China-India Brief #71

Guest Column

India, ASEAN, and RCEP: The Challenges of Negotiating a Services Pact

by Blake Harley Berger

As the negotiations on the Regional Comprehensive Economic Partnership (RCEP) agreement, which will bring China, India, ASEAN, and several East Asian and Oceania states into a free trade agreement (FTA), advances towards the 12^th Round in Perth, Australia in April 2016, a stalemate over the services portion of the agreement has emerged and presents a significant roadblock to RCEP’s speedy conclusion. Following the 11^th Round in Brunei in February 2016, the lack of progress in negotiating services has resulted in an impasse with India pressing for the simultaneous negotiation of the goods and services pacts. The standstill that the negotiating states currently find themselves in over services can be directly traced back to the India-ASEAN free trade agreement (AIFTA), how the FTA was negotiated, and why India felt that it got the short end of the deal.

The RCEP agreement, which seeks to amalgamate ASEAN’s existing bilateral FTAs with China, Japan, South Korea, Australia, New Zealand, and India, into a single regional FTA was launched in 2012, and began negotiations in 2013. The ambitious agreement will not only bring together three of the largest Asian economies, with a combined GDP of roughly $19 trillion, but will also become the largest trading bloc rivalling the Trans-Pacific-Partnership (TPP).

Prior to examining why the stalemate over services arose in the RCEP negotiations, it is prudent to analyse why India wants to take part in the agreement, and why services is so important to India. Through taking part in the negotiations, India would be able to further integrate its economy with East and Southeast Asia and gain improved access to their markets; reduce trade costs through streamlining trade rules and regulations; integrate itself further in regional production networks and global value chains; and boost Indian exports of goods and services. Enhancing market access for services and the movement of professionals for India is crucial for the country as services account for roughly 52% of India’s GDP in 2015. Additionally, India has a comparative advantage in a variety of services sectors compared to ASEAN in the information and communication technology (ICT), e-commerce, telecommunications, and engineering sectors. While the opportunities arising from participating in RCEP are abundant, India’s experience negotiating the AIFTA and the perceived shortfalls resulting from it have resulted in India’s current stance and present impasse.

The AIFTA negotiations began in 2004 with an ambitious goal of concluding the agreement on goods by 2005, and once the goods portion was finalised, conclude the services pact by 2007; note that goods and services in the negotiations were conducted separately. However, the AIFTA negotiations were drawn out, with the goods section being concluded in 2010 and services portion in 2012. While the goods agreement became operational in 2010, the services pact as of 2016 has yet to be ratified by three ASEAN countries, Cambodia, Indonesia, and the Philippines, which is extremely significant as Indonesia is India’s largest trading partner within ASEAN. As a result of the lopsided agreement, India’s trade deficit with ASEAN has increased. In 2014-2015, India’s exports to ASEAN, the country’s fourth largest trade partner, totalled $31.82 billion and its imports from ASEAN grew to $44.72 billion, resulting in a trade deficit of $12.9 billion, up from $11 billion in 2013.

There are two primary reasons why India was unable to benefit as much from the AIFTA agreement. First, due to the already low tariffs within ASEAN, India was unable to gain as much from the good pact. Second, the negotiations of the services pact did not meet India’s expectations due to the sensitive nature of services and movement of professionals within ASEAN, which resulted in an negotiation and agreement structure that differed significantly from the goods pact, which in turn reduced India’s leverage in the negotiations. In negotiating the goods agreement, India and ASEAN negotiated one single regional agreement that encompassed all states, however with services, India was required to 8+1+1 negotiating structure. This meant that there was an agreement between India and Laos, Myanmar, Cambodia, Vietnam, Brunei, Singapore, and Thailand, and two separate agreements for Indonesia and the Philippines, respectively.

Further complicating the negotiations over services were the sensitivities within the ASEAN states over the freer movement of professionals, which is referred to as Mode IV, and mutual recognition agreements (MRAs), which regulates the movement of professionals. Mode IV covers professionals who are either service suppliers or work for service suppliers, and if agreed upon through an MRA would facilitate and ease the entry of Indian professionals into ASEAN states. Due to these sensitivities and lack of a region-wide services negotiation, India had to negotiate MRAs bilaterally with individual ASEAN states in order to gain Mode IV access. The concern amongst ASEAN states is that increasing visas and facilitating the entry of professionals from India could substitute the employment of domestic services professionals and lead to higher unemployment. The Mode IV component of the services agreement was met with resistance from several of the ASEAN states, and due to both ASEAN and India previously agreeing to the goods pact, India was unable to exert significant leverage during the services negotiations.

