India Says No to Trade Bloc. Will It Ever Say Yes to Tough Reforms?

It shouldn’t really surprise that in the end, after seven long years of deliberation, India decided against joining the Regional Comprehensive Economic Partnership (RCEP).

The Narendra Modi government, despite a platform of economic growth that brought it to power in 2014, has revealed itself over the years to be skeptical about trade openness. A series of tariff increases, rumblings that current trade agreements have not benefited India, and concerns about the mounting trade deficit with China have all suggested that New Delhi would sign onto RCEP only reluctantly. And ultimately, the answer was no—at least for now.

The Modi government apparently felt that it could not get enough of a reprieve on tariffs, nor enough of an opening for its services professionals, to join RCEP. This is precisely what India’s long-standing trade position has been: reluctance to reduce its own tariffs, while seeking greater services market access from other countries. I wrote about this negotiating posture in my book, citing a 2016 speech by former Minister of Commerce and Industry Nirmala Sitharaman (now finance minister) as the prime example:

Commerce Minister Nirmala Sitharaman unwittingly offered a good example. Sitharaman said that blame for delays in completing trade pacts with the EU, Australia, and the Regional Comprehensive Economic Partnership grouping should not fall on India, and other countries’ attempts to cast India as “obstructionist” was like trash-talk in sports. To the contrary, she said, India’s negotiating partners had rejected its “ambitious” proposals to ease restrictions on movement of persons. She added, apparently without irony, that trading partners sought for India to reduce tariffs on goods like wheat and autos—but that “India will not yield” to pressure. Indian officials will need to strategize for an economic world in which their concerns for market access abroad align with what they permit at home. As the saying goes, you can’t have it both ways.

It is certainly true that China has become a trade powerhouse, and India’s concerns about its trade deficit with China and a desire to prevent further “flooding” of the Indian market with Chinese goods resemble those of the Trump administration toward trade with China. But it is hard to see where India is headed: the prime minister wants to increase manufacturing in India, yet by staying out of a regional trade pact, India runs the risk of missing out on trade with parties now inside the RCEP tent. In an era in which manufacturing requires the ability to become more—not less—integrated into global supply chains, this decision appears for the moment to make it harder to boost manufacturing in India.

But more to the point, the central issue for the Indian government isn’t in the wording of a trade deal, but in the competitiveness of the Indian economy. Will Indian political leaders use this time outside the RCEP to take the tough decisions needed to make the Indian economy more globally competitive—and therefore an economy that does not need protection from its own region? Asia has become, according to the World Economic Forum (WEF)’s Global Competitiveness Report, the “most competitive [region] in the world.” Singapore tops the WEF list, and all of the RCEP countries except Laos and Cambodia beat India, at number sixty-eight (Myanmar does not appear).

It’s understandable that with recent news of slowing growth and rising unemployment, the Modi government was unwilling to take steps that could result in further short-term economic pain and political backlash. Farmers are protesting, the anti-trade right-wingers never wanted trade openness anyway, and the Congress party has been making anti-RCEP noises.

But for the current and future prosperity of the Indian economy, someone will have to explain why further reforms will be needed for India to become a more globally competitive economy. So far, it doesn’t look like anyone’s ready to stand up to make this case.