Caught Between The Dragon And The Elephant

India’s trade diplomats will need some deft footwork to manage two trade partners—China and the US

Two large beasts cramp our geostrategic mindspace. One, China’s dragon refuses to vacate our imagination. The second one stirring about in the same space is expected to further cramp room for manoeuvrability. The current US administration, much like the Republican Party’s elephant symbol, is steamrollering global multilateral negotiations. Both these heavyweights present India with a difficult balancing act.

The first inkling of India’s expected high-wire act came from Chile last week when 11 members of the floundering Trans-Pacific Partnership (TPP), all founding nations barring the US, met to revive the plurilateral agreement. An added twist was China’s presence at the meeting.

It is expected that China will step into the US’ large shoes. America’s withdrawal from the TPP was seen as a parting kiss of death since its stewardship had kept negotiations alive. Having invested time, resources and political capital—especially on beyond-the-border issues like labour standards, environment rules and intellectual property laws—many developing countries are loath to let all that work go to waste.

These developments point to the likelihood of an alternative Asia-Pacific trade agreement, perhaps without the trademark TPP markers. Importantly, China was not part of the TPP, which was seen as an instrument and extension of the US’ strategic power. While it is still early to predict how it will all shape up, hopes are the new pact will be built on the back of Latin America’s four-country Pacific Alliance and South-East Asia’s Regional Comprehensive Economic Partnership (RCEP).

India is part of the RCEP trade and investment initiative being negotiated between 16 countries—10 countries from the Association of South-East Asian Nations (Singapore, Malaysia, Thailand, Indonesia, Cambodia, Vietnam, Laos, Myanmar, Brunei and the Philippines) and six others with which the regional grouping has a free trade agreement (India, China, Japan, South Korea, Australia and New Zealand). Many of these nations are also TPP members. The RCEP provides India an opportunity to stamp its strategic and economic presence across the Asia-Pacific. It also provides India an opportunity to bring multilateralism back to centre stage.

But here’s the thing. With China assuming leadership of the RCEP and the putative Asia-Pacific alliance, the world will be keenly watching the shape of the new trade and investment agreement, especially who gets to set standards and the nature of standards finalized. The TPP’s insistence on standardized labour, environment and intellectual property right (IPR) regulations (apart from a host of other issues) conflicted with notions of sovereignty.

The question now is: Will China impose similar standards?

While China has publicly endorsed World Trade Organization (WTO)-compatible trade agreements, will it cherrypick rules? India and China share an uneasy geostrategic relationship, especially in trade. India’s three-tiered tariff proposal for the RCEP has already met with disapproval and India’s push for inclusion of trade in services faces multiple headwinds.

In the other corner, the US’ browbeating at the recently concluded G20 meeting in Germany provides a glimpse of forthcoming challenges to the existing world trade order and globalization. During the drafting of the final communiqué, the US bullied all members to drop pro forma references to free trade and protectionism. Not surprisingly, all members complied, though they did grumble in private.

US President Donald Trump’s administration has repeatedly emphasized that it prefers bilateral agreements over multilateral compacts. The 2017 Trade Policy Agenda makes it official: “The overarching purpose of our trade policy…will be to expand trade in a way that is freer and fairer for all Americans…these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations—and by renegotiating and revising trade agreements when our goals are not being met.”

India does not have a free trade agreement with the US and negotiations over a bilateral investment treaty between the two countries is stuck over, among other things, the investor-state dispute system. IPR laws are the other thorn in the relationship: India claims its IPR regime is compliant with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights while the US insists on a WTO-plus framework. This has prompted the US to unilaterally include India in its “Priority Watch List” under Special 301.

The trade agenda outlines the future course of the bilateral: “Although existing Indian trade and regulatory policies have inhibited an even more robust trade and investment relationship, India’s economic growth and development could support significantly more US exports…In 2017, the United States will press India to make meaningful progress…on intellectual property rights, promoting investment in manufacturing, agriculture, and trade in goods and services.”

