India is better off inside trade deals than out

By Mihir Sharma

Indian policymakers have traditionally scorned advice from overseas, especially from multilateral agencies such as the World Bank. Suggestions from the latter’s most recent India Development Update are therefore likely to be ignored.

That would be a mistake. The report’s primary recommendation, that India reconsider its pessimism about plurilateral trade deals, deserves a sympathetic hearing.

The Bank’s concerns are easy to understand. While India’s growth over the past decades has appeared impressive, the contribution of trade to that acceleration has been small and is decreasing.

The degree of India’s participation in global value chains has been similarly disappointing. Meanwhile, other developing countries with less restrictive attitudes toward trade — particularly in Southeast Asia — have seen jobs and prosperity expand thanks to their membership in large trade blocs.

What will raise hackles in New Delhi in particular is the Bank’s suggestion that India could do better by joining the Regional Comprehensive Economic Partnership, the giant trade agreement that spans the 10 member states of the Association of Southeast Asian Nations alongside their partners in East Asia and Oceania.

India took part in RCEP negotiations for years before dramatically pulling out at the last minute. The Japanese, in particular, continue to be disappointed: They were hoping India’s presence in RCEP would help balance out China.

At the time, policymakers thought that signing up to a trade deal that centered the People’s Republic was a mistake. It wasn’t just that India was — and is — paranoid about its manufacturing being relatively uncompetitive compared to the mainland’s.

Back in late 2019, there was simultaneously a certain hubris about India’s ability to replace China in global value chains. And leaders didn’t want to give Washington the impression they preferred to cooperate more closely with Beijing.

Today, those assumptions no longer hold. A US-led move toward greater economic integration seems entirely unlikely. The limited ambition of President Joe Biden’s Indo-Pacific Economic Framework has driven that point home.

India has also become far more rational about evolving supply chains. Given the sheer heft of Chinese manufacturing, it would be absurd to maintain policies that essentially ignore the gravitational pull of the mainland.

If you intend to offer an alternative to China in global value chains, you first need to participate in them. Every time a new trading power has supplanted another, it has done so with the compliance of the corporations, investors, and traders of the older manufacturing hub. British investment industrialized the US in the 19th century. Japanese companies were pivotal in China’s rise.

Nor can Indian manufacturers continue to be paralyzed by fear of Chinese competition. For one thing, India already has a free-trade agreement with ASEAN — countries that are, in turn, closely integrated with China.

It’s hard to pinpoint, in today’s value chains, where value is being added. It’s doubly hard for slow-moving bureaucracies such as India’s. In other words, local producers are already pretty exposed to Chinese competition through trade with Southeast Asia, but without any of the benefits of participation in RCEP, from increased investment to export markets.

Politically, India is far more distrustful of China than it was five years ago. But it has also begun to reconsider its approach to investment from the mainland and Hong Kong. Some restrictions have already been lifted. Senior policymakers have admitted that setting up manufacturing ecosystems without investment and knowhow from the Chinese private sector might be impossible.

Nobody in government has yet talked about revisiting RCEP. Given grudging acceptance of the role that corporate China will have to play in India’s development, however, that is the logical next step.

Things might be different if India had the kind of surging private-sector investment or job growth that could sustain high domestic demand. Or if it had shown greater enthusiasm for integration with partners in the West, particularly the European Union.

But neither is the case. For India to keep growing, it will need trade. And it will need to become part of value chains that, for the foreseeable future, will have a large Chinese component. If there’s no escaping this fact, then surely being inside RCEP is better for India than staying out?