As a result of the perceived shortfalls with the AIFTA negotiations, India entered the RCEP negotiations with the goal of ensuring that a similar outcome would not occur. However as the RCEP negotiations have progressed, several negotiating states have been unwilling to show flexibility in the liberalisation of services and continue to push for further liberalisation in goods. During the 10^th Round of negotiations in South Korea in 2015, New Delhi introduce a position paper stressing that the liberalisation of goods and investment were contingent upon a satisfactory deal on services and the movement of professionals. Following the negotiation round, an Indian official commented that, “We will not repeat the mistake that we made in our free trade negotiation with ASEAN when we agreed to conclude goods and services separately and got almost no concessions for our workers.”

While India is seemingly content to allow the negotiations to stretch on in hopes of sealing a better negotiating structure and agreement, China has been insistent on pushing the conclusion of the agreement by 2016. Following the 10^th Round in 2015, Chinese Premier Li Keqiang expressed to the media “China’s upmost commitment to finalise the RCEP negotiations for its implementation next year” in 2016. One factor driving China’s desire to conclude and implement RCEP as soon as possible is the looming ratification of the TPP agreement, especially in light of the increased interest to join by several ASEAN states including Indonesia, Thailand, and the Philippines. Even though China’s Minister of Commerce, Gao Hucheng, told the media in February 2016 that the TPP and RCEP are not opposed to one another but instead should be viewed as parallel agreements, concluding RCEP would not only further integrate China into East, Southeast, and South Asian economies, but also provide China with additional leverage in future economic and trade negotiations.

As the states progress towards the 12^th Round in April, the negotiations have seemingly reached an impasse over the simultaneous negotiation of goods and services, liberalisation of the latter, and movement of professionals. Due to India’s past experience with AIFTA, the lack of progress on services and Mode IV liberalisation, and resulting trade deficit with ASEAN, it would seem prudent for Indian negotiators to holdout on advancing the negotiations until an agreement among the states can be reached on services and Mode IV. Framed in this light, it seems increasingly unlikely that the RCEP negotiations will be concluded by 2016 unless the stalemate can be broken. While the negotiation process is fluid, it will be of extreme interest to see if and what Chinese negotiators can do to bridge the gap between India and ASEAN over services in order to ensure a timely conclusion to the agreement.

Blake Harley Berger is a Research Associate at the Centre on Asia and Globalisation, Lee Kuan Yew School of Public Policy.

The views expressed in this article are solely those of the author and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.

News Reports

Bilateral Relations

China, India express hope to further cultural exchanges through publication cooperation
Xinhua, March 9
China and India Saturday expressed their hope to further cultural exchanges through publication cooperation. At the inaugural ceremony of the 24th World Book Fair of New Delhi, Chinese and Indian officials said the two countries are experiencing "a wind of change" in their interactions in cultural fields and publication in particular. Over 250 Chinese delegates were participating in the book fair, considered one of the biggest book fairs in Asia, as China is the guest of honor state. "We are facing an important opportunity to strengthen the traditional friendship between our two countries with a booming cooperation of publication businesses in a new stage of such development since the beginning of the new century," said Sun Shoushan, vice minister from the State Administration of Press, Publication, Radio, Film and Television of China.

News Reports

China and India in the Regions

Chinese naval escort fleet returns from mission in Somali waters
Xinhua, March 9
A Chinese naval fleet returned from an escort mission in the Gulf of Aden and Somali waters on Tuesday to a military port in Sanya City in the southern island province of Hainan, the PLA Daily reported. The fleet, the 21st since December 2008, when China sent its first escort squad to the Gulf of Aden and Somali waters, was composed of the guided-missile frigates Liuzhou, Sanya and the comprehensive supply ship Qinghaihu. They left for the mission on August 4, 2015. During the mission, it escorted a total of 65 Chinese and foreign ships and observed 56 suspicious vessels. The fleet also visited Pakistan, Sri Lanka, Bangladesh, India, Thailand and Cambodia, and carried out joint anti-piracy drills with the naval forces of nations including the Republic of Korea and Denmark.

