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RCEP: Chinese Quicksand in South East Asia

 

The much-talked about Regional Comprehensive Economic Partnership (RCEP), a multilateral trade agreement between the 10-member ASEAN bloc and its six FTA partners has been finalised, albeit without inclusion of India. Trade agreements are designed economic policy based rules between two countries, mindful of their respective economic capabilities and preferences. Three aspects of rule of law, business integrity and the common good are accepted by all countries. Trade grows stronger when partner nations benefit together. Is RCEP another way of swamping cheap goods manufactured in “sweat shops”, which has been the Chinese model of generating revenue. Or is it the second round of shackles entwined with bleak prospects of the slow moving OBOR initiative of China. The Chinese hope that RCEP will ensure Debt-Trap diplomacy gets another leverage, in strategic terms.

TPP VS RCEP

Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement that is often characterised as a China-led response to the Trans-Pacific Partnership (TPP) put forward by the US since a decade. The pact is currently being negotiated among the 10 ASEAN member states (BruneiCambodiaIndonesiaLaosMalaysiaMyanmar, the PhilippinesSingaporeThailand, and Vietnam) as well as the six FTA partners ( Australia, China, India, Japan, New Zealand and South Korea).

These two deals have been shaped by the countries that led negotiations: the US and China, respectively. While  TPP was a more ambitious plan, including market access for goods and services as well as regulations on labour, the environment, intellectual property and state-owned companies, RCEP on the other hand, lacks liberalization of state owned companies, non-transparent procurement processes and safeguards for the developing participant nations. Hence disparities between member countries also threatens to exacerbate global. It is another ploy of having skewed trade dynamics with one nation forced to be a dumping ground of Chinese goods, suffocating the manufacturing-industrial base.

Asia-Pacific Strategy of China

Chinese short term concerns are economic, however are Geo-Strategic dominance in long term, based on debt-trap diplomacy and now with RCEP driven economic dependency and economic isolation. Till now Chinese strategy has been two pronged however brazen. After aggressively pursuing the South –China Sea war(Years 2008-2018) against US-Japan-South Korea combine, at cost of South East Asian countries, China simultaneously lured corrupt politicians of  susceptible countries to partake in the OBOR initiative.

Reality of OBOR is more complex to understand. Chinese interests rose for expanding infrastructure programmes through OBOR was the long-term fallout from the 2007–2008 global financial crises. China rode out the crisis only through a US$586 billion stimulus package, mostly involving local government borrowing to finance infrastructure projects. By the early 2010s, there were no takers for the surplus infrastructure created. The stimulus was spent and many local provincial governments were virtually bankrupt. Overcapacity exceeded 30% in the iron, steel, glass, cement, aluminium and power generation industries. Many States owned Enterprises (SOEs) faced a major profitability crisis, with returns on domestic infrastructure turning very negative. Chinese banks faced dire over-accumulation crisis, with US$3 trillion in foreign exchange reserves and falling domestic lending prospects.

For tiding over this crisis, OBOR represented an opportunity to internationalise their domestic surplus capacity and in effect their unpaid rogue loans. Unsurprisingly, these politico-economic factors of strictly Chinese domestic concerns, in name of OBOR lobbied furiously to influence South East Asia & Eurasia into a rosy falsified account of economic boom, simply based on “Cheap Chinese goods”, in order to grab spoils from other countries. This was achieved using the similar obtrusive one sided agreements of OBOR infrastructure schemes, which were not just and definitely not conforming to international trade standards. Corrupting the susceptible local politicians these infrastructure assets are already a liability for the native countries.

 

China knows that debt is free and that Western criticisms of excessive infrastructure investment can be circumvented using shady deals with susceptible corrupt politicians in these countries. So there is never any downside to borrowing to build more infrastructures. China’s infrastructure-building complex fiasco, which faced diminishing returns domestically, is now being paid by rest of the whole world. OBOR projects gave breathing space to dwindling Chinese economy, at cost of South East Asian countries, by “borrowing to survive” strategy of Chinese banks through the China’s Asian Infrastructure Investment Bank (AIIB). This strategy turned to “Loan to survive” at cost of all others.

