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Can Asia’s next trade pact make a difference to global trade?

The proposed Regional Comprehensive Economic Partnership (RCEP) would create the world’s largest free trade zone.
03 November 2019 •

Seven years and 27 rounds of meetings later, negotiations for Asia’s next trade pact are heading for the final stretch, according to some RCEP leaders.

They claim members of the proposed free trade agreement between the Association of Southeast Asian Nations (ASEAN) and six other nations — Australia, China, India, Japan, New Zealand, and South Korea — will finalize and strike a deal by the end of 2019.

But observers have cast doubts on this. After all, it is not the first time that officials from member countries have insisted on final scenarios for the trade pact.

Even so, the potential of the proposed agreement makes it difficult to ignore. If formed, RCEP will boost market access to products and capital, and create the world’s largest regional trading bloc that will account for more than 29.1 percent of global trade.

Its potential to increase global real incomes will be massive — an estimated US$286 billion (€259 billion) a year — when the accord moves into full swing in 2030.

Can the bloc influence global trade?

The RCEP will be a powerful boost to the global trading system, according to economics professors Peter Petri and Michael Plummer. Once created, the bloc is projected to increase global trade by 1.9 percent.

The proposed RCEP would create the world’s largest regional trading bloc.
The proposed RCEP would create the world’s largest regional trading bloc.

“Trade diversion is estimated to be small,” said Petri and Plummer. “Some non-members may in fact benefit due to the multilateral nature of the liberalization that RCEP requires and spillovers from members’ increased productivity.”

But RCEP will not provide a quick fix for the impact of the U.S.–China dispute on trade, as many hope, said Maxfield Brown, Head of Business Intelligence for ASEAN at professional services firm Dezan Shira & Associates.

Giving the example of a potential China–India free trade agreement, Brown said the nature of the demand for Chinese products in India does not align directly with current Chinese exports to the U.S.

“Any scaling up of Chinese sales in India will also require time to identify effective partners and distribution channels,” said Brown. “Similarly, the less-developed state of contract manufacturing in India will require many companies relocating to India to establish their own factories.”

The proposed pact will likely contribute to regional trade growth in the medium term, added Brown.

But can member countries get out of the cycle of delays and reach an agreement soon?

A shot in the arm

There is an impetus to act quicker with global trade and economic growth slowing, as observed in the latest DHL Global Trade Barometer, a growth index that provides an early indicator of the trade outlook based on key import and export data.

DHL Global Trade Barometer_SEP_Global

The RCEP member countries recognize that a pact could potentially buffer them against worsening trade woes — and some hope this would move the group to arrive at a deal soon.

China has been particularly keen to seal a deal as it seeks new markets for goods hit by American tariffs. But this has raised concerns in India, which does not have a free trade accord with China.

India is averse to any deal that would create a de facto trade agreement with China for fear that it would flood its market with Chinese goods. It also wants free movement of labor, which other member countries have opposed.

Indian Prime Minister Narendra Modi
Indian Prime Minister Narendra Modi

Political tensions are also making it increasingly difficult to conclude RCEP this year, according to Brown.

“China’s recent support of Pakistan over Kashmir tensions has increased pressure on the Modi administration [in India] to take a hard line on Chinese investment in India and threatens to derail already sensitive negotiations,” he said.

Then there is the worsening tension between Japan and South Korea, which Brown believes will make RCEP a politically difficult sell on either side.

Importantly, member countries have yet to resolve several negotiation issues. These include setting rules of origin, investment restrictions, e-commerce rules, and intellectual property protection.

A deal without India?

To get the process going, China proposed creating an agreement without India, Australia, and New Zealand. Though Australia and New Zealand have raised concerns over environmental and labor issues, both are on board with the deal.

China’s proposal also found support in Malaysian Prime Minister Mahathir Mohamad, who said he would prefer creating a 13-nation deal “for the time being”.

“It’s quite difficult because we are competing economies ... we’re competing with each other and from there, to go on to work together requires some radical change in our mindset. That will take time,” said Mahathir.

But India’s exclusion from an agreement would deal a blow to RCEP, according to Brown. “RCEP without Indian involvement would help to create a common set of trading standards among remaining economies but would fall well short of capturing 30 percent of global trade.”

As talks are slated to conclude by the end of the year, the member countries have much to sort through to make the partnership come to fruition.

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Seven years and 27 rounds of meetings later, negotiations for Asia’s next trade pact are heading for the final stretch, according to some RCEP leaders.

