India need not give up RCEP but TPP is the future: L Gordon Flake

L Gordon Flake is the founder CEO of the Perth USAsia Centre, and has previously been executive director of the Maureen and Mike Mansfield Foundation, and a senior fellow and associate director of the Program on Conflict Resolution at The Atlantic Council. He spoke to DNA about the need for India to realise its importance in the Indo-Pacific region and look beyond the RCEP at the TPP. He also spoke about how important it is to look at the origin of products that are flooding India through the free-trade agreements, and how they can be tackled. The term ‘Indo-Pacific’ is barely a year old but it has been acquiring traction, not just as a term but also as a way of looking at relationships in Asia, where India and not the traditional powers may be the driving force. Excerpts from the interview

DNA spoke to former foreign secretary of Australia, Peter Varghese, who talked about the need for balance in the Indo-Pacific region which can be provided by the quad: India, Australia, Japan and the US. Chinese State media responded to the interview, saying India will never be part of any Indo-Pacific strategic alliance which is led by the US, Australia and Japan, because it will be subservient in that relationship.

Right, first of all, I would say that the accuracy of Chinese official predictions on the Indo-Pacific has not been very good. In March, and again in May, Chinese foreign minister Wang Yi dismissed the Indo-Pacific as a construct. He said it is like foam on sea formed by waves and predicted it will blow away.

In June, I attended the Shangri-La Dialogue in Singapore, and within the space of one week, the US-Pacific Command changed its name to Indo-Pacific Command. India and Indonesia forged a bilateral agreement which used the term Indo-Pacific, and Prime Minister Narendra Modi laid out a speech at Shangri-La Dialogue where he used the term Indo-Pacific 11 times, and a very open and expansive view of the Indo-Pacific. I tweeted that day that the sea foam on the ocean is very robust and very strong. I said this as a joke, but just because China says something does not mean it is true. It’s a projection of China’s desires, and it clearly desires that India does not join Indo-Pacific.

But if the Indo-Pacific is not an alliance, what is it?

It’s more about a congruence of common interests, shared interests, which means we coordinate and work together; (it’s) not a formal alliance. I would object to the notion that India is naturally and inevitably a subservient partner. How does that make sense in the world today? Leverage is dependent on one thing — who wants it more; who is the demander; who is the recipient?

Who is that?

Within Indo-Pacific right now, people are supporting India. They actively want India’s engagement in the Quad. Everybody is knocking on India’s doors. Now that’s not the same as power, but it is influence and it is leverage. So it’s a case where people are asking India.

India has enhanced leverage because, again, everybody wants India. Japan is very proactively seeking to strengthen its relationship with India, including massive investments high speed rail etc. Australia, as explained by Peter Varghese in the first part, put out that 535-page report. India is the only country ever in history that Australia has done such a report on. The only bilateral report ever. That tells you that Australia needs India. Likewise the United States, which is in kind of a mess right now, but it also recognises that it needs India.

That’s not the same thing as an alliance, but the Quad wants India, because we think that India will help strengthen our positions. Everybody believes that having India in the Indo-Pacific makes it stronger than India out of the Indo-Pacific, which is especially why didn’t we just stick with Asia-Pacific.

You are specifically not using the term ‘alliance’. But are you saying this will have legs for investment, trade and defence?

Hopefully all of the above, but let me give you some context on this. Australia and Japan do not have any alliance. There is no alliance between Australia and Japan, and yet in the last two years, you would be hard pressed to find any two countries working together more effectively than Australia and Japan.

Another example: Despite the US’ decision to withdraw from TPP — US killed the Trans-Pacific Partnership — Japan and Australia are working together against everybody’s expectations to resurrect it. They convinced the other nine partners, including Vietnam, Malaysia and Singapore to stay in it. This despite the primary economic benefit of the US market was gone. This is a tremendous level of partnership between two countries which aren’t allies. So, there is no formal Australia and Japan alliance, and yet they are clearly Indo-Pacific partners right now. As for investments, just this month, the Japanese and Australian foreign ministers announced a partnership on investment in the region, because already, to be honest, despite all the talk about BRI, Japanese investments way outweighs Chinese investment.

In Australia?

In Asia, and even in ASEAN countries, and in Australia for sure. In ASEAN countries like Philippines, Japanese investments is in the private sector, and it actually works. It is low key; it is by companies’ right, whereas BRI is a lot of showmanship in drama.

Trade with China will still be the largest for Australia and other countries in region?