Bigger Picture

While countries like Japan, New Zealand and Australia shall accrue some benefits being flourishing economies, the developing countries will always be in trade deficit. Fast forward to 15 years hence, with Infrastructure in hands of Chinese controlled Asian Development Bank (ADB)/AIIB and forays to control subsequently the Info space/AI/Data, all driven by Chinese technology, puts the country in Chinese hands. While this along with RECP induced trade deficits and OBOR infrastructure liabilities also weighing them down, these countries will have no choice but to submit to Chinese “Cooperative Security” Paradigm. This shall include physical occupation of strategic locations by PLA/PLAAF/PLAN, much intricate to Chinese oriented NATO like arrangement. This shall ensure exclusive US like arms sale industry of China and Digital Sale industry (AI/Data industry) to be exclusively Chinese dominated. RCEP induced trade deficit shall put to sleep the country’s own manufacturing base, and the country shall be dependent on Chinese goods and industries for all endeavours. This systematic economic isolation of these Asian countries shall in effect complete the Strategic colonization of Asia to accrue economic manipulation by China.

India’s Dilemma

Any Free Trade Agreement (FTA) is beneficial only for a developed trade partner. Which is why India’s FTAs with South Asian countries has been beneficial for us? Given this background, one would have expected that India has to move very cautiously before setting foot in an RCEP trap. India already has independent FTAs with ASEAN, Japan and South Korea, and is actively pursuing similar agreements with Australia and New Zealand.

Even without a FTA, Chinese goods swamp Indian markets. It’s not clear yet how China’s tariff war with the US will play out. But Beijing desperately needs to have preferential access to Indian markets to keep China’s economic engine purring. This is a major driving force behind RCEP.

India has a trade deficit with 11of the 16 countries in the proposed FTA, with China at about $50 billion being the highest. It is, from all accounts, making no headway in the one area we are strong in: services. This calls into the lag that India’s manufacturing sector has been since last two decades. Prime Minister Modi’s Make in India is the face of getting the manufacturing sector on its feet. That shall take a big blow if India allows RCEP as exports will happen once the domestic manufacturing sector is strong, never the other way around. It is evident why would anybody want to manufacture in India when we can import the same product under RCEP at reduced or zero rates of duties? Set-top boxes, earlier manufactured in India, are now almost entirely imported under FTA. Apart from the obvious loss of revenue across goods and sectors, it also results in loss of manufacturing and jobs in India. So its imprudent and unviable option for India to get cooked in the Chinese Pan.

 

Viewpoint

Should India join the bandwagon like Australia, Japan, New Zealand and South Korea. RCEP is less ambitious than TPP, aiming mostly to lower tariffs between member nations and taking steps to open up trade in services. But it doesn’t include any of the stringent labour or environmental standards from the original TPP or the safeguard provisions for ethical trade practices. The shallower nature of the trade agreement, very skewed in favour of cheap-Chinese goods based Chinese economy, even across such a huge swath of the continent, also means its expected benefits for any country are marginal. However in ways, it is the watered-down TPP but susceptible to abuse than the original. Economically developed RCEP members, such as Australia and New Zealand, were initially less than enthusiastic about the modest provisions.  But Trump’s use of tariffs and his trade war with China have set confusion through the global economy and raised questions about the very subsistence of the global trading order. With shelving of TPP, they’ve become willing to settle for less just to help prop up that exposed economic existing shape. Additionally the developed economies shall always extract the same benefits of TPP from RCEP, while successfully negating the Chinese draconian economic practices. Same shall not be true for balance of the emerging and developing economies of 10 ASEAN nations.

For decades, India has been leery of opening its industrial and agricultural sectors to too much competition, and that’s just what joining RCEP would do. Fears of a flood of cheap Chinese goods are especially true, since India’s bilateral trade deficit with China is roughly half of its entire deficit with all RCEP members. India has also not tangibly benefitted from the handful of free trade pacts it has signed in the past, ruling out enthusiasm for joining a megadeal. Sectors including steel, aluminium, textiles, dairy, and other agriculture have all been skeptic that joining RCEP that could put millions of Indians out of work and global FTA sponsored by China till the time Indian manufacturing sector ascends up the Global Value Chain (GVC) ladder. Seven out of 15 RCEP countries are already part of the other mega regional FTAs, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPATPP), and could export duty-free RCEP non-party goods to India. India should build up on this independently with them while wait and watch the developments at RCEP. With evaporation of euphoria of RCEP, the manner in which OBOR is fizzling away, India along with Japan, South Korea and Australia, with its Indo-Pacific strategy in the fore, shall be in a better position to commandeer the Geo-Strategic chaos unfolding in South East Asia towards consistency.

08 Nov 19/Friday                                                           Written by: Fayaz

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