Nepal eyes South Asia’s development through China’s Belt and Road Initiative
Xinhua, March 17
Nepal has regarded China's Belt and Road Initiative as a milestone to turn promising South Asia into a developed region in the world. Addressing a seminar on "South Asia China Cooperation under One Belt One Road Initiative" held here on Thursday, Nepal spoke highly of the Chinese initiative which will create immense economic opportunities for the region. "China's Silk Road Economic Belt initiative will connect Asia and Europe, creating more opportunities in trade, investment and infrastructure development in our region", Nepalese Minister for Industry Som Prasad Pandey said while addressing the seminar. The minister further said that the economic belt would take the whole Asia into a new height by exploring development.

Interview: Nepal keen to join China’s Belt and Road Initiative: PM
Xinhua, March 20
Nepal can benift from China's progress by joining the Belt and Road Initiative, Nepali Prime Minsiter K. P. Sharma Oli has said ahead of his China-tour. Oli made the remarks in an exclusive interview with Xinhua here on Saturday. The prime minister, departing for China on Sunday, said Himalaya symbolizes friendship, as Nepal's relationship with China is as high as the mountain. "The two countries are working together in close cooperation," said the prime minister. Stating that Nepal has ended an era of political struggle and started the phase of the new economic development after the promulgation of a new constitution in last September, Oli wishes that his seven-day state visit would expand and deepen the friendship and cooperation between Nepal and China. "To get support and goodwill from China is the main purpose of my visit between March 20 and March 27," said the prime minister.

Xi calls for China-Nepal community of common destiny
Xinhua, March 21
Chinese President Xi Jinping met with visiting Nepali Prime Minister K. P. Sharma Oli on Monday, calling on both governments to carry forward the traditional friendship and expand practical cooperation to make the two nations a "community of common destiny." Xi said China and Nepal are close neighbors that enjoy permanent friendship and comprehensive cooperation, stressing the significance of the Five Principles of Peaceful Coexistence they uphold. The principles are mutual respect for sovereignty and territorial integrity, mutual non-aggression, mutual non-interference in each other's internal affairs, equality and mutual benefit, and peaceful co-existence.

Peeved with India, Nepal set to offer railway, airport, oil and gas projects to china
The Times of India, March 21
China is in talks with the visiting Nepali prime minister KP Sharma Oil to establish a rail network connecting different cities in the Himalayan kingdom, sources said. This is besides the plan to extent the Tibetan railway to the Nepali border. The two countries signed 10 different agreements, and began negotiations on greater transport connectivity. The moves, which come after the recent blockade on the India-Nepal border, have great implications for India, observers said. Indian infrastructure companies are bound to lose out in competition for Nepali projects because of inept political and diplomatic handling of the blockade situation, sources said.

Nepal can be bridge between China and India, says Pres Xi
Hindustan Times, March 22
Nepal could become a bridge between India and China, President Xi Jinping told visiting Nepalese Prime Minister KP Sharma Oli in an uncharacteristic mention of a third country at a bilateral meeting. Oli is on high-profile week-long visit to China, his first after becoming premier, which many experts say is an effort to reduce the land-locked Himalayan country’s dependence on India for trade and supply of essential goods. Oli signed 10 deals, including one on a new trans-border railway line and another on China opening up its sea ports to Nepal for trade. During his discussion with Oli, Xi said it would be best for Nepal to benefit from the growth of both China and India. “Nepal can be a bridge between China and India,” Xi told Oli, according to the official Xinhua news agency.

News Reports

Economy and Trade

India won’t exploit exchange rate as trade tool, says Modi
The Hindu, March 13
Taking a swipe at China, Prime Minister Narendra Modi said that India’s growth rate of over seven per cent was being achieved in a country that is also a vibrant democracy. Speaking at the Advancing Asia conference here, he said India dispelled the myth that democracy and rapid economic growth could not go together. India’s rapid economic growth, he said, was also very distinct in Asia, as the country had never tried to gain in trade at the expense of partners, never undervalued its exchange rate; it rather added to the world and Asian demand by running current account deficits. “We do not follow beggar-thy-neighbour macro-economic policies... We are good Asian and good global economic citizens, and a source of demand to our trading partners,” he said, without naming China, at the three-day conference organised by India and the International Monetary Fund (IMF).