They claim members of the proposed free trade agreement between the Association of Southeast Asian Nations (ASEAN) and six other nations — Australia, China, India, Japan, New Zealand, and South Korea — will finalize and strike a deal by the end of 2019.

But observers have cast doubts on this. After all, it is not the first time that officials from member countries have insisted on final scenarios for the trade pact.

Even so, the potential of the proposed agreement makes it difficult to ignore. If formed, RCEP will boost market access to products and capital, and create the world’s largest regional trading bloc that will account for more than 29.1 percent of global trade.

Its potential to increase global real incomes will be massive — an estimated US$286 billion (€259 billion) a year — when the accord moves into full swing in 2030.

Can the bloc influence global trade?

The RCEP will be a powerful boost to the global trading system, according to economics professors Peter Petri and Michael Plummer. Once created, the bloc is projected to increase global trade by 1.9 percent.

The proposed RCEP would create the world’s largest regional trading bloc.
The proposed RCEP would create the world’s largest regional trading bloc.

“Trade diversion is estimated to be small,” said Petri and Plummer. “Some non-members may in fact benefit due to the multilateral nature of the liberalization that RCEP requires and spillovers from members’ increased productivity.”

But RCEP will not provide a quick fix for the impact of the U.S.–China dispute on trade, as many hope, said Maxfield Brown, Head of Business Intelligence for ASEAN at professional services firm Dezan Shira & Associates.

Giving the example of a potential China–India free trade agreement, Brown said the nature of the demand for Chinese products in India does not align directly with current Chinese exports to the U.S.

“Any scaling up of Chinese sales in India will also require time to identify effective partners and distribution channels,” said Brown. “Similarly, the less-developed state of contract manufacturing in India will require many companies relocating to India to establish their own factories.”

The proposed pact will likely contribute to regional trade growth in the medium term, added Brown.

But can member countries get out of the cycle of delays and reach an agreement soon?

A shot in the arm

There is an impetus to act quicker with global trade and economic growth slowing, as observed in the latest DHL Global Trade Barometer, a growth index that provides an early indicator of the trade outlook based on key import and export data.

DHL Global Trade Barometer_SEP_Global

The RCEP member countries recognize that a pact could potentially buffer them against worsening trade woes — and some hope this would move the group to arrive at a deal soon.

China has been particularly keen to seal a deal as it seeks new markets for goods hit by American tariffs. But this has raised concerns in India, which does not have a free trade accord with China.

India is averse to any deal that would create a de facto trade agreement with China for fear that it would flood its market with Chinese goods. It also wants free movement of labor, which other member countries have opposed.

Indian Prime Minister Narendra Modi
Indian Prime Minister Narendra Modi

Political tensions are also making it increasingly difficult to conclude RCEP this year, according to Brown.

“China’s recent support of Pakistan over Kashmir tensions has increased pressure on the Modi administration [in India] to take a hard line on Chinese investment in India and threatens to derail already sensitive negotiations,” he said.

Then there is the worsening tension between Japan and South Korea, which Brown believes will make RCEP a politically difficult sell on either side.

Importantly, member countries have yet to resolve several negotiation issues. These include setting rules of origin, investment restrictions, e-commerce rules, and intellectual property protection.

A deal without India?

To get the process going, China proposed creating an agreement without India, Australia, and New Zealand. Though Australia and New Zealand have raised concerns over environmental and labor issues, both are on board with the deal.

China’s proposal also found support in Malaysian Prime Minister Mahathir Mohamad, who said he would prefer creating a 13-nation deal “for the time being”.

“It’s quite difficult because we are competing economies … we’re competing with each other and from there, to go on to work together requires some radical change in our mindset. That will take time,” said Mahathir.

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Four years after Indian Prime Minister Narendra Modi vowed to turn India into a global manufacturing power, the “Make in India” initiative has resonated across the country — but more must be done.

Encased in a sleek blue-black body with a wide high-definition display screen, the device looks every inch a modern smartphone.

The Z92 phone is proudly made in India by local firm Lava International — a symbol of Indian Prime Minister Narendra Modi’s vision to transform the country into a global manufacturing power.

Once just an importer of cheap mobile phones, the company now builds its smartphones out of two factories on the outskirts of New Delhi. Establishing a local presence has allowed the company to reduce costs and focus on innovation, building high-quality devices that sell for less than US$150 (€134).

Thanks to Modi’s “Make in India” campaign, other local companies like Lava now make up a manufacturing cluster that places India as the world’s second-largest mobile phone maker, after China.

The Indian Cellular Association even set a target of around 500 million mobile phone units worth US$46 billion to be made in India by 2019, with 120 million units to be exported.

