India should join RCEP and not obsess over trade gaps

Introduction

 

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.

 

Our obsession with trade deficits are being reviewed at a bilateral/regional level without the realization that a deficit with a country/region may be offset by a surplus with another.

 

An uninformed backlash is preventing several countries from signing free trade agreements (FTAs) at bilateral or regional levels, as such FTAs may require steep reductions in tariffs, enhancing the possibility of an import deluge. The most recent example of this is our stance on RCEP.

 

Let us review India's international trade position in some detail.

 

Over the years, India has typically run a surplus in the trade of services, but a deficit in the trade of goods. These two, along with the receipt of income from investments and unilateral transfers, make up the current account balance of the country. As a percentage of gross domestic product (GDP), India's current account deficit was 1.5% in 2013-14. It widened to 1.8% in 2017-18 and further to 2.1% in 2018-19. The increase in the goods trade deficit from 6% in 2017-18 to 6.6% in 2018-19 was the key factor in the widening of India's trade deficit during this period.

 

In a recent paper available on the Reserve Bank of India website ( bit.ly/2OlsfZf ), Soumasree Tewari and Anshul point out that of the 0.6% change, only 0.1% was because of higher import volumes and the bulk was on account of higher commodity prices.

 

In 2017-18, India experienced a deficit in its goods trade of around $160 billion. Of this, a negative trade balance of around $45 billion was observed in the electronic goods sector.

 

In another recent paper ( bit.ly/2CSgLHd ), Misra et al highlight that in 2013-14, mobile phones and parts accounted for 53% and 20%, respectively, of telephone set imports. By 2017-18, the composition reversed, with mobile phone parts making up around 55% and mobile phones around 17% of these imports. They also estimate that the switching of electronics imports from final consumption to intermediate goods has resulted in higher investment, higher domestic production, value addition and more domestic employment.

 

Fears of free trade deals widening trade deficits are not new. Based on an ex-ante analysis of India's FTA with Asean, several studies had concluded that India's allocative efficiency would increase, but the terms of trade would continue to weigh against us. However, studies based on ex-post analysis concluded that after that FTA, India's exports to Asean countries increased substantially, with the largest access gained in Thailand, Cambodia, Vietnam, Malaysia, and the Philippines.

 

India's FTAs with Japan, Asean and South Korea are among its biggest such deals. In yet another paper ( bit.ly/2OqW0b9 ), Choudhry et al observe that in the case of Japan, after the implementation of the agreement, India has mostly imported industrial supplies, capital goods and transport equipment. These are predominantly used as intermediate goods and have thus helped India improve productive capacity and employment generation. India ran a trade deficit of $7.9 billion with Japan in 2018-19, but these gains cannot be overlooked.

 

Moreover, on average, India's exports to FTA partner countries have seen an increase of 15% after an agreement is signed, a sharper incline than that for non-partner countries.

 

Intermediate goods are typically exported by adding value. India's domestic value-added content of exports has gradually increased from an estimated $46 billion in 1999-00 to $295 billion in 2012-13. In their recent paper ( bit.ly/2r6evd2 ), Veeramani et al estimate that during this period, the total number of direct and indirect jobs supported by aggregate Indian exports rose from about 34 million to 62.6 million, with the share of export-tied jobs in total employment having risen from a little more than 9% to 14.5%. Backward linkages, from manufacturing to agriculture and services, have become a key source of export-related value addition and job creation in India.

 

In the final analysis, it is important for India to continue to import intermediate goods at internationally competitive prices. To this end, it needs to integrate itself with global value chains. Participating in FTAs is essential in this regard.

 

We need to focus on the composition of imports, the possibility of exports, and concurrent employment opportunities created under FTAs, rather than unnecessarily worrying about import deluges and irrelevant trade deficits. We must get back into RCEP without fear.

 

Source

 

Livemint, 27 November, 2019