This, in short, is the dilemma. India’s geostrategic ambitions include RCEP membership but it will have to contend with China’s growing heft and increasing pressures to further reduce tariffs. India’s trade deficit with China is growing every year and shows no signs of reversing. On the other hand, India’s support for multilateralism will have to contend with the US’ insistence on bilateral treaties and a re-examination of all existing trade relations. Ironically, India enjoys a trade surplus with the US—in 2015, it touched $30 billion. India’s trade diplomats will need some deft footwork to manage these two trade partners and contradictions.

The above article was published in Mint newspaper and can also be read here 

Do Trade Targets Work?

India has used two-way trade targets as a proxy for judging the temperature of its key bilateral and plurilateral relationships. But a deeper understanding is needed of the extent to which physical targets can help accomplish qualitative objectives

The government of India’s new Foreign Trade Policy (FTP) for 2015-2020 has set a $900-billion goods and services export target, to be achieved by 2020. Compared with the $465.9 billion achieved during 2013-14, the target is almost double of current levels.

The policy document prefaces the target with a rare pithy statement: “A vision is best achieved through measurable targets.”[1] But the fact is, most of India’s key diplomatic engagements—at bilateral, plurilateral, or even multilateral levels—are defined by targets.

Targets are ubiquitous in India’s economic diplomacy. There are many ways to judge the breadth and depth of a relationship between two countries, including cultural exchanges, defence cooperation, people-to-people interaction, and historical ties. But trade and investment targets lay out vector paths for future growth, and set concrete milestones against which progress can be gauged.

The target-driven approach is now spreading to bilateral ties with even smaller nations; for example, India and Vietnam recently agreed to a trade target of $15 billion, to be met by 2020. [2]

But targets are essentially cut-and-dry, and temporal. There is no definitive research showing whether targets have succeeded in imparting additional meaning to an existing relationship, or whether they have been effective in bringing two disparate nation-states closer. In other words, there’s no conclusive evidence showing that quantifiable bounds improve the qualitative facet of an engagement.

India’s Free Trade Agreement (FTA) with ASEAN is a good example. It has been a source of anxiety within government and key stakeholders. India signed the FTA for goods in 2009, but the one on services and investment—arguably India’s strong point—is yet to come into force. Even in the goods trade, India suffers a chronic trade deficit with ASEAN: it imports more than it exports.

In the face of this, the target for India-ASEAN bilateral trade—$100 billion by 2015—looks unattainable, especially since two-way trade (exports plus imports) between the two regions amounted to only $70.5 billion during April-February 2014-15. [3]

Confronted by this glacial pace of trade growth, India has done the next best thing: it has stretched out both the physical target as well the end-date. The India-ASEAN relationship will now be measured by a new target without having to necessarily address performance vis-a-vis the earlier target. External affairs minister Sushma Swaraj announced the new target at the inaugural session of Delhi Dialogue VII on March 11: “However, we need to make a special effort to achieve our target of enhancing trade to $100 billion by 2015, and our aspiration is to double it to $200 billion by 2022.” [4]

India has recast other targets in other strategic relationships as well. During Prime Minister Narendra Modi first state visit to the U.S. in September 2014, the joint statement he issued with President Barack Obama stated: “Noting that two-way trade has increased five-fold since 2001 to nearly $100 billion, President Obama and Prime Minister Modi committed to facilitate the actions necessary to increase trade another five-fold.” [5] In other words, to take trade to $500 billion, though the statement refrained from mentioning a target year.

In the other strategic relation with neighbour China, there is some clarity of objectives on both investments and trade. A joint statement issued by Modi and President Xi Jinping in September 2014 announced: “The Chinese side would also endeavour to realise an investment of $20 billion in India in the next 5 years in various industrial and infrastructure development projects”. [6] During the same trip, a five-year Trade and Economic Development Plan signed between the two countries has, among other targets, an unquantified over-riding objective: reduce the trade imbalance India suffers in its $65-billion bilateral trade with China. [7]

Even with Africa, the $90-billion target set for 2015 is likely to be missed. [8] It is also quite likely that the target will be bumped up—both the volume as well the year. This might be announced at the Third India-Africa Summit scheduled for October 2015.

When the foreign trade and investment landscape is suffused with a surfeit of targets, the logical questions are: How are targets fixed? What is the strategy for meeting them? No one knows the answers.

