Worrying distanomics: Has India factored CPEC into RCEP?

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Robinder Nath Sachdev | 05 Nov, 2019
As the 16 nations in Asia are marching towards closure on Regional Comprehensive Economic Partnership (RCEP) discussions in Bangkok, it will be a major step if India signs up to the deal. But there are questions, and a raging controversy back home in India about the pros and cons of the agreement in its present form.

One glaring factor that has been missing in all debates so far is any assessment of the "distanomics" in India China trade. Critical insights emerge when we study India China trade by using the lens of distanomics, defined by the authors, as the "impact of distances on the economics of production and transport, for exports".

This article therefore seeks to evaluate the economic impact of the distances as enabled by the China Pakistan Economic Corridor (CPEC) on China's exports to India, in a post-RCEP world.

It is well known that India has been at the receiving end of opening its markets in FTAs and has lost in the trade deficit battle with China and ASEAN countries. Its current trade deficit with China is about $55 billion while with total RCEP countries it is about $105 Bn. It is also well known that the relationship between India and China has both an economic angle as well as the strategic angle. India has a long-running border dispute with China, and recently China has increased its meddling into Indian Kashmir via CPEC and openly siding with Pakistan in the UN.

Therefore, as India readies to sign the RCEP, an important question arises? How will India deal with exports coming from Chinese hinterlands via CPEC? As part of the CPEC, China is building a cargo and rail line from Lanzhou, through Xinjiang to Gwadar port. A part of this service, which is the Gwadar port, has opened for commercial operations in October 2019.

China desperately wants to make its commercial investments into Gwardar successful and it can achieve these goals by exporting to West Asia, Africa, and to the Indian western hemisphere from Lanzhou/Xinjiang via Gwadar. The Belt Road Initiative (BRI) central corridor from Lanzhou will connect to the Southern CPEC corridor in Kashgar.

We believe that for China to make economical products, it will have to migrate more and more manufacturing inside, and utilize CPEC to export to India and other countries via Gwadar. Therefore, it is important to note that one cardinal reason for China to launch the BRI initiative is to shift its manufacturing base from port cities to more internal cities where the cost and availability of labour are still attractive. BRI will allow it to reduce the cost of transport to Europe, Africa, the Middle East, and India.e

The Chinese model of investments is driven by front-loading the infrastructure, and fixed costs and later to find markets to dump the products so that they can utilize labor and capital. As they simultaneously migrate the manufacturing to central and western China, open trade routes to India via CPEC, what is India doing to counter it? This conversion of interior areas as export hubs is an important part of Chinese strategy and CPEC demand will play a critical role in it.Given India's opposition to RCEP, has India factored this question?

Currently, it takes about 12 to 25 days for shipping time (excluding port time)efrom China to India. The quickest being Shenzhen to Chennai about 12 days vs the longest being Dalian to Mumbai at about 25 days of travel in the sea. This number will reduce to less than 3 days for shipping between Gwadar to Mumbai.

The distance from Kashgar in China to Gwadar is shorter than travelling from Kashgar to Western sea-ports of China. Kashgar to Shenzhen is about 5500 Kms, while Kashgar to Gwadar is about 2500 KM. Given this changed shipping dynamics, India will be a major destination of exports from China via Gwadar as it will make a lot more economic sense.

It will combine a trifecta of strategic objectives for China - Cheaper labour, moving production to inland, economically fulfilling the CPEC objectives, and strengthening China's Pakistan economic linkage at the cost of India.

The current export from China to India is about $85 Bn. If a part of this shifts to Gwadar, it will create an asymmetric challenge to India as the India exports to China may continue to remain expensive as most of the consumption market in China is on its Western Border which is Shanghai and sea cities, while China to India exports will become further cheaper, easily transportable.

This double whammy of production (lower production costs in the interiors) and geographic transport shift (lower transport and freight costs, quicker delivery) will mean that India will never become cost-competitive with China in exports. Also, Pakistan may take the reverse advantage of truck movements from its borders to export to China and thus further reducing the overall transport cost to them at the expense of India.

RCEP + CPEC is a potent combination for China where it can strategically continue to keep its export engine running, reduce travel time between India and China significantly, achieve economies of scale in Xinjiang and other provinces, with transportation hubs at Gwadar and Kashgar and make Gwadar economically viable for Pakistan. India will be significantly disadvantaged as it will continue to export, ship to Chinese consumption hubs in Shanghai etc.

Post RCEP and CPEC, India will not be competing with China but will compete directly with the hinterlands of China like Xinjiang province where the cost of labor is low. The asymmetric travel time advantage will solidify the Chinese hold on the Indian market.e Indian manufacturers will find it very difficult to beat the scale that China will bring in via Xinjiang.eee

So, what can India do to counter this googly of distanomics that is arising due to the CPEC?

India cannot take baby steps towards RCEP. If it signs RCEP, it needs to ensure a high level of border trade between India and China, and maximize the use of routes via Leh, Uttarakhand, Arunachal, and Nepal to ensure that we can gain from this. Else we will be significantly disadvantaged.

Thus, a counter to the distanomics of CPEC can only be achieved via the distanomics of border trade from India. To obtain this, we need peace on the India China border. Therefore, it may not be out of place to recommend that India should join the RCEP only after successful resolution of border disputes with China.

Before signing the RCEP, India should be ready to grow its border trade with China via trucks thus forcing a two-way trade equation.eDevoid of this opening of border trade with China, we are going to get further trapped into a challenge.

The question then becomes e can India hold out and not sign the RCEP till border resolution with China? And, are the advantages of RCEP so important to China that it would sit down with India and resolve the border issues? If so, then we have a game changer.

Otherwise the distanomics of the CPEC combined with RCEP will be devastating for India.