India’s trade deficit with China swells to $51.9 billion in 2015
The Times of India, March 14
India's trade deficit with China increased to $51.86 billion in 2015, Parliament was informed. "Increasing trade deficit with China can primarily be attributed to the fact that Chinese exports to India rely strongly on manufactured items meeting the demand of fast-expanding sectors like telecom and power while India's exports to China are characterized by primary products, raw material and intermediate products," commerce and industry minister Nirmala Sitharaman said in a written reply to the Lok Sabha. She said India's trade deficit with China stood at $51.86 billion, with a bilateral trade of $71.22 billion in 2015. During this period, India's exports to China came in at $9.68 billion while imports were $61.54 billion.In a separate reply, she said Indian MSMEs are facing significant competition from Chinese imports.

China plans first commercial rocket-launch company, Xinhua says
Bloomberg Business, March 15
China plans to set up a commercial rocket-launch company in view of the market’s potential, the official Xinhua news agency reported. China Sanjiang Space Group Co. is preparing to enter the commercial-rocket business with a launch slated for 2017, Xinhua reported Tuesday, citing the company’s chief engineer Hu Shengyun. Some Internet companies have expressed interest in collaborating on commercial launches, Hu said. China, India and other Asian countries are spending billions of dollars on their space exploration projects.

India to discuss trade curbs, projects at BRICS meeting
The Hindu, March 16
The government is preparing a list of priority projects for which investments could be sought from other BRICS nations, official sources said. Official sources told The Hindu that the list of big projects, in addition to a proposal to set up a mechanism to expeditiously resolve non-tariff barriers (NTBs) that are hurting goods trade between BRICS member countries, will be taken up for discussion during the next month’s meeting of the grouping’s Contact Group on Economic and Trade Issues (CGETI). Investments would be sought for projects, mostly in infrastructure sector, from other member nations viz. Brazil, Russia, China and South Africa. The CGETI meeting, which will be attended by high-level government officials, sets the agenda for the BRICS (Brazil, Russia, India, China and South Africa) trade and economy ministers’ meeting. India is chairing the influential bloc BRICS for an 11-month term till December 2016. India’s list of projects will be similar to what Russia brought out during its term as the chair of the BRICS Group last year.

India, China exchange tariff cut offers under RCEP
The Financial Express, March 16
Plans to liberalise trade between India and China, the world’s two fastest-growing large economies, have gathered momentum with both sides exchanging offers on removal of a chunk of tariff lines on goods imports. Against India’s offer to remove 42.5% of tariff lines under the 16-country Regional Comprehensive Economic Partnership (RCEP), China has expressed its willingness to abolish equivalent amount of tariff lines for India. India could press for a greater commitment from China in goods, apart from stepping up its demand for a liberalisation of the services sector in Perth in Australia where the 12th round of RCEP negotiations are scheduled to take place from April 22, a source said.

China’s service outsourcing continues to grow in Jan.-Feb.
Xinhua, March 17
China's service outsourcing industry continued to grow in the first two months of this year despite economic headwinds, the Ministry of Commerce (MOC) said. Chinese companies inked service outsourcing contracts worth 16.92 billion U.S. dollars, up 7.5 percent year on year, Shen Danyang, spokesperson for the MOC, told a press conference. Among the deals were offshore service outsourcing contracts valued at 75.54 billion yuan (11.64 billion U.S. dollars) in the first two months, rising 28.5 percent year on year. China is the world's second largest service outsourcing provider after India. The State Council described the sector as a "green industry" that will be a new engine for tertiary industry and a boon to increasing employment.

News Reports

Energy and Environment

Government downplays Greenpeace India report on air pollution
Daily News and Analysis, March 15
Downplaying Greenpeace India's recent report which said India overtook China's air pollution levels in 2015, the Centre today said the study was based on "extrapolated and constructed" data "without" field validation. "Greenpeace India published a report titled 'Clean Air Action Plan: The Way Forward' in February 2016. The report... is on the basis of NASA satellite data which is based on extrapolated and constructed data without field validation," Environment Minister Prakash Javadekar said in a written reply in Lok Sabha. Greenpeace's analysis said India had overtaken China's air pollution levels in 2015 and its average particulate matter exposure was higher for the first time in the 21st century.