For one, there is no clarity on who should set and announce targets—the commerce ministry or the external affairs ministry? While think tanks and academic experts are known to have been engaged by both ministries to finalise targets, the research output is not available to civil society, either for viewing or for providing inputs. Inviting public comments before finalising targets, or even to assess the methodology used, can probably infuse some realism into these exercises.

Second, once the targets are announced, there is no detailed analysis of how these will be met, and no outlining of strategy, at least not in the public domain.

Finally, this year’s Foreign Trade Policy also raises a crucial issue that has bedevilled India’s trade practices: the lack of coordination between different economic agents as well as ministries operating in silo-like structures. But then the policy stops short of mentioning how “Make in India” or “Digital India” or even the policy on smart cities can be integrated with the FTP to deliver higher exports of both goods and services. That remains the biggest challenge for India’s trade regime.

References


[1] Ministry of Commerce and Industry, Government of India; Foreign Trade Policy Statement, <http://dgft.gov.in/exim/2000/FTPstatement2015.pdf>, p.14

[2] Ministry of External Affairs, Government of India, Joint Statement by Indian Prime Minister Narendra Modi and Vietnamese Prime Minister Nguyen Tan Dung,28 October 2014, <http://www.mea.gov.in/Speeches-Statements.htm?dtl/24143/Media+Statements+by+Prime+Minister+of+India+and+Prime+Minister+of+Vietnam+in+New+Delhi+October+28+2014>

[3] Ministry of Commerce and Industry, Government of India, Trade Statistics, <http://commerce.nic.in/ftpa/cntq.asp>

[4] Swaraj, Sushma, Keynote Address at Inaugural Session of Delhi Dialogue VII,Ministry of External Affairs, Government of India, 11 March 2015,

<http://www.mea.gov.in/Speeches-Statements.htm?dtl/24899/Keynote_Address_by_External_Affairs_Minister_at_the_Inaugural_Session_of_Delhi_Dialogue_VII_New_Delhi>

[5] Ministry of External Affairs, Government of India, Joint statement by Indian Prime Minister Narendra Modi & U.S.A. President Barack Obama, 30 September 2014,

<http://www.mea.gov.in/bilateral-documents.htm?dtl/24051/Joint_Statement_during_the_visit_of_Prime_Minister_to_USA>

[6] Ministry of External Affairs, Government of India, Joint Statement between the Republic of India and the People’s Republic of China on Building a Closer Developmental Partnership, 19 September 2014,

<http://www.mea.gov.in/bilateral-documents.htmdtl/24022/Joint_Statement_between_the_Republic_of_India_and_the_Peoples_Republic_of_China_on_Building_a_Closer_Developmental_Partnership>

[7] Ministry of External Affairs, Government of India, List of Documents signed during the State Visit of Chinese President Xi Jinping to India, 18 September 2014, <http://www.mea.gov.in/incoming-visit-detail.htm?24012/List+of+Documents+signed+during+the+State+Visit+of+Chinese+President+Xi+Jinping+to+India>

[8] Singhal, Rajrishi; Indian Banks in Africa: Change Agents; Policy Perspective No 8, Gateway House: Indian Counmcil on Global Relations, 9 January 2015, 

<http://www.gatewayhouse.in/wp-content/uploads/2015/01/Policy-Perspective_Economic-diplomacy-with-Africa.pdf>

Time To Put Substance Before Style

China now views itself as an emerging superpower rather than a ‘developing’ country. India should take this into account

Long after President Xi Jinping has flown back to Beijing, there will remain a host of prickly issues that senior ministers and diplomats on both sides will need to bang heads over. During President Xi’s 48-hour whistle-stop through Ahmedabad and Delhi, the climate-controlled atmospherics, the fastidiously choreographed diplomatic pas de deux on Sabarmati, the thunderous rhetoric and the flurry of MoUs made for good optics. But action is always a poor substitute for achievement.

One of the visible thorns in the blossoming relationship is border uncertainty and both President Xi and Prime Minister Narendra Modi did reiterate a need to settle it. But beyond the omnipresent irritation of a virtual border, it is in India’s interest to resolve numerous pending geo-economic issues with China.

