What should motivate a country to join a trading bloc or a free trade agreement?
The ability of enhancing its exports, growth in trade, cheaper imports for its consumers, increased foreign investment, possibility of participation in global value chains and enhanced transfer of technology and knowhow are some of the triggers. However, to what extent a trade agreement would benefit a country would depend on hard data, analysis and sectoral analysis of strengths and weaknesses compared to the other partners in the agreement. Would the trade agreement benefit the country's manufacturers to export more to partner countries or will it lead to flooding of the market with cheap imported goods from the very same partners. A bit of both is good but a tilt to imports can be hazardous.
The above debate is being seen in the contentious issue of whether India should join the RCEP. Calls for rejoining the trading arrangement have been recently voiced. The World Bank in its India Development Update 2024 pushed for a strong case for India's entry into the world's largest trading bloc.
"Analysts have tried to evaluate the impact of participating in or pulling out of mega trade deals using general equilibrium models, The conclusion of the most widely cited study (Petri and Plummer, 2020) suggests that India would gain USD 60 billion by 2030 if it joined RCEP. Aggregate income gains from RCEP16 would be shared across all of India’s major economic sectors (raw materials, light manufacturers, advanced manufactures, domestic services and traded services). Export gains would range from approximately 4 percent for (primarily) domestic services to 17 percent for traded services (e.g., in computing, finance, marketing) (Figure 2)."
The World Bank report also argues that integrating into global value chains would have a great impact for India on diversification of its exports as well as gaining competitiveness.
"By integrating into GVCs, India can: (i) expand the variety of what it produces (by participating in the production of higher-added value goods), (ii) enhance its competitiveness (by gaining access to advanced technologies and global markets), and (iii) increase flows of FDI by multinationals seeking to produce in India. Currently, India's participation in GVCs is relatively limited. Backward participation, where exports incorporate foreign inputs, peaked at over 25 percent of gross exports around 2010 before declining to about 15 percent by 2020. Forward participation, where India provides inputs for other countries' exports, remained relatively stable between 10 percent and 15 percent from 1995 to 2020, with minor fluctuations around the 2008 financial crisis and after 2011. The decline in backward participation highlights the importance of removing barriers on intermediate inputs (Figure 4.11). "
However, the other side of the spectrum there is scepticism. It is reflected in this piece by Surendar Singh who argues that the data shows that the trade deficit with RCEP partners has grown over the years and this would further worsen. He states:
"This raises a pertinent point: Had India joined the RCEP agreement, the trade deficit would likely have worsened, further contributing to its trade deficit with RCEP countries, mainly on account of China.
Therefore, it is important to state that India’s decision to reconsider joining the RCEP agreement should weigh the potential gains and losses in terms of trade at both aggregate and country levels. These are particularly important vis-a-vis China, with which India conducts a significant volume of trade, and has a huge trade deficit. "
The data he puts forth is quite telling:
The detailed report by Peter A. Petri and Michael G. Plummer in their study titled "East Asia Decouples from theUnited States: Trade War, COVID-19,and East Asia’s New Trade Blocs" for PIIE however estimates substantial gains from India's entering into RCEP.
"Finally, India will gain $60 billion on an ongoing basis if it joins RCEP, that is, RCEP16 is implemented instead of RCEP15. Put another way, India’s decision involves losing $6 billion outside RCEP or gaining $54 billion in it (table 4). This loss is 1.2 percent of India’s projected GDP in 2030 and thereafter, or a little more than twice the US loss from pulling out of the TPP. The remaining RCEP15 economies are $6 billion better off without India, a negligible share of the region’s $44 trillion income in 2030."
However, they do recognise the potential impact of the RCEP on India's economy:
"The government apparently felt that potential threats to manufacturing employment due to Chinese competition would be politically unacceptable. Indeed, concerns about Chinese competition have been prominent since the start of negotiations but are now exacerbated by concerns that China will shift its exports from the United States to India. India’s politically sensitive agriculture sector also feels threatened by products such as spices from Southeast Asia and dairy from New Zealand and Australia. Finally, India has run a bilateral trade deficit with 11 of its 15 RCEP partners and, like the United States today, it is evidently concerned about it. In 2018, India’s deficit rose to $74 billion with China, 25 percent of its overall deficit.32 To mitigate these fears, India has asked for modifications of RCEP, including changing tariff calculations, adding “auto-trigger” protection for import surges, and greater flexibility on tariff concessions (Suneja 2019). Other members were unwilling to accommodate so many changes."
In conclusion, what does one have to weigh in on when analysing one's options:
1. A detailed evidenced based analysis of what impact the trading arrangement could have across sectors in both manufacturing and services
2. In what ways could India integrate in GVCs in these partner countries? Which MSMEs and in what sectors are these GVC possibilities possible? An oft-repeated refrain is that India's businesses have not utlised the potential of their existing FTA opportunities. If that is the case, one would have to closely examine whether joining the GVC bandwagon remains a theoretical construct and fails on the ground due to other contributing factors.
3. How would India's exports be boosted considering already existing trading arrangements?
4. Are a surge of imports always a bane for the country or can it be viewed as benefitting consumers as final beneficiaries or businesses who use intermediate imports to re-export final products.
5. If there is a gain predicted, what are the sectors that would benefit from the inclusion? Would it offset the loss of other sectors. As it is said, there are always winners and losers in a trading arrangement.