Let me give you a very specific example. Two years ago, we did a report on economic interaction. Trade is something which everybody understands; it is very simple, but trade is not a measure of dependence, and trade is not a measure of strength and relationship, because trade is transaction. It ends at the border. So, just like for most countries in the region, China is unquestionably Australia’s largest trade partner, and that is a country that has a trade deficit with Australia just given.

I understand the importance of investment; it’s a no brainer. What is the quantum of deficit between Australia and China?

I don’t know the trade deficit between China and Australia.

India runs a trade deficit of nearly $60 billion with China.

Really Australia is trade surplus. It is not that large, but I will check that and then I will get back to you. But my point is this: Though that investment is a very different measure in a relationship because that requires faith in each other’s laws, rule of law, the ability to be paid through your profits, the stability of the processes. So if you look at US investment stock in Australia, it is 10 times higher than Chinese investment in stock markets.

US investment stock in China?

No, US investment stock in Australia. It is 10 times higher than Chinese.

You are saying that institutional investors from US investing into Australian market stocks?

Not just the stock markets.

Then?

Primarily in businesses. So we did really something creative and I will send you a link to this report because it is worth looking at. We looked at the year 2015, the last time we had full data; we looked at sales by Australian majority owned firms in the US, and we looked at sales by US majority owned firms in Australia. The interesting thing is sales by Australian majority owned firms in the US were four times greater than Australian exports to the US. Sales by US majority owned firms in Australia were five times higher than US exports to Australia. So, what does that tell you about trade? Trade only captures a little bit.

If you look at the impact of investment, the effects of trade in addition to the jobs created by that, so the point is in the case of Australia. China is unquestionably Australia’s largest trade partner. US is no comparison the largest economic partner. If you go through ASEAN, despite all the fanfare about Belt and Road initiative, if you look at who their largest economic partner is regarding trade and investment for almost every country in ASEAN, it remains either US or Japan. No one comes close, but that story is not told.

I mean I would believe that for both Indonesia or Malaysia, China would be a bigger trade partner than Japan.

An absolutely bigger trade partner, no question, but not economic partner, that is my point. So we actually need to be a little more careful about how we look at ‘economic partner’, and what we mean by the term. Who is investing right? Where is the investment coming from? Where is it going? So to be honest, I am not saying China is bad. For Australia, China is essentially good, but there are almost no Australian majority owned firms in China. The Chinese law does not allow it. There are very few Chinese majority owned firms in Australia as well.

China does not allow majority owned firms in China; you need to have a local partner, and of course you cannot repatriate dividends or profits very easily either.

It is difficult. The result is that though the Australia-China relationship is very transactional, it’s at the borders. If you look at the Philippines, my understanding is that in the last year, Japanese investment in the Philippines is 20 times higher than Chinese; Korean investment is 11 times higher. So, again, that is not part of the story because we all focus on the Chinese objects.

One of the concerns that was raised in the recent past on India’s ‘Look East’ policy is that we have signed several FTA agreements and we are now reconsidering. And one of the reasons for reconsideration it that most of these countries have become canalising agents for Chinese exports into India.

For instance, in Singapore, we have an FTA and a DTA, a double taxation agreement. As a result, Chinese companies established in Singapore buy from China and supply to Indian owned companies in Singapore. This basically has become the route for e-commerce in sales in India.  Almost all e-commerce companies in India are Singapore based, so the sale actually happens in Singapore. Such trade does not go via normal trade channels; it bypasses several.

A big area of concern is that electronics parts for assembly are using the FTA with these countries, basically affecting both prices and local manufacturing in India. The Indian government has opened up some of the bilateral FTAs as underlying all this cheap imports from China. In this environment, how do you see progress taking place on any kind of multilateral alliance in the East?

I understand your question completely. At its core, this is an issue of relative Indian competitiveness, but it’s also a question of nature of the FTAs. One of the advantages of the Trans-Pacific Partnership is because candidly it is what they call 21st Century free trade agreement, which means there is an awful lot more in there than just tariff schedules.

Regarding earlier FTAs, I am not an expert on the India-ASEAN FTA, but my presumption is that it is a relatively low level FTA focussing primarily on tariff. For example, full transparency on the percentage of products — where they came from, and the core parts of the Trans-Pacific Partnership basically measures local content. In an era of advanced supply chains, how do you say Malaysian products, Japanese products, Indonesian products or Singaporean products; you got to have transparency and you have to know what the local content is.

Absolutely, and what about your presumption?

