Solving RCEP differences and trade paves road for new China-India relations

By Amitendu Palit Source:Global Times Published: 2019/10/17 21:08:40

Illustration: Luo Xuan/GT

The "Chennai Connect" continues the spirit of Wuhan in taking forward exclusive bilateral discussions between Chinese and Indian leaders. The latest meeting appears to have signaled a new direction in trade and economic relations between the two countries. If it is indeed so, then the meeting might also mark the beginning of a new phase in Sino-Indian relations.

Trade has become a major point of difference between China and India over the years. India has been particularly unhappy about the large trade deficit it has with China. In fiscal year 2018-19, India's trade deficit with China was $53.6 billion. This was 29 percent of India's total trade deficit of $184 billion. The share, while reflecting a decline from 39 percent in the previous year, was still substantial. The trade deficit with China has been a serious concern for India. India has been demanding greater market access from China for many of its exports, which, once facilitated, are likely to decrease the trade deficit. 

China's commitment to work closely with India on reducing the trade deficit was one of the most important outcomes of the meeting. Key Indian exports, like generic drugs, already stand to benefit from the new drug law passed by China a few weeks ago. The new law enables generic drugs, tested and approved for sale in other major countries such as the US, to be sold in China also. Previously, these drugs had to apply for registration and obtain clearances separately before being sold in the Chinese domestic market. Apart from generic drugs, India is also looking at expanding other exports to China. These include agricultural exports like rice, sugar and seafood. India might also become a major source of organic food imports by China. The possibilities fit well with China's increasing structural shift toward a more consumption-oriented and import-driven economic system. 

The other prominent trade issue that featured in the informal summit was the Regional Comprehensive Economic Partnership (RCEP). India is encountering significant domestic resistance in joining the RCEP. This resistance is largely due to fears of lower tariffs leading to a sharp increase in the volume of Chinese imports, further aggravating the trade imbalance. Strategically, India is aware of the importance of joining the RCEP in terms of the benefits it would bring through trade, investments and regional integration, but it needs to address domestic concerns. Therefore, the Chinese assurances about the bilateral trade deficit and India's concerns over having an RCEP deal balanced on trade in goods, services and investment, are significant to India. For China, having an RCEP deal without India is certainly not the best option either. 

Measured in purchasing power parity, China and India are the two largest economies in the RCEP. If India drops out of the RCEP, it would sharply reduce the market size of the free trade area (FTA) and diminish its long-term economic prospects. 

The conclusion of the RCEP, which would produce the world's largest FTA including nearly half of the world's population and more than one-third of global GDP, depends heavily on the understanding reached by China and India on trade. 

Several regional opinions view China-India differences on trade to be reflective of the differences they have regarding other issues. These largely cynical views also hold that the RCEP will not be able to reach a consensus with both China and India remaining in it. Most of these views stand to be corrected by the urgency displayed by both heads of states in moving forward with the RCEP.  

It is also notable that the bilateral mechanism for correcting the trade imbalance has been established at a time when both countries are revisiting their trade engagements in a comprehensive fashion. China is looking to work out a broader trade deal with the US. So is India. There are also major developments taking place in the world of trade, particularly in terms of the trade deals that the US is engaged in, including one with Japan. 

Both China and India, on the other hand, are trying to keep both regional and bilateral options open, with a greater preference for the latter, as evidenced by the RCEP. In this process, both countries would encounter a new set of challenges going forward, given the pushback encountered by WTO-led multilateralism.

The decision to work on correcting the bilateral trade imbalance doesn't mean that China and India have overcome all their differences on trade. What they have been able to achieve is a willingness to address a subject that has been an irritant for several years. Much will depend on how swiftly the mechanism is able to deliver. If it drags on delivery, any effort will be rendered meaningless. 

The author is senior research fellow and research lead at the Institute of South Asian Studies in the National University of Singapore.


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