Trade Diffidence or Economic Confidence?-RCEP negotiations

Prof. Panagariya of my alma mater Columbia University has written a guest editorial for the Times of India today. It talks about India exiting the RCEP treaty because of a perceived threat of significantly increased imports from China.

The article argues that economies need not worry about bilateral trade deficits and should worry about the overall trade deficit of the country against all other countries it trades with. The essential argument is that you could run a deficit with one country and run a surplus with one or several other countries and as long as the overall balance of exports and imports is maintained there is no problem.

The article does concede that if the balance is not maintained and there is net overall deficit and it is balanced using borrowings from abroad then there is a threat. The counter argument it gives is that the country can decrease its imports in alignment with a decrease in exports.

Further, it goes on to argue along Ricardo's argument, although not explicitly, that one should export what one is good at and import what is available cheaper from somewhere else.

It continues to argue --implicitly or explicitly--that this will either make the local businesses competing with the imports more efficient or force the economic and human resources employed in these businesses to shift to the exporters where the country has a competitive advantage.

All this is absolutely true in a World where all countries follow free economic policies without internal and external barriers AND these countries also follow a rational democratic politics. (Rational democracy means having voters who will not get swayed by a promise of $1000 per month, or per year, dole from a politician and vote for him or her. Meaning that they understand the future impacts of such doles in the long run from economic, social, cultural and other perspectives.)

Unfortunately we don't live in such a World yet. If we run a trade deficit overall we still need essentials which we need to import. We don't, yet, have the ability to reduce imports in line with reduced exports. Trade pacts legally curb those capabilities further.

We can definitely try to identify a set of sectors or industries where we are (or can have) a comparative advantage and groom those with favorable policies and encourage talent and training in those; provide capital and other resources to those. It is not an easy job to say what the World will look like in a decade and then align the identified sectors to those and build competence in those. But it can be attempted seriously.

So, just like the IT and Software industry came up in the late 1980s to 1990s and saved India from complete disaster on the exports front post-liberalization, more such industries can be nurtured. Of course, that was a lucky break and all the STPI and other policies came in after the industry has established a beachhead due to the confluence of US demand for cheap IT talent, huge "brain drain" from India to US during 1970s to 1990s causing a large network of respected Indian executives in the US corporations who were respected for their talents, availability of huge educated, cheap manpower in Engineering and related disciplines. This exploded during the 1995-1999 period because of the dotcom boom and Y2K. A depreciated INR (Indian Rupee) definitely helped. And yes, it helped other exports to take off in pharmaceutical, gems and jewellery and textiles etc. Again, there was some existing factors providing the comparative advantages to these industries.

However, our oil imports of around $100 Billion annually are inelastic. They cannot be wished away yet. So we have some essential imports which have to be done even when our exports are not happening. We might have to borrow from international markets.

So the remedy is to groom those industries which can be exporters of the future, groom some industries to become more efficient and resilient in the face of imports (mostly from China but others too), and also negotiate hard with RCEP and other countries for lowering barriers to industries which we are already good at; i.e. services which require free movement of professionals and some might require free movement of labour.

The fact that the above is not mentioned in the article reminds me of the "the curious case of the dog that didn't bark" from Arthur Conan Doyle's Sherlock Holmes novel. Prof. Panagariya who has headed the NITI Aayog and is a global economic intellectual could have easily taken the position of an Economic Statesmen, possibly together with another Columbia Prof. of Chinese origin, to bring home the point to the other RCEP countries that they need to concede on free professional services movements under the agreement. Such a nudging can help bring a, demonstrably win-win, deal about much quicker.

Let us hope that well-entrenched professors like him and Prof. Jagdish Bhagwati (and possibly some Chinese and Asian origin professors at Columbia--which is hugely respected in China--put intellectual pressure for a more balanced deal on the remaining RCEP members.