Shifts and moves

Start with World Trade Organisation (WTO) first. India invited universal censure after blocking safe passage of Trade Facilitation Agreement (TFA) at WTO’s General Council meeting in Geneva on July 31, 2014. However, China’s unprincipled floor-crossing on that day was truly shocking, after having supported India’s stand in many multilateral fora (such as G-33, G-20) and in bilateral meetings.

China’s mercurial shift could be understandable if India was found to be acting irrationally. But, on closer analysis, it seems India’s actions were justified. Having agreed at the Bali ministerial to approve TFA, on condition that developing countries not be penalised for food security imperatives till a permanent solution is formalised by 2017, India discovered that all discussions thereafter were focused on only TFA. This was contrary to the post-Bali work programme and gave India (and some other developing countries) grounds to believe that once TFA was out of the way, rich countries didn't care much for the Doha Development Agenda, including food security measures.

But, there are some other valid reasons for India’s principled action. For one, India has a sovereign right to provide food security for its citizens, just as US has the right to buy and stockpile crude oil to provide its citizens with energy security. Two, TFA will cause a spike in infrastructure costs for poor countries; the rich nations were to provide budgetary assistance to help them tide over this unplanned expense, but the amount finalised is too low and the modalities are still vague.

Finally, benefits from TFA are ambiguous, with most gains likely to go to the developed world.

China’s sovereign objectives are somewhat aligned with India on this issue, particularly since it too has to provide food at reasonable prices for large sections of its population. Also, China has been a signatory to all the food security negotiations by G-33, a grouping of developing countries with convergent trade issues.

A change of heart?

While it’s not known if Modi-Xi talks included China’s breach of trust, the joint statement issued by both governments was patently anodyne: “As developing countries, India and China have common interests on several issues of global importance like climate change, Doha Development Round of WTO, energy and food security, reform of the international financial institutions and global governance. This is reflected in close cooperation and coordination between the two sides within the BRICS, G-20 and other fora.”

One reason for China’s change of heart could be India’s lackadaisical communications strategy; also, India’s parleys could have conveyed a message that it’s interested in cherry-picking only food stockpiling from a multitude of other development issues. This might have even influenced some of the other large emerging nations, such as Brazil and South Africa, to isolate India.

But there’s another significant development. There's probably a radical shift in how China views itself: as a world superpower and a trade behemoth, competing with the developed countries. Hence, in keeping with this new-found status, TFA makes more sense rather than hankering for food security. While China is indeed a trade colossus, India needs to keep in mind this change in China’s self-perception when negotiating with President Xi’s men in future.

The border incursion, intriguingly timed to coincide with President Xi’s visit, is a reminder of China’s foreign policy dualism: an extended hand of economic friendship to mask the ugly face of geographic expansionism.

The second issue is climate change and India would do well to keep the new Chinese psyche in mind in future multilateral deliberations.

On the surface, both India and China seem to be on the same page. Apart from a common historical stand, both President Xi and PM Modi have also excused themselves from the UN Climate Summit on September 23.

But that’s where the similarities end. China has already signed a separate climate change agreement with US. While these agreements reduce the climate policy distance between the two superpowers, there are still some sticking points. While China and US agree that that rich countries must provide developing nations with wherewithal to upgrade technology, the divergence is whether the old labels of “developing” or “developed” need to be upgraded.

In essence, the rest of the world’s identity — including India’s — is hostage to progress of talks between two superpowers. The initiative seems to be slipping away from India’s grasp; a climate change strategy is required before the big climate summit in Paris next year. While China’s stand may be driven by thickening smog over its cities, India may have to fashion its own position consistent with its economy and stage of development.

Myriad issues

There are many other unresolved issues on the table — using renminbi as a alternative currency, India’s membership in multilateral institutions (such as Asian Investment Infrastructure Bank) and groupings (Shanghai Cooperation Organisation, for example), discussions on how to take the BRICS Bank ahead, enhanced market access for Indian goods and services, are just some of them.

The lessons for Modi are clear: with China what you see is never what you get. Modi will have to take every opportunity to create an independent policy space for india, even if that requires striking trade and investment deals with Japan, USA, EU, Russia or Australia.

The writer is a journalist and senior fellow with Gateway House

Courtesy: The Hindu BusinessLine, edition dated September 22, 2014 (The original can be read here:goo.gl/Cbm3Ex)