Backdoor entry

The end goal behind India’s abandonment of RCEP was to prevent Chinese predation. Yet paranoia hangs over the ramifications of RCEP and the China-ASEAN FTA. India has taken several steps to reduce imports from China. Unfortunately, these failed. China reappeared as India’s biggest trading partner in 2020-2021 – after a two-year gap – overtaking the United States. The Chinese juggernaut continues with the dumping of goods in Indian markets.

China and ASEAN are the two main players in RCEP. These are the future wings of world trade. Indeed, RCEP would be the largest trading bloc in the world. It accounts for 27 percent of global merchandise trade and 30 percent of global GDP.

RCEP is likely to be the potential gateway for accelerating China’s backdoor entry despite India exiting. There are two arguments in its favor. First, with the full implementation of RCEP, China can use the duty-free imports of 15 countries, against 10 ASEAN countries, due to the China-ASEAN FTA. Second, most-favored-nation (MFN) tariff rates range from 0.3 percent in Brunei to 13.1 percent in South Korea, with an average of 5.6 percent for all RCEP countries. At the end of the degressive tariff period, most of these tariffs will be reduced to zero in the RCEP region. RCEP’s ROOs (rules of origin) are more business-friendly than the China-ASEAN FTA. Previous studies show that there have been several attempts to simplify ASEAN’s ROOs. But they haven’t materialized yet.

An increase in closer ties and over-reliance between China and ASEAN in the RCEP, however, does not translate into balanced growth in trading power for the two. Observers fear an imbalance in commercial power between the two. RCEP will pave the way for China’s deeper entry into ASEAN, leading to a gradual loss of ASEAN’s trade power and an escalation of its vulnerability to the Chinese trade trap. This can be illustrated by the outcome of the China-ASEAN FTA. Both entered the FTA in 2010. Since then, ASEAN has become an important export market for China. Its exports to ASEAN jumped 148 percent. Conversely, ASEAN’s exports to China grew by 80%, nearly half of the growth in Chinese exports. In other words, through the China-ASEAN FTA, China has made a deeper penetration into the ASEAN market.

Ultimately, this had repercussions on India-ASEAN trade. India has experienced a decline in exports and an increase in imports from ASEAN. India’s exports fell 4.4% and imports jumped 29.2% between 2012-13 and 2019-20. The FTA gave ASEAN more opportunities to export to India than India could export to ASEAN. ASEAN exports accounted for 12% of India’s global imports in 2020-2021, up from 8.7% in 2012-13. Therefore, it raises questions about China’s back door entry into India.

One of the indicators of China’s back entry into India is the dynamism of products in India’s import basket from ASEAN. The import of electronic and electrical items has doubled from ASEAN in the period 2012-2021 – after the ASEAN-China FTA. It rose more than 105 percent against ASEAN during the period. But India has failed to reap the benefits in reverse.

The sharp increase in imports of electrical and electronic items from ASEAN follows the corresponding growth in ASEAN imports from China. ASEAN’s imports of electrical and electronic items from China increased by more than 92 percent from 2012 to 2020. They accounted for 35 percent of ASEAN’s total imports from China in 2020, up from 30 percent. percent in 2012. Exports flow to India via the China-ASEAN FTA vis-à-vis the India-ASEAN FTA.

ASEAN member Vietnam is a game-changer for China’s back door entry into India. The factors behind this possibility are a surge in imports and dynamic changes in the basket of imports from Vietnam. From 2012-2013 to 2020-21, under the aegis of the India-ASEAN FTA, India experienced a threefold increase in imports of electronic and telecommunications items from Vietnam. Vietnam has become the second largest source of imports of electronics and telecommunications after China. At the same time, between 2010 and 2020, under the China-ASEAN FTA, Vietnamese imports of electronic and telecommunications items from China have increased tenfold. Given these trade dynamics between Vietnam and India vis-à-vis Vietnam and China, he decodes enough evidence of China’s stealth entry into India after the FTAs.

Given the assumption that RCEP will increase the likelihood that ASEAN will succumb to the Chinese trade trap, observers have advocated reviewing the India-ASEAN FTA and Act East policy. This will give India the opportunity to separately engage in new economic partnerships with emerging Asian countries, depending on the particular characteristics of each ASEAN member. For example, Vietnam may be an alternative GVC partner with a separate FTA commitment, citing stricter regulations under rules of origin, preventing back entry from China.

The author is a former adviser to the Japan Foreign Trade Organization (JETRO), New Delhi. Opinions expressed are personal

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