The convention of projecting the economic rise of the East over the West comes with its own ups and downs. The Regional Comprehensive Economic Partnership or RCEP is trying to set up a free (not completely, but not important here) trade area between economies with different levels of openness. Consisting of India, China, Japan, South Korea, Australia, New Zealand, and the 10 ASEAN countries, RCEP (if signed) is set to be a major trading bloc in the world.
The ASEAN bloc, a major part of RCEP, has itself not been completely integrated despite two decades into its existence. The reasons are numerous and quite technical but I am going to pose a twisted version to the readers: why are they even together? Clearly, it is two things: trade and finance. After the 1990’s, they have understood that they all face the same problem, namely, market sentiments of western countries―the wiseguys with the greenback. The idea of presenting a united front and avoiding a skewed economy which pulls down the entire region is at the heart of the ASEAN.
In RCEP, however, different countries are at different places on the development curve, and economists can only ponder what they will prioritize upon reckoning with trouble. This can be extended to a related concern: which country is going to be the engine to which the economies chain themselves in RCEP? The core problem lies in the fact that RCEP is mismatch between developing economies and developed economies. To put it in a light manner, countries like India are the bride behind the veil and economies like Singapore play the groom. The bride is expected to keep the veil on for as long as possible and the groom is expected to act against that. And it is this skewered relationship which creates the confusion. Drawing parallels, the bride’s act of “keeping the veil” symbolises the act of ‘protectionism’, while the groom’s act of trying to remove it symbolises greater ‘openness’.
A topic where China has the smirk is the power of its political economy. Even though US tariffs have blistered China and the wound is still fresh. As is suspected, China is going into RCEP to expand its influence on the world economy. With the volatility of the Indian rupee (INR), oil prices and other assorted delicacies for a cancerous Current Account Deficit (CAD), Indians are sleeping through the negotiations with one eye open, pondering over the numbers but more importantly, over the political issues which have nothing but negative rents for the current Indian government. India is also in the cross-hairs due to the services-led structure of its economy. As there is no backstopping authority regarding RCEP, running huge trade deficits is not an option.
The economics is simple here. It is an election year in India and the fiscal taps are going to open; and countries are sitting with their eyes fixed on this. A market as large as India, with an increased demand due to populist government spending, will be exactly what the ‘hawks’ in a free trade agreement would desire. In simple terms, excessive demand in India means more exports for other countries in RCEP. The cost? India’s CAD. The moment India nudges on the services sector, labour arbitrage (body shopping) will open itself up. Pharmaceuticals too, are a big thorn in some countries’ beds thanks to India, which is referred to as the “pharmacy of the developing world” due to the cheap generic medicines it can provide. While exporters might see India (with its young population) as a potential market to tap, India’s services and pharma industry themselves threaten to destroy local competition in many RCEP countries. Add on to this the fact that India has not been a part of any major free trade agreement like this before, and you can see why India can be a problem for both the bloc and itself. India is both threatened (by an explosion of imports from RCEP) and a threat (thanks to its services and pharmaceuticals).
Lastly, political stability and a quest for a quasi-hyper globalised trade acting along with inward-looking policy making, cannot go hand-in-hand. This is a serious fault line etching itself into existence. All countries want to cash the dividends but not face rents of such an action. There are various tools, from basic common sense to game theoretic models to prove that, with the potential problems/costs all countries face, the RCEP might lead to policies which are de facto tariffs.
One may ask why am I being so pessimistic about RCEP? There are two reasons – firstly, I can see the chinks in the contract; and secondly, the winds in global trade have become strong. The world does need a major bloc (in terms of GDP) from the oriental side to put certain perspectives on the global macroeconomic spotlight, ranging from the composition of major international institutions to the skewness sewed into global policy actions. RCEP could be a forum for coordinated action and a backstop to the forceful push of adoption to the western macroeconomic framework. It can also provide an opportunity to end the age of capital imperialism. There are numerous reasons why RCEP should be an opportunity pursued but it doesn’t really look like it could be. To that end, I hope the friends see the milk and cookies after the fight on the ground.
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