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RCEP meet: How India can gain from US-China trade war

The decoupling of the US-Chinese economies opens a huge opportunity for India. The Chinese economy is showing the strains of the US-China Trade War, with all indices pointing to a slowdown.

Smita Purushottam        Last Updated: October 11, 2019  | 09:54 IST
RCEP meet: How India can gain from US-China trade war
As India finalises its negotiating position on the Regional Comprehensive Economic Partnership (RCEP), concern regarding the consequences for Indian Industry and Agriculture is mounting.

As India finalises its negotiating position on the Regional Comprehensive Economic Partnership (RCEP), concern regarding the consequences for Indian Industry and Agriculture is mounting.

India already has Free Trade Agreements (FTAs) with several RCEP  members  - Korea, Japan and the ASEAN. Electoral compulsions will stymie any opening up of the Dairy Sector to Australia and New Zealand. The only country, therefore, to significantly benefit from India joining the RCEP will be China, which has a zero-sum economic strategy.

A Parliamentary Standing Committee report on the Chinese threat to Indian industry, which is worth reading in full, outlines the damage inflicted on India's manufacturing sector by unfair Chinese trade practices, under-bidding and dumping.

Also Read: US, China tariffs could lower global economic output by 0.8% in 2020: IMF

Chinese under-bidding by anything between 30-70% has resulted in Chinese companies winning telecom tenders for sensitive government networks operated by BSNL, Railtel, Powergrid Corporation of India, and Oil & Gas companies - and securing a huge strategic advantage over India.

Predatory Chinese pricing has resulted in an unsustainable trade imbalance in telecom/ICT, with over 50% of $21.5 bn telecom imports coming from China in FY18, and nil exports from Indian companies. This has grave consequences for India's high-tech ICT (including telecom) companies, some of which are 10 years ahead of their MNC rivals - and has endangered national security, since China's Information Warfare is conducted through ICT networks.

Chinese companies moreover enjoy billions of dollars in State R&D subsidies - proscribed under the WTO. Under just one program for Strategic Emerging Industries  - China reportedly committed $1.5 trillion in 2010 for domestic R&D support, with hundreds of billions more committed under "Made in China 2025". Opening our high-tech sectors to heavily state-subsidised competition gives China free rein to undermine our security and destroy our companies.

China has perfected the art of economic aggression, detailed in a White House report of the same name. A US Trade Representative report examines China's predatory economic tactics while a Defence Industrial Base report and the National Defence Authorisation Act list supply chain and other risks from economic engagement with China.

All this precipitated the US-China Trade-cum-Technology War. If the Americans are so worried about the damage caused to their economy, what chance does India stand in competition with China?

The alternative at hand

The decoupling of the US-Chinese economies opens a huge opportunity for India. The Chinese economy is showing the strains of the US-China Trade War, with all indices pointing to a slowdown. China is relocating production to RCEP nations and camouflaging exports including to India via RCEP countries and Hong Kong.

We need to pre-empt this by taking advantage of the Trade War ourselves. It makes no geopolitical or economic sense to throw a life-line to China while it is under so much pressure from the United States, pressure that is unlikely to relent as there is a strong bipartisan consensus in the United States on containing China's destructive economic behaviour.

Also Read: India Economic Summit: Anti-globalisation, US-China trade war, tech disruption dominate discussions

How India can gain from the Trade War

India should seize this opportunity to speed up the relocation of production and trade away from China. UBS reports that 37% of 200 manufacturing firms in China interviewed have moved some production out of China and 33% plan to move out in the coming months.

Regarding trade, China is itself an intermediary in global supply chains. A US report confirms that China's global trade surplus in the high-tech electrical and optical equipment industry shrinks to only $1 billion on a value-added basis, as the bulk of this value accretes to inputs from the United States, the EU, South Korea and Taiwan.

With some effort, India can insert itself into these supply chains. A Credit Suisse report cited in the Indian media estimates a $350-550 billion dollars' opportunity in diversion of China's exports to India. The potential trade and investment stimulus to the Indian economy would be enormous.

A note of caution is necessary. People have argued that the RCEP will force India to undertake much needed structural reforms. However, earlier FTAs which presented similar challenges did not lead to restructuring, with India's trade deficits with FTA partners doubling instead over 8 years to $104 bn in FY2018.

Also Read: US, China grant trade concessions as fresh talks loom

So, there is an urgent need for thorough-going reform before we can benefit from existing FTAs, let alone one with the behemoth Chinese economy.

Governance reforms, greater indigenous procurement, real indigenisation and higher R&D investment are needed to generate higher domestic value, employment and growth. If the next 3 years can be utilised to make India future-ready, India can join the RCEP and any other FTA  on a stronger foundation.

{The author is founder and chairperson, SITARA (Science, Indigenous Technology & Advanced Research Accelerator)}

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