notably, to be globally competitive, industry needs to face global competition. By shielding Indian industry from competition, high tariff barriers encourage inefficient industries to flourish and prevent Indian products from being globally competitive. This would also make it difficult for India to fully exploit the potential of free trade pacts, regional or bilateral.
IPEF is as yet a soft framework that has a long way to go to be firmed up. But if one wants to have a say in framing the rules of the game, one must be involved in the dialogue. Staying away from such frameworks just because everything is not exactly as one would like it at the outset doesn’t take us anywhere. All negotiations involve give and take; they cannot be only about taking without giving.
Consequent to the Western economic sanctions imposed following the Ukraine Conflict, the world has become segmented as never before. Any understandings on global trade are definitely out. For countries trying to avoid being part of any of the segmented blocs, being part of regional trade arrangements is important. It opens up trade opportunities at a time when such opportunities are getting more and more restricted for many countries. India is on a growth path, and must seize all such opportunities that can potentially accelerate growth.
In Shakespeare’s immortal words
There is a tide in the affairs of men,
Which, taken at the flood, leads on to fortune…
(The author is a former civil servant who has also served with the World Bank. He writes by invitation for RK)