India, China both see advantages in potential trade deal

Published on
November 21, 2018

A mega trade deal driven between India and China looks to be moving to completion this month.

Negotiations are ongoing both bilaterally between China and India and the members of the Regional Comprehensive Economic Partnership – which include Australia, China, India, Japan, South Korea, New Zealand and the 10 countries belonging to the Association of Southeast Asian Nations (ASEAN). There are still major obstacles to overcome before any trade deal is signed, but an agreement could emerge out of a summit of the 16 nations in Singapore later this month.

China’s centralized decision-making system has allowed it to become a manufacturing powerhouse, while India’s democratic system has in many cases allowed for a stronger protectionist lobby for key local industries. With frenzied negotiations continuing, it remains to be seen how many opt-outs emerge in the final agreement, but India’s shrimp exporters will be hoping a deal will include a reduction on the duty rate faced by Indian shipments into China. Currently, frozen shrimp from India faces a six percent customs duty at Chinese ports, while shrimp from ASEAN countries such as Malaysia, Indonesia, and Vietnam enjoys tariff-free access to the Chinese market. 

With China seeking trading alternatives in the midst of its trade war with the United States, its leaders in Beijing are warming to the option of a free trade deal with the country’s continental neighbor. China has been the main driver of RCEP, which emerged as the most promising regional trade vehicle after U.S. President Donald Trump killed the Trans-Pacific Partnership the day he took office (a revised deal did not include the United States, India, or China).

While China favors RCEP, India prefers a bilateral trade deal, for many reasons. First, India fears a deal that will result in dumping of low-cost products by China’s massive manufacturing base hurting domestic industry. A bilateral deal could give India more leverage in negotiating some protectionist measures for favoured industry segments. 

Second, India already faces stiff competition from other Asian countries for the Chinese market. In particular, the growing economic clout of the ASEAN bloc gives India pause. That growth can clearly be seen in the rise in seafood shipments from ASEAN into China last year – ASEAN nations sold 648,000 metric tons (MT) of seafood to China, worth USD 1.42 billion (EUR 1.24 billion), up 3.69 percent and 13.7 percent, respectively. Vietnam’s role in particular worries India. Shipments of seafood from Vietnam into China rose 20.8 percent in volume to 232,600 MT and jumped 30.1 percent in value to USD 398 million (EUR 347.5 million). And Indonesia’s role as a supplier of shrimp and fish makes it the biggest supplier in ASEAN. At 279,400 MT worth USD 490 million (EUR 427.9 million), Indonesia’s shipments to China were up 3.59 percent and 11.2 percent, respectively, in 2017. 

While the ASEAN data likely contains a degree of Indian-origin seafood product, India ranks much lower down the list of China’s seafood suppliers. India didn’t rank in the top eight suppliers of China’s seafood imports in 2017, despite its relative geographic proximity to China and the scale of its production. That fact becomes even more surprising given the fact that Chile, Peru, and New Zealand – all of which have free trade deals with China – did. 

A third important factor in India’s preference of a bilateral agreement with China is the fact that India runs a huge trade deficit with China, its top trading partner. India is currently the seventh-most important destination for Chinese exports. The deficit in trade between the two rose by 8.5 percent last year to USD 51.7 billion (EUR 45.2 billion), even though Indian exports to China rose 39.1 percent to USD 16.3 billion (EUR 14.2 billion). However, imports from China also rose by 14.5 percent to USD 68.1 billion (EUR 59.5 billion) – primarily composed of machinery, chemicals, and fertilizers. The scale of its trade deficit with China gives India leverage in trade negotiations.

Beijing will no doubt be open to listening to India’s complaints about the trade deficit, considering the U.S. trade deficit with China was the primary reason cited by U.S. President Donald Trump in setting off the trade war soon after he took office. 

But China will still angle hard in favor of the RCEP. If signed off on, the free trade agreement (FTA) would be the world’s largest, encompassing 39 percent of global GDP and covering 10 member-states. Its size would give China a huge boost both economically and on the public relations front, as it continues to fight mixed public opinion on its handling of the U.S-initiated trade war.

India may see advantages in capitulating to China’s preference for RCEP over a bilateral deal. With an average industrial wage about one-third of that paid in China, India is in a favourable position to grow its role as a supplier to China. On the seafood front, India could become a hubfor labor-intensive work like shrimp and fish production and processing. 

Still, the politics between China and India may get in the way of any deal. A long-simmering border dispute between the two sides has seen troops regularly face off on the Doklam Pass in Tibet, and China’s embrace of India’s arch-rival Pakistan has also strained ties.

But with so much to gain, the leaders of each country may be able to look past the many obstacles preventing a deal. And the consequences of that are likely to create a seismic shift in the global seafood trade.

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