India's Chinese dilemma - How India can Leverage China’s concerns on Huawei, FDI and BRI to Negotiate a Better Deal on RCEP

With India being seen as the major obstacle, there is growing pressure on New Delhi to let negotiations on Regional Comprehensive Economic Partnership - a 16-member free trade pact comprising ASEAN, China, Japan, Australia and New Zealand - conclude at the earliest. 

On the other hand, struggling to compete with Chinese merchandise, Indian industry is strongly opposed to freer trade with China. To maker matters worse, New Delhi is clueless about how to deal with its large trade deficit with the middle kingdom. Thus, in desperation, the government has been raising import barriers and increasingly relying on safeguards and anti-dumping investigations to rein in import of cheaper Chinese merchandise and support indigenous manufacturers. China’s reluctance to genuinely open up its market for Indian exports doesn’t help either.

However, New Delhi must engage with Beijing to get a mutually beneficial trade deal at a time China would be more accommodative of India’s market access concerns given its defensiveness on Huawei, FDI and BRI that Modi government can leverage to its advantage.

India’s import from China declined by 8% from $76.3 billion in FY2017-18 to $70.3 billion in FY 2018-19. However, its import from Hong Kong increased by a whopping 68.4% from $10.6 billion to $17.9 billion in this period. As a result, India’s trade deficit with China and Hong Kong taken together remained the same: $59 billion in FY 2017-18 versus $58.5 billion in FY2018-19. With increasing focus on electrical vehicles and solar energy, the prospects for cutting India’s trade deficit with China remain bleak as India will be importing more lithium batteries and solar panels to push the use of cleaner energy. Thus, it’s not difficult to understand why India has been dragging its feet on the free trade pact. 

However, quitting the talks shouldn’t be an option. India needs to engage with China (and other RCEP partners) to protect its commercial interests. Timing for that can’t be more opportune. Trump’s administration has been warning its adversaries and allies alike, not to use Huawei’s fifth generation (5G) telecom gears. However, Beijing wants New Delhi to ignore US pressure and allow Huawei gears in its 5G roll out. Chinese investments are increasingly being blocked out by the EU and US who feel threatened by China’s growing technological might and its alleged manipulation of global trade and investment rules if violation of IPRs were not enough. Besides, Mr Xi’s pet project, belt and road initiative (BRI) is facing headwinds from countries that have borrowed Chinese money to finance their extravagant infrastructure projects. Thus, going forward, China can’t entirely depend upon BRI and its own market is slowing down leading to lower return on investment. Thus, it would be interested in deploying its surplus capital in India, still one of the fastest growing large economies. Getting India to somehow join BRI would be a big diplomatic coup for Beijing. For India, surplus Chinese capital will help in bridging its saving-investment gap at a time its domestic saving is declining while populist (unproductive) spending is on the rise.

RCEP - accounting for 30% of global GDP and merchandise trade, and over one-fourth of cross-border investment (FDI) flows - makes sense for India as trade and investment is turning increasingly regional. Supply chains are now sourcing more locally and regionally than before. Rising wages and increasing American and European boycott of Chinese investment especially in their tech industry will induce China to increasingly look for regional opportunities. India, given its stable government, large market size and cheaper labour can be an attractive investment destination for Chinese outward FDI. 

Moreover, India can’t really ignore the potential benefit of a deeper engagement with China with over $2.13 trillion of annual imports especially when the US is turning protectionist, EU is struggling to deal with Brexit mess and middle east is troubled by its over-reliance on oil and political turmoil. The removal of India from the US GSP beneficiary list and tightening of immigration rules will further obstacle India’s exports. Thus, India got little choice but to look for alternative markets such as China that it could tap if it plays ball on RCEP. China also remains the most price-competitive supplier of key industrial inputs and equipment including APIs, electronics and telecom gears for which India doesn’t have adequate domestic capacity or alternative suppliers who can match China in price or scale. 

To make up for its large trade deficit, India must welcome Chinese FDI in upgrade of its infrastructure i.e. roads, rail networks and ports without officially joining BRI that it is rightly opposed to. Increased Chinese investment would increase Beijing’s stake in India's well-being, and discourage it from encouraging Pakistani’s adventurism.

Over 100 million Chinese outbound tourists spent US$ 258 billion in 2017. Given its diverse geography and rich heritage, India could realistically aim at a 10% share of this. That will help cut India’s trade deficit with China by 44% =(25.8/58.5)*100. India can reasonably aim for another US$15-20 billion in Chinese FDI. Together, these two will fill 70% of India-China trade gap. 

To safeguards indigenous business from influx of Chinese imports, India needs to effectively address the internal impediments to manufacturing such as basic infrastructure, quality of regulations and red tape that have kept its manufacturing sector uncompetitive. For protecting its defensive trade interests, India should insist on a longer timeframe for duty reduction commitments. Besides, it can also keep upto 10-15% of its vulnerable products under negative list. However, rejecting RCEP in toto doesn’t make sense.

To conclude, given RCEP market size, it can be a vehicle of doubling India’s global export share from below 2% to 4% - needed to make India a $5 trillion economy by 2022. That calls for a pragmatic approach on RCEP and other issues of Chinese interests such as Huawei and possibly BRI on part of New Delhi.

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A version of this op-ed piece was first published by Nikkei Asian Review from the Nikkei-Financial Times Group here