Regional Comprehensive Economic Partnership (RCEP)
Recently, 15 countries solidified their participation in the Regional Comprehensive Economic Partnership (RCEP). Even as India opted to stay out after walking out of discussions last year, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.
• Described as the “largest” regional trading agreement to this day, RCEP was originally being negotiated between 16 countries — ASEAN members and countries with which they have free trade agreements (FTAs), namely Australia, China, Korea, Japan, New Zealand and India.
• The purpose of RCEP was to make it easier for products and services of each of these countries to be available across this region.
• It also includes provisions on intellectual property, telecommunications, financial services, e-commerce and professional services.
• Although the RCEP was an ASEAN initiative, it is regarded by many as a China-backed alternative to the Trans-Pacific Partnership (TPP), a proposed deal that excluded China but included many Asian countries.
• Members of the RCEP make up nearly a third of the world's population and account for 29% of global gross domestic product.
Why India did not join?
Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector.
India’s fears that there were “inadequate” protections against surges in imports. It felt there could also be a possible circumvention of rules of origin— the criteria used to determine the national source of a product — in the absence of which some countries could dump their products by routing them through other countries that enjoyed lower tariffs.
India was unable to ensure countermeasures like an auto-trigger mechanism to raise tariffs on products when their imports crossed a certain threshold.
It also wanted RCEP to exclude most-favoured nation (MFN) obligations from the investment chapter, as it did not want to hand out, especially to countries with which it has border disputes, the benefits it was giving to strategic allies or for geopolitical reasons.
India felt the agreement would force it to extend benefits given to other countries for sensitive sectors like defence to all RCEP members.
RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing bilateral free trade agreements with several RCEP members to increase exports.
The China Factor- Escalating tensions with China are a major reason for India’s decision. While China’s participation in the deal had already been proving difficult for India due to various economic threats, the clash at Galwan Valley has soured relations between the two countries. The various measures India has taken to reduce its exposure to China would have sat uncomfortably with its commitments under RCEP.
Arguments in favour
Unless we address the structural issues that impact Indian competitiveness, our domestic industry will find it difficult to leverage any FTA to its advantage.
Those who support India’s decision argue that while RCEP may theoretically offer India new opportunities for exports and integration with pan-Asian production networks, we have a lot of work to do internally before we are in a position to make the most of free-trade deals.
India’s stance on the deal also comes as a result of learnings from unfavorable trade balances that it has with several RCEP members, with some of which it even has FTAs.
Study shows that while there has been growth rate in both imports from and exports to these FTA partners, the utilisation rate of FTAs both for India and its partners has been “moderate” across sectors, which covers pacts with Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, Republic of Korea and Malaysia
By staying out of RCEP, India has strengthened incentives to decouple supply-chains that incorporate China, and encourage these to redeploy around India and ASEAN.
There are concerns that India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc.
The move could potentially leave India with less scope to tap the large market that RCEP presents as the countries involved account for over 2 billion of the world’s population..
India’s decision could impact the Australia-India-Japan network in the Indo-Pacific. It could potentially put a spanner in the works on informal talks to promote a Supply Chain Resilience Initiative among the three.
The RCEP is now seen paving the way for lowering trade barriers for member nations at a time when the pandemic poses a challenge to global commerce.
For India, the withdrawal will result in a loss of 1.2% of the nation’s projected GDP in 2030, according to a paper by Peterson Institute for International Economics.
Other Alternatives Available for India
India, as an original negotiating participant of RCEP, has the option of joining the agreement without having to wait 18 months as stipulated for new members in the terms of the pact.
The possible alternative that India may be exploring is reviews of its existing bilateral FTAs with some of these RCEP members as well as newer agreements with other markets with potential for Indian exports. Over 20 negotiations are underway.
There is also a growing view that it would serve India’s interest to invest strongly in negotiating bilateral agreements with the US and the EU, both currently a work in progress.
That India offers a far more flexible labour market now than in the past will only redouble the speed with which global manufacturing supply chains begin to centre around India.