Eurasia Review - 30 April 2020
Coronavirus stricken China losing grips on RCEP: should India give second thought to join? – analysis
By Subrata Majumder
After intense parley through several ministerial and secretarial meetings over past seven years, India refused to join RCEP in November 2019. It alleged that several significant issues, which it proposed, were not addressed. Vehement protests were made by farmers, manufacturers and industries against joining the trade block. They argued that “while we open our 80 percent market , in return we don’t get anything”. Experiences show that India had several FTAs before. But, none of them proved boon to it. The central point of dispute was the block not agreeing to safeguard measures , which India proposed in the form of stringent ROO (Rules of Origin) to deflate China’s easy accessibility to Indian market through ASEAN. China has FTA with ASEAN .
With the outbreak of Corona Virus, China lost the aura. Structurally, China run trade block wean away. Eventually, it will lose its grip on South East Asia or ASEAN, which holds a bigger stake in RCEP. China deployed economic splurges, in combination with soft and hard power to rein in power in the region. It used trade muscle to make the region over-dependent on it for export led economic growth. It launched BRI (Belt and Road Initiative) to reconnect the region to reduce geographical proximity and increase control in the region.
China is the biggest trading partner of ASEAN. China is the biggest import destination for the region. The significance of large imports from China lies with ASEAN’s export model economy. It depends largely for imports of inputs from China. Over one-fourth (26 percent in 2018) of its global imports of electronic and electrical items, which make base for its exports, are from China. Eventually, FTA with ASEAN made a strong platform for its over-dependence on China for supply chain.
It launched BRI (Belt and Road Initiative) to reconnect the region and boost the trade links through infrastructure development. “BRI is the most viable platform for advancing China’s neighborhood diplomacy”, according to Dr Jonathan Stromseth of Brooking Institute. Indonesia, Vietnam and Malaysia are the top recipients of Chinese capital through BRI connectivity.
Alongside, China used soft power to increase its influence in the region. It focused to reconnect the overseas Chinese in the region by altering its long –established policies towards overseas Chinese. Under the leadership of Chinese Prez Xi Jinping , China relaxed the visa systems for Chinese diasporas. The region holds biggest number of Chinese diasporas. There are 30 million overseas Chinese in the region, which accounts for 70 percent of overseas Chinese in the world.In terms of hard power, China carried out aggressive move in South China Sea, overreaching Vietnam’s right in the sea.
With reports appearing for Corona Virus engulfing China, cracks are developing in the supply chain in the region. It is said that Vietnam will be most affected due to its over-dependence. Hong and Singapore will be more severe, given the fact they are already experiencing slow pace of growth due to structural weakness before.
The region’s most developed export oriented industries like electronics, automobile, machine and textile sectors will be most affected by the disruption of supply chain. Over 20 percent of global trade in manufacturing intermediates originate from China according to UNTACD. Eventually, it will affect China’s manufacturing capacity and undermine the output elsewhere.
Consequently, Corona Virus generated a new thought in the South East Asia model of development. Heavy dependence in export led growth and overdependence on China centric supply chain escalate risk. Given the uncertainty of the duration of the virus, it is advocated that diversification of supply chain to multiple nations is the only solution, instead of overdependence on one nation. In other words, small nations in ASEAN should diversify their procurement from multiple nations in Asia , who can provide low cost manufacturing. This leverages scope for other nations as substitute to China .India is no exception to this.
Every MNC is now looking for alternatives to reduce dependence on China. There are three ways to do it. First, they should move for sources back to home market. Second, they should move to the markets of its consumers and third, move to third countries. India stands for opportunities for the later two sources.
Given the demographic advantages of big population and low aging people, India has the advantage for a big consuming market. It is said that whatever you produce in India, you can sell. Automobile and mobile phone manufacturing exemplify the hopes. India is the fourth largest producer of passenger car and the largest producer of two-wheelers in the world. Over 86 percent of these vehicles produced in the country is consumed domestically, even though they are high priced. So is the case with mobile phones. India is the second biggest producer of mobile phones. A large part of the production is consumed domestically.
Recently, India was caught in the vortex of hope and despair due to contraction of GDP – from 7.0 percent in July-September 2018 to 4.5 percent in July-September 2019. One of the main reasons was staggered domestic investment. Domestic investors were shy, owing to demonetization fear lingering and slump in demand. Amidst this, surge in foreign investment became some respite. Foreign investment surged from US$30 billion in 2014-15 to US$44.8 Billion in 2018-19 .
RCEP (ASEAN 10 + 6 ) is the main source of FDI (Foreign Direct Investment ) in India. In 2018-19 RCEP accounted for 47 percent of total FDI flow in India. Investment has become the need of the day after the country plunged in downswing in growth. Even though India’s FTA with ASEAN resulted demerits in trade by widening trade deficit, in terms of foreign investment it yielded windfall. In between 2011 and 2018, FDI from ASEAN leaped 80 percent. It accounted for 37 percent of total FDI in 2018, as compared to 12 percent in 2011. This underpins the other side of FTA, albeit trade demerits.
Given China’s influence gradually ebbing as a major supply chain hub in the region and Japan and Japan asking its investors to withdraw from China, new opportunities emerge for India to woo investment from these nations. With India having a big consumer market on the one hand and a large pool of working population embedded with IT skills on the other hand, India is likely to outbid China for an important investment destination. In consideration to this structural changes in RCEP after the Corona Virus outbreak, India can give a second outlook to join the trade block.