By abandoning EU trade talks, India is the only South Asian country subject to European import duty

By abandoning EU trade talks, India is the only South Asian country subject to European import duty

The world garment trade was transformed in August, writes Mike Flanagan, with the biggest casualty likely to be India’s plans to increase textile and clothing exports by 20% a year and create an extra 35m jobs by 2024.

August proved to be an extraordinary month for proposed trade agreements.

  • The 12 countries negotiating the Trans-Pacific Partnership (TPP) failed to get an agreement they could take to their legislatures later this year. With scarcely a single current candidate in the 2016 US presidential election having a good word to say about it, the TPP’s probably going to go nowhere this decade.
  • EU and Vietnamese negotiators announced an agreement on free trade – but the details are still vague, full withdrawal of duty will take up to seven years, and the deal needs ratifying by the EU’s Parliament.
  • India announced it was pulling out of free trade negotiations with the EU (first started in 2007, though the last actual talks were in 2013) over an EU ban on pharmaceutical imports.
  • And on 24 August, 16 Asian countries (China, India, Australia, Brunei, Burma/Myanmar, Cambodia, Indonesia, Japan, Korea, Laos, Malaysia, New Zealand, Philippines, Singapore, Thailand, Vietnam and New Zealand) negotiating the Regional Comprehensive Economic Partnership (RCEP) announced they would “cut 80% of import duties in the next ten years”.

So, in short, Japan and New Zealand failed to agree the TPP with the US and Canada – but appear happy about a similar deal with China. India pulled out of trade talks with the EU, but made almost revolutionary trade commitments with most of Asia.

Among possible explanations

  • There’s less to RCEP than meets the eye. The negotiators announced they would eliminate import duty with each other on 65% of the products they trade as soon as the agreement came into force, and on 80% within ten years. But they need at least a year to conclude talks – and getting whatever they agree through their legislatures will take another couple of years, so RCEP is unlikely to come into force before 2019. The Indians later said they would abolish duty more slowly than the August announcement had claimed.
  • The prospect of closer trade links with "modern, dynamic" China excites other Asian nations so much that they agreed to concessions they wouldn't make with the "recession-bound" EU and US.
  • China is so desperate to keep its exports going that it’s a lot less picky about the details of trade agreements than the EU or US.
  • Some of the RCEP is plain hogwash. The biggest fall in China’s July garment exports was a 15% collapse in sales to Japan - the result of a carefully planned, long-term, Japanese government strategy five years ago to reduce imports from China. Japan certainly hasn’t become an enthusiastic convert to more liberalised trade with China.

All contain some truth

  • RCEP’s not the only recent complex trade deal. Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia recently signed a trade deal with Vietnam for their Eurasian Economic Union (EEU). They claim over 40 other countries - including Egypt, Iran, China and India - are interested in joining. But with Chinese garment exports to Russia down by over 50% in 2014, the value of a trade deal with the EEU is more about giving governments an easy trophy to display rather than any serious prospect of substantial exports soon.
  • There is widespread hostility to the huge impact its opponents claim the TPP will have on their countries’ economies, and TPP supporters have been incapable of influencing public opinion. Public opinion elsewhere in Asia, though, has simply not scrutinised RCEP.
  • Some of the TPP’s problems come from anti-Americanism, while the current Indian government’s coolness towards an EU trade deal stems from over-sensitivity to perceived “colonialist” attitudes in Europe. But there’s no widespread public support around Asia for greater closeness to China than to the US or Europe.
  • In just nine months, slowing Chinese exports have led to rapid falls in its domestic cotton price, five interest rate cuts and a currency devaluation after 20 years of managed stability against the US dollar. China certainly is worried.

This August, the world garment trade was transformed in three ways:

  • China’s reactions to its problems will damage other Asian countries.
  • No significant new trade deal will become operational for at least the next four years.
  • Asian politicians in particular, though, now have more possible alternative trade options.

The biggest likely casualty of these changes is India’s 2014 Vision Action Plan for 20% annual textile and clothing (T&C) export growth, creating an extra 35 million jobs by 2024. India’s T&C exports grew just 5.3% in 2014/15. With an annual 10m population increase, no other sector of the economy proposes job creation on the necessary scale.

Sri Lanka is now likely to regain the EU duty-free access that Pakistan and Bangladesh already enjoy, so India’s abandoning EU trade talks makes it the only South Asian country subject to European import duty.

In spite of endless announcements since its election in May 2014, the Indian government has achieved almost nothing for its textile and garment industry:

  • Promising new factories and transport infrastructure is meaningless without land acquisition;
  • There’s no progress on labour law reforms;
  • This government is deaf to calls for lower taxes on manmade fibres;
  • It has cut annual subsidies upgrading textile plants;
  • It has not renewed the 3% interest rate subsidy for exporters that expired just before it came to power. But China has cut its interest rates five times since then – to levels now around half that of India.

Even before China’s devaluation, the Chinese cut in domestic cotton prices had forced almost half of India’s spinning capacity to be closed.

Does the Indian government really believe it can get those 35m new jobs without cooperating with Europe or America? It might look at the state of China’s apparel exports to Russia if it does.