At 76 million, India has most people without clean water and they’re paying for it: report
The Japan Times, March 23
India has the world’s highest number of people without access to clean water — imposing a major financial burden for some of the country’s poorest people, according to a report. The international charity Water Aid says 75.8 million Indians — or 5 percent of the country’s 1.25 billion population — are forced to either buy water at high rates or use supplies that are contaminated with sewage or chemicals. That accounts for more than a tenth of the 650 million people worldwide without clean water access — more than any single country in Africa or China, where 63 million have no access. The situation worldwide has improved since 1990, with 2.6 billion people gaining access to clean water since then. But the report urged more action in “a world where one in 10 people are trapped in a cycle of poverty and disease for want of a safe, affordable water supply of their own.”

Analyses and Commentaries

Trading places
The Indian Express, March 9
In the last few months though, Delhi and Washington have begun to trade places. Delhi now speaks a lot less in public and Washington can’t stop talking. If Indian media complains that official Delhi doesn’t keep them in the loop, Washington is trying to conduct negotiations with India through the Indian media. Under Prime Minister Narendra Modi, Delhi has been compelled to curb its enthusiasm for public argumentation. Its mandate now is to bargain hard in private and be prepared to give and take on a pragmatic basis. The focus is on finding win-win outcomes. This approach has, for example, helped India wrap up the outstanding issues in implementing the historic civil nuclear initiative. Even as Delhi tries to advance India’s strategic cooperation with the United States, an overly eager Washington is undermining the prospects for forward movement with its public diplomacy.

China’s defence budget and its implications for India
Daily News and Analysis, March 9
The People’s Liberation Army is still the world's largest standing military. In December 2015, PLA established a Rocket Force to oversee its strategic missiles. In February 2016, it replaced seven military area commands with five PLA theatre commands. Beijing is looking to increase naval reach and is building its second, entirely domestically designed, aircraft carrier. On the other hand, India’s defence outlay for 2016-17 is US$ 38 billion, an increase of 1.16% over last year’s budget estimates, albeit a 9.76% increase over actual defence budget spend. India’s capital outlay required for modernisation has actually decreased. The rising US dollar will further reduce India’s funds for modernisation.

India, US must collaborate on South China Sea
The Hindustan Times, March 13
The Cold War between the US and China on the South China Sea dispute is becoming hot. Last month, it was reported that the US and India have held talks about conducting joint naval patrols that could include the disputed South China Sea. The US and India were quick to dismiss the report. Even though it seems clear that the US and India are not ready for joint patrols, the trial balloon is indicative of the evolving Indian position on one of the key disputes in the Asian strategic landscape. A number of factors are forcing India’s hand. The US itself has been forced to adopt a more robust posture in the Indo-Pacific. The dramatic acceleration in American military commitment to the region is a function of the astonishing rise of China, which is becoming a serious regional military power.

Stop scapegoating China for America’s economic ills
The Week, March 22
American economists across the political spectrum have long held firm that globalization and trade liberalization are, on balance, a boon for the country. But now this consensus may be fraying, with The New York Times' agent provocateur Paul Krugman recently declaring that such thinking is "fundamentally dishonest" elitist bunkum. "It is fair to say," Krugman declaims, "that the case for more trade agreements — including TPP, which hasn't happened yet — is very, very weak. And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things." That is astonishingly myopic. There is every reason to believe that even after job losses are factored in, trade with China and other developing countries has benefited even working-class Americans.

Books and Journals

Economic Reform in Asia: China, India, and Japan
Edward Elgar Publishing, 2016
Economic Reform in Asia compares and analyzes the reform and development patterns of China, India, and Japan from both historical and developmental perspectives. Sara Hsu specifically focuses on China’s reform and opening-up in 1979, India’s accelerated liberalization in 1991, and the outset of the Meiji Restoration in Japan in 1878. This detailed overview of growth patterns in Asia’s largest economies is invaluable, especially in its determination to understand which development policies work, what role institutions play in development, and what issues may arise during said development.

Compiled and sent to you by Centre on Asia and Globalisation and the Lee Kuan Yew School of Public Policy, National University of Singapore.

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