Despite bold forecasts, India’s overall manufacturing output has remained largely stagnant since the launch of the campaign — a gap that Modi needs to address urgently as he embarks on his second term as Prime Minister.

Early success

In 2014, just months after taking office during his first term, Modi unveiled his ambitious “Make in India” initiative.

The goal then was to encourage multinational and domestic companies to manufacture products in India. The initiative was intended to raise production capacity, stimulate job creation, and attract foreign direct investment (FDI).

Narendra Modi was sworn in for a second term as Prime Minister of India in May 2019.
Narendra Modi was sworn in for a second term as Prime Minister of India in May 2019.

The plan focused on creating a more favorable business environment in 25 sectors, including IT and business process management, automobile, and defense manufacturing.

Four years on, India is beginning to see some results.

Businesses wanting to set up shop in India have been able to do so more easily. In 2017, India jumped 30 places in the World Bank’s “Ease of Doing Business” rankings to break into the top 100 nations. Last year, it climbed higher to 77th.

The introduction of a new goods and services tax (GST) in 2017 — aimed at replacing the multi-layered and complicated tax system in India — boosted business transactions further, and increased FDI by more than 6 percent to US$42 billion in the following year.

Notably, the technology industry has been one of the biggest beneficiaries of such reforms. Until 2014, there were only two mobile phone manufacturing units in India — which in 2018 had grown to 120 factories and created jobs for over 400,000 people.

“Today, some of the world’s biggest companies are manufacturing in the country,” said Amit Dawar, Senior Director of Value Added Services – India & South Asia, at DHL Global Forwarding India.

The way forward

But while the technology sector is growing, experts say the drive to expand the broader manufacturing output in India still shows little signs of momentum.

Manufacturing continues to fall short of its goal to contribute 25 percent to the country’s gross domestic product (GDP) by 2025.

India is now the second largest mobile phone producer in the world after China.
India is now the second largest mobile phone producer in the world after China.

In fact, the sector accounted for about 15 percent of GDP in 2017, down from a peak of 18.6 percent in 1995. In comparison, China’s manufacturing sector makes up around 40 percent of its GDP — the benchmark for developing and middle-income countries.

The jump in FDI to record levels under the incumbent government has also been short-lived, even as other countries in Asia are undergoing an investment boom.

More needs to be done. This includes investing in human capital, said economist Kunal Kumar Kundu from French bank Societe Generale.

According to India’s National Institute of Public Finance and Policy, only about 2 percent of Indian workers have qualified for certificates that recognize the mastery of professional skills.

Another way forward would be to strengthen the logistics sector, which Dawar said will be crucial in helping the manufacturing sector advance from serving a domestic consumption base to becoming a prominent exporter.

RELATED ARTICLES


DHL Global Trade Barometer
The DHL Global Trade Barometer is a new and unique early indicator for the current state and future development of global trade.

He believes technology will play a vital role in achieving this.

Technology has already digitized what used to be physical forms issued during the movement of goods into Indian states. Toll fees are now also automatically deducted from trucks that cross a toll plaza.

In the future, blockchain technology could synchronize multi-party logistics value chains and eliminate the need for the duplicity of documentation processes, while the Internet of Things will be used to provide logistics carriers with real-time information.

But there is still much to do, said Dawar. The annual logistics spending in India accounts for 14 percent of India’s GDP, much higher than the 8 to 10 percent in developed countries, which makes Indian goods less price-competitive.

“The government has provided the platforms. Now, the stakeholders need to make use of them,” he said, pointing to the opportunities that would come with the new roads constructed over the last few years, including dedicated freight and economic corridors. These new roads far surpass the number built in the previous decade.

“People will need to take that plunge to venture out of the traditional cities and industrial sectors. It is time to invest in these new corridors,” he added.

[post_title] => What’s next after ‘Make in India’? [post_excerpt] => [post_status] => publish [comment_status] => open [ping_status] => open [post_password] => [post_name] => whats-next-after-make-in-india [to_ping] => [pinged] => [post_modified] => 2022-09-28 00:27:37 [post_modified_gmt] => 2022-09-27 16:27:37 [post_content_filtered] =>

Encased in a sleek blue-black body with a wide high-definition display screen, the device looks every inch a modern smartphone.

The Z92 phone is proudly made in India by local firm Lava International — a symbol of Indian Prime Minister Narendra Modi’s vision to transform the country into a global manufacturing power.

