Almost 6 months ago, in the month of November 2019, India refused to join Regional Comprehensive Economic Partnership (RCEP), a free trade agreement led by China which includes ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and 6 Asia-Pacific countries (Australia, China, India, Japan, South Korea and New Zealand).
India had its own reasons to dump the RCEP, primarily- protection of domestic agriculture and allied activities from competition of Australian industry and fear of becoming a dumping ground for cheap Chinese products.
But 6 months later, the global order, business, and economy has changed completely and not going for RCEP is proving to be boon for the country. Today, majority of the Western companies with manufacturing units in China are mulling over the idea to shift their production to India, and the country could become the new ‘factory of the world’.
Had India signed RCEP trade agreement, the incentive for the companies to move to India would have been little. The vast Indian market could have been flooded by cheap Chinese goods and therefore the Western companies, which not only look for cheap labour but also a big market where they can sell their products, would not move to India. After joining RCEP, India would have been forced to lower the duty on imports and the Western companies would not be able to pricing of Chinese products.
To simplify it further, let us take example of North American Free Trade Agreement. After NAFTA, thousands of American companies moved their production units to Mexico as it was cheaper to produce there. Similarly, if India and China already had a free trade agreement, moving factories to India would not makes much sense, because the western companies as well as Chinese companies already would have had access to Indian market. But without a free trade agreement, it is beneficial for western companies to move India, as Chinese competition is out of the way with duties imposed by Indian government, and you get duty free access to Indian market only if you move you production unit to India. Therefore, not signing RCEP proved blessing in disguise for the country.
After Coronavirus pandemic, the countries around the world which manufacture in China are looking to shift their production units. After the outbreak of Coronavirus pandemic, China not only refused to share crucial data with the countries around the world, but also threatened countries like Australia and member states of European Union of retaliatory action if they take any steps to hold the Communist government responsible.
US Secretary of State Mike Pompeo said that the country is working with its “friends” to restructure the global supply chain. “We’re working with our friends in Australia, India and Japan, New Zealand, the Republic of Korea, and Vietnam to share information and best practices as we begin to move the global economy forward,” said Pompeo at a press conference on Wednesday.
The US seems to be endorsing India for US companies to shift to in the event of their exodus from China. “India can quickly become a favourable jurisdiction for more of the industrial activities that are happening currently in China,” Thomas Vajda, assistant secretary of state for South Asia in the US Department of State, said in a meeting. He also said, “Government relations between the two countries will be supportive.”
Meanwhile, Prime Minister Modi has signaled that the government is ready to do áll it takes’ to attract the firms exiting China and integrate India into global supply chain. PM discussed the strategy to attract these companies with ministers of top bureaucrats, as per a report by Times of India.
If the Modi government is able to bring the manufacturing activity in India, this would help Indian economy to attain a sustainable double digit growth, and make the country a manufacturing powerhouse just like China is now. And not signing RCEP would prove a big fortune for the Indian government.