India should revisit FTA with ASEAN; have new economic partnerships with emerging Asian nations

Notwithstanding India not joining the RCEP, it is likely to become the potential gateway for accelerating China’s backdoor entry into India, writes S. Majumder for South Asia Monitor

S. Majumder Sep 17, 2021
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India and ASEAN

India quit RCEP (Regional Comprehensive Economic Partnership) – one of the world’s largest free trade agreements involving 15 Asia-Pacific economies including China – over concerns expressed by the domestic industry about cheap Chinese imports. India has taken several measures to reduce imports from China, but unfortunately, the steps failed. China reemerged as the biggest trading partner of India in 2020-21, after a gap of two years, outsmarting the US. China has continued to dump its goods in India.
 
China and the ten-member Association of Southeast Asian Nations (ASEAN) bloc are the two major stakeholders in RCEP. They are the future wings for global trade. This is because RCEP is expected to become the world’s biggest trade block in the world. It accounts for 27 percent of world merchandise trade and 30 percent of global gross domestic product (GDP).

However, notwithstanding India not joining the RCEP, it is likely to become the potential gateway for accelerating China’s backdoor entry into India. There are two arguments in favor of this premise. First, with full implementation of RCEP, China can use duty-free imports from as many as 15 nations - as against from the ten ASEAN nations presently - owing to the existing China-ASEAN FTA that went into full force on January 1, 2010.

Second, MFN (Most Favored Nation) tariff rates vary from 0.3 percent in Brunei to 13.1 percent in South Korea, with an average of 5.6 percent for all RCEP countries. At the end of the tariff phasing down period, most of this tariff will come down to zero within the RCEP region. ROO (Rules of Origin - the criteria needed to determine the national source of a product) in RCEP is more business-friendly than the China-ASEAN FTA. Previous studies show that there were several attempts to simplify ASEAN ROO. But they are yet to materialize.

ASEAN-China trade imbalance

The uptick in closer ties and overdependence between China and ASEAN in RCEP do not, however, manifest balanced growth in trading power for both. Observers apprehend an imbalance in trade power between the two.

RCEP will pave the way for the Chinese to make deeper entry into the ASEAN, resulting in the bloc set up in 1967 gradually losing trade power and increasing the vulnerability of its member-nations to the Chinese trade trap.

This can be buttressed by studying the outcome of the China-ASEAN FTA. Since 2010, ASEAN has become an important export market for China. Its export to ASEAN has leapfrogged 148 percent.

In contrast, the ASEAN nations’ export to China increased by 80 percent, a little over half of the growth in China’s export to these countries.  In other words, China made a deeper penetration in the ASEAN market, owing to the China-ASEAN FTA.

Eventually, this development impacted India-ASEAN trade. India witnessed a downturn in export and an increase in imports from ASEAN. India’s exports declined by 4.4 percent and imports surged by 29.2 percent between 2012-13 and 2019-20.  The FTA gave more scope to the ASEAN states to export to India, compared to India’s export to them. Export from ASEAN states accounted for 12 percent of India's global import in 2020-21 as compared to 8.7 percent in 2012-13. Consequently, concerns have been raised over  China’s backdoor entry into India.

China’s backdoor entry

One of the indicators for China’s backdoor entry into India is the product dynamism in India’s import basket from ASEAN. Import of electronic and electrical items from ASEAN doubled during 2012 –2021 - post the ASEAN-China FTA. The increase in export by the ASEAN nations to India was 105 percent during the period. But, India failed to reap the benefit in terms of its exports to the region.

The surge in India’s imports of electrical and electronic items from ASEAN follows the corresponding growth in imports by ASEAN nations from China. ASEAN's imports of electrical and electronic items from China spurred by over 92 percent between 2012 and 2020. They accounted for 35 percent of the ASEAN member-states total import from China in 2020, as compared to  30 percent in 2012. This raises apprehension over  Chinese exports sneaking to India through China –ASEAN FTA as against India-ASEAN FTA.

Vietnam,  a  member of ASEAN, is the game-changer for the backdoor entry of China in India. Factors attributing to this eventuality are a surge in imports and dynamic changes in the import basket from Vietnam.

During 2012-13 to 2020-21 under the umbrella of India-ASEAN FTA, India witnessed a three-fold increase in imports of electronic and telecommunication items from Vietnam. Vietnam became the second biggest source of imports of electronic and telecommunication items after China. Correspondingly, during 2010-2020 under the China-ASEAN FTA umbrella, Vietnam’s imports of electronic and telecommunication items from China increased ten times.

Given the trade dynamism between Vietnam and India, as against that between Vietnam and China, there is enough evidence for backdoor Chinese entry into India post the FTA between China and ASEAN. 
 
Chinese trade trap

Given the assumption that RCEP will increase the possibility of the ASEAN bloc succumbing to the Chinese trade trap,  observers have advocated revisit of India-ASEAN FTA and Act East policy. It will give opportunities to India to engage in new economic partnerships with emerging Asian nations separately, depending upon the special characteristics of each member of ASEAN. For example, Vietnam can be an alternative Global Value Chain partner with FTA engagement separately, invoking stricter regulations under ROO, preventing China’s backdoor entry.

Around one-fourth of China’s export is to the RCEP member countries. ASEAN’s vulnerability to the threat of the Chinese trade trap increased with the ASEAN-China FTA. Trade experts and political pundits apprehend that ASEAN will become the dumping ground for China, with India not joining RCEP. 

RCEP will leverage more scope to China to penetrate the ASEAN market. The ASEAN countries won’t be able to penetrate the Chinese market to that extent. ASEAN accounted for 8.1 percent of Chinese imports in 2010, which witnessed a marginal growth to 10.4 percent in 2020. Eventually, ASEAN would sink into a wide trade deficit with China. 

(The writer is a former adviser, Japan External Trade Organization (JETRO), New Delhi. The views expressed are personal. He can be reached at subratamajumder0604@gmail.com)