Corona Daily 265: Asia Unites without India

Yesterday, on a virtual call hosted by Vietnam, fifteen Asia-Pacific countries formed the world’s largest trading bloc, bigger than the European Union. The diverse composition included: China, South Korea, Japan, Australia, New Zealand, Singapore, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand and Vietnam. With 30% of the world’s population and GDP, the block targets to eliminate 90% of duties over the next twenty years. This was China’s first ever multi-lateral trade agreement. Japan and China came together in a bloc for the first time. The fifteen countries were keener to sign the RCEP (Regional Comprehensive Economic Partnership) because their economies are severely affected by the pandemic. The agreement was negotiated with blood, sweat and tears as described by Malaysia’s trade minister. The negotiations had started in 2012, and other than China, the most important member was expected to be India.

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A year ago, India decided to withdraw. India feared cheap goods from China flooding the Indian market, further widening the trade deficit. Dairy products coming from New Zealand would be so cheap as to threaten the livelihood of Indian dairy farmers. Narendra Modi invoked Mahatma Gandhi in his withdrawal announcement. Gandhi had advocated a self-reliant India with an aversion to foreign goods. This was pre-independence. After 1947, India adopted protectionism that caused substandard products, red tape, excessive duties and consequent smuggling until 1991. As the experience of communist countries showed, the fantasy of self-reliance usually ends in self-destruction. This is even more relevant in 2020. Supply chains are now global. Every time there is an opportunity to remove a border, a nation should pounce on it.

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India has been negotiating this agreement for seven years. China’s strengths are well known. There is nothing intrinsically wrong with having a trade deficit with China, every nation does. “Made in India” no longer means developed by Indians. My Nike shoes are made in Laos or Vietnam, they can be made in India in a trade-friendly environment. I-phones can be assembled in India and exported all over the world. The strongest point of this agreement is the unified “rules of origin”. If components are made in any of these fifteen countries, the final product will be eligible for the lowest duties. India now misses on it by being outside.

The threat of 5% dairy products from New Zealand ruining the other 95% is beyond my understanding of economics. If New Zealand can consistently supply milk powder at half the Indian rate, can someone please explain why.

The agreement offers each country a flexibility to specify protected items. Japan will maintain high import duties on “politically sensitive” agricultural products. Surely, India could have done the same with dairy products. If the intent was to join the agreement, this is a surprising failure of negotiations.

The more likely explanation is reverting to protectionism and mixing business with politics. Trump’s America first and withdrawal from the Trans-pacific partnership seems to have been photocopied by India. The USA and India share their dislike for China. But sustained enmity with a neighbour is a bad policy. Being part of a trading bloc could improve India-China relations. This agreement was a small step in an eventual grand single Asian market.

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India’s decision is perplexing. The parties are given two years to ratify the agreement in their parliaments. India’s signing could have allowed the parliament and public to better debate it. India could have joined yesterday’s engagement ceremony, and refused to marry later, or divorce if the marriage didn’t work. The step to run away before the engagement is timid and embarrassing.

Ravi