Once just an importer of cheap mobile phones, the company now builds its smartphones out of two factories on the outskirts of New Delhi. Establishing a local presence has allowed the company to reduce costs and focus on innovation, building high-quality devices that sell for less than US$150 (€134).

Thanks to Modi’s “Make in India” campaign, other local companies like Lava now make up a manufacturing cluster that places India as the world’s second-largest mobile phone maker, after China.

The Indian Cellular Association even set a target of around 500 million mobile phone units worth US$46 billion to be made in India by 2019, with 120 million units to be exported.

Despite bold forecasts, India’s overall manufacturing output has remained largely stagnant since the launch of the campaign — a gap that Modi needs to address urgently as he embarks on his second term as Prime Minister.

Early success

In 2014, just months after taking office during his first term, Modi unveiled his ambitious “Make in India” initiative.

The goal then was to encourage multinational and domestic companies to manufacture products in India. The initiative was intended to raise production capacity, stimulate job creation, and attract foreign direct investment (FDI).

Narendra Modi was sworn in for a second term as Prime Minister of India in May 2019.
Narendra Modi was sworn in for a second term as Prime Minister of India in May 2019.

The plan focused on creating a more favorable business environment in 25 sectors, including IT and business process management, automobile, and defense manufacturing.

Four years on, India is beginning to see some results.

Businesses wanting to set up shop in India have been able to do so more easily. In 2017, India jumped 30 places in the World Bank’s “Ease of Doing Business” rankings to break into the top 100 nations. Last year, it climbed higher to 77th.

The introduction of a new goods and services tax (GST) in 2017 — aimed at replacing the multi-layered and complicated tax system in India — boosted business transactions further, and increased FDI by more than 6 percent to US$42 billion in the following year.

Notably, the technology industry has been one of the biggest beneficiaries of such reforms. Until 2014, there were only two mobile phone manufacturing units in India — which in 2018 had grown to 120 factories and created jobs for over 400,000 people.

“Today, some of the world’s biggest companies are manufacturing in the country,” said Amit Dawar, Senior Director of Value Added Services – India & South Asia, at DHL Global Forwarding India.

The way forward

But while the technology sector is growing, experts say the drive to expand the broader manufacturing output in India still shows little signs of momentum.

Manufacturing continues to fall short of its goal to contribute 25 percent to the country’s gross domestic product (GDP) by 2025.

India is now the second largest mobile phone producer in the world after China.
India is now the second largest mobile phone producer in the world after China.

In fact, the sector accounted for about 15 percent of GDP in 2017, down from a peak of 18.6 percent in 1995. In comparison, China’s manufacturing sector makes up around 40 percent of its GDP — the benchmark for developing and middle-income countries.

The jump in FDI to record levels under the incumbent government has also been short-lived, even as other countries in Asia are undergoing an investment boom.

More needs to be done. This includes investing in human capital, said economist Kunal Kumar Kundu from French bank Societe Generale.

According to India’s National Institute of Public Finance and Policy, only about 2 percent of Indian workers have qualified for certificates that recognize the mastery of professional skills.

Another way forward would be to strengthen the logistics sector, which Dawar said will be crucial in helping the manufacturing sector advance from serving a domestic consumption base to becoming a prominent exporter.

RELATED ARTICLES


DHL Global Trade Barometer
The DHL Global Trade Barometer is a new and unique early indicator for the current state and future development of global trade.

He believes technology will play a vital role in achieving this.

Technology has already digitized what used to be physical forms issued during the movement of goods into Indian states. Toll fees are now also automatically deducted from trucks that cross a toll plaza.

In the future, blockchain technology could synchronize multi-party logistics value chains and eliminate the need for the duplicity of documentation processes, while the Internet of Things will be used to provide logistics carriers with real-time information.

But there is still much to do, said Dawar. The annual logistics spending in India accounts for 14 percent of India’s GDP, much higher than the 8 to 10 percent in developed countries, which makes Indian goods less price-competitive.

“The government has provided the platforms. Now, the stakeholders need to make use of them,” he said, pointing to the opportunities that would come with the new roads constructed over the last few years, including dedicated freight and economic corridors. These new roads far surpass the number built in the previous decade.

“People will need to take that plunge to venture out of the traditional cities and industrial sectors. It is time to invest in these new corridors,” he added.

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But India’s exclusion from an agreement would deal a blow to RCEP, according to Brown. “RCEP without Indian involvement would help to create a common set of trading standards among remaining economies but would fall well short of capturing 30 percent of global trade.”

As talks are slated to conclude by the end of the year, the member countries have much to sort through to make the partnership come to fruition.

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