My presumption is I don’t know this. My presumption is that the existing India-ASEAN FTA does not have stringent provisions about local content, because if you have that, to be honest, as long as there is transparency, then those products would not benefit from the tariff schedules in the FTA unless they had a certain percentage of profit. So the shorter answer is rather than blocking the FTA, India and ASEAN need to upgrade the FTA to meet the new circumstances.  Every FTA requires updating on a regular basis because if it was done 10 years ago, the technology today is different from what it was at the time. The Australia-US FTA was done 11 years ago right now.

Now I am also keenly aware that trade is a particularly sensitive issue in this thing. Especially for India, given its history and experience with free trade agreement. And given the experience that you just described, I can understand India’s reluctance to sign the RCEP (Regional Cooperative Economic Partnership) agreement. India is widely perceived to be the obstacle.

How are RCEP and TPP different in their structure?

They have different objectives. They have different approaches to trade liberalisation. Among the two, RCEP is obviously the easier one for India to join. If India is going to be involved in any regional trade liberalisation, it is not going to be TPP. It is too long, too hard right now to get into the TPP. New countries like Korea and Thailand have already said they want in, and Indonesia has also expressed an interest. It is hard for Indonesia right now, but still possible. It was hard for Vietnam too. The question is, how does India look at this. Do they look at RCEP just as a threat or do they use this as an opportunity to force through difficult domestic reforms, because in the end, in every FTA ever negotiated in history, the country that had to make the greatest compromises gained the greatest.

There is no reason for internal reform on the basis of the fact that we want to get into RCEP. The thinking is completely reverse: How can we influence the largest trading partners in this part of the world to get things that have been traditionally been denied to India as a block and individually? The question here is between RCEP and TPP. Which is  the better way to proceed in the long run for country like India?

I agree, yes. I would rather see India reach for TPP than work for RCEP. Again, RCEP is a good thing, it is fine, but it is complicated, and the politics are complicated. I think it would be really interesting for India to carefully study the experience of Vietnam in the next couple of years. Vietnam has State-owned enterprises, really serious difficulties, they are going to have to make some major domestic reforms in order to fully receive the TPP, and the question is — will that hurt them or harm them?

Indonesia is a perfect example; it is the biggest economy in ASEAN; you would think it would have a certain level of confidence that we are going to compete with, but instead they are afraid of the Thais, they are afraid of the Malaysians, they are doing everything that they can actually to be honest to downgrade or to weaken the standards within the ASEAN Economic Community.

The broader question for India then is Vietnam is a pretty self-confident country right now. You are absolutely right. The reach goal of TPP, even if it takes 10 years, is probably the better track. And in the meantime, you know there is also another element to all these agreements, which is geostrategic.

Is there an advantage between the geostrategic nature of the RCEP and TPP? So what is the role that Australia or the Quad can play in getting India into TPP?

I think everybody agrees that is probably a little too much of a reach right now. You have got to be realistic, so I don’t think there is any role for the Quad to get the US-India into the TPP. Because number 1 right now is the US having gone from being the creator and defender of things to destroying the global trading system. So, the US is in no position to encourage India in that direction.

What about Australia and Japan?

Australia and Japan, I think, would love that. But I don’t think you know, if you think about Australia, the difficulty and the challenge of even a bilateral FTA with Australia. Australia has got 25 million people and the level of threat that India should feel from Australia is minimal. And yet, I think Indians made a decision — that they are going to prioritise RCEP over that bilateral. I have not talked to anyone in Australia who is optimistic that there is going to be progress in the short term, that is really the decision for India. So, and both of these things, to be honest, it all comes back to: What is India’s national objective or interest in pursuing these agreements? Is it to protect yourself or is to strengthen yourself? They are very different strategies, right?

Yes, going back to the geostrategic thing now. Right now, there are some people who are probably saying that India should pull out of the RCEP. That would be, I think, a geostrategic mistake. I can fully understand India wanting to be careful with RCEP. I can understand India wanting to make sure that the level of Chinese influence in the other partners in RCEP is fully taken into account in whatever agreement it comes into. So again, maybe placing a higher priority or something, like rules of origin, without being an expert on that.

So the way forward on RCEP from an Indian point of view would be…?

If India were to withdraw from RCEP, the perception about India’s strength, self-confidence, future, India’s relationship in the region, etc. would be negative. There is a geostrategic case that would be borne from that type of treaty. To be honest, the US is bearing a cost for its withdrawal from TPP.

Every major FTA is ultimately signed on geostrategic considerations. NAFTA was largely about Canada and Mexico strengthening, in response to the EU and other things. Korea-US FTA was not an economic thing; it was an alliance. Going back to your question, I would love to see an Indian leader say: Look, we are not ready for it right now, but we want TPP.

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