RCEP trade deal: India's standpoint and what it means to the region
At the 16-nation Regional Comprehensive Economic Partnership (RCEP) meet on November 4, 2019, India decided to opt-out, maintaining that its key concerns were not addressed. Indian Prime Minister Narendra Modi said in the ASEAN meet in Bangkok: “The present form of the RCEP Agreement doesn’t fully reflect the basic spirit and the agreed guiding principles of RECP”. He added: “It also does not address satisfactorily India’s outstanding issues and concerns. In such a situation, India can't join the RCEP Agreement."
In the course of deliberations, India’s viewpoint was that her experience with Free Trade Agreements (FTAs) has been underwhelming. The New Indian Express of 17 November 2020 wrote: “India is believed to be underutilizing its existing Free Trade Agreements (FTA) and evidence came from Agricultural Development Bank (ADB) a few years ago, which pointed out that the utilisation rate of India’s FTAs varies between 5 and 25 per cent— one of the lowest across Asia.” Besides, it added, our exports to FTA countries didn’t outperform overall export growth or exports to the rest of the world. Buttressing the same, a Niti Aayog (Planning Commission) paper, too, in the past had noted that recent FTAs suggest unfavourable gains to trade partners and that worsening trade imbalances merits attention. It underscored how India’s trade deficit with ASEAN, Korea and Japan widened post-FTAs.
The RCEP is an agreement between the 10 Southeast Asian Nations (ASEAN) and their six free trade agreement (FTA) partners, namely Australia, China, India, Japan, Republic of Korea and New Zealand. The objective was to achieve a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement among the ASEAN member States and its FTA partners. RCEP believe the organization will create an integrated market with 15 countries, making it easier for products and services of each of these countries to be available across this region. The negotiations are focused on trade in goods and services, investment, intellectual property, dispute settlement, e-commerce, small and medium enterprises, and economic cooperation.
In 2017, 16 prospective signatories accounted for a population of 3.4 billion people with a total GDP of US $ 49.5 trillion, approximately 39 per cent of the world’s GDP. Had the mega-FTA been concluded, this could have been the world’s largest integrated trading zone and the biggest trade pact since the World Trade Organization (WTO) was formed.
In the RCEP summit held in Bangkok on November 4, 2019, India opted to sit out of the meeting for the reason that her “key concerns were not addressed.” An Indian source said that his country had been consistently raising fundamental issues and concerns throughout the negotiations. But as they had not been resolved by the deadline for signing the deal India walked out of the deliberations, of course, by way of dissent. Earlier in his address to the ASEAN in Bangkok, the Indian Prime Minister had said, “The present form of the RCEP Agreement doesn’t fully reflect the basic spirit and the agreed guiding principles of RECP.”
India has several concerns but primarily three of these are conspicuous, viz. (a) Overall trade imbalance under FTAs and threats in certain industry sectors (b) Threats from China and no defence mechanism (auto-trigger) and (c) Domestic pressure. Let us examine each of these.
(a) Trade imbalance
The Economic Times of Sept. 09, 2019, quoted Indian foreign minister telling the India-Singapore Business & Innovation Summit in Singapore as this: "India remained concerned over the unfair market access to her products and the protectionist policies of Beijing that have created a significant trade deficit between the two nations.” The paper writes, “The trade deficit with India in 2018, according to official Chinese data, climbed to USD 57.86 billion from USD 51.72 billion in 2017 in about USD 95.54 total bilateral trade.” Indian foreign minister had said, “RECP, at the end of the day, is an economic negotiation. It has a strategic implication but the merits.... have to be economic.”
India says that it has a trade imbalance with almost all RECP member countries with which it has bilateral trade agreements. Indian Ministry of Commerce and Industry has issued the following table showing India’s trade balance with RCEP countries:
Saddened by depressing trade balance scenario with RCEP member countries and not too happy a performance by the domestic manufacturing sector, India planned to reduce the tariff from 80 to 65 per cent with countries she already has FTA like Japan and South Korea and 42.5 per cent reduction in the case of RCEP countries with whom India has no FTA like China, Australia and New Zealand. But RCEP members wanted a greater reduction in tariff lines to the tune of 90 per cent. India's proposal was neglected by the RCEP. India also nursed the apprehension that signing the trade agreement in the shape presented to her would hurt her ‘Make in India’ initiative which aimed at enhancing the capabilities of India's manufacturing sector.
(b) China factor
ASEAN member states had been trying to balance the rising Chinese clout with the US engagement in the region. But India’s hesitation to be part of RCEP disquiets them because it would leave space open for China. More importantly, Indian influence in the Indo-Pacific strategy may also ebb. This notwithstanding, India’s foremost perturbation is that the elimination of tariffs would open the floodgate for dumping cheap Chinese imports in her markets. That will be immensely hurtful to the local producers and a setback to India’s ‘Make in India’ initiative. From the Indian point of view China promising to address India's concerns after India had opted out was a contradiction in terms. China and other members of RCEP had sufficient time at their disposal to address India's concerns but they didn’t give it the importance it deserved. India had elaborated her standpoint threadbare and expected the RCEP to come out with a compromise formula in Bangkok. It did not.
In a bid to protect her home industries against a surge in cheap imports particularly from China, India had proposed the inclusion of auto-trigger and snapback mechanism. The implication was that the imports crossing a specific threshold, proposed measures would come to play automatically and safeguard the Indian economy. It would also apply to Australia and New Zealand for their agricultural and dairy product exports to India. This vital concern of India remained unaddressed. India would not want China to invade her domestic markets without first solving her domestic concerns and enhancing infrastructural facilities
(c) Domestic Pressure
India has been under pressure from political and economic sectors not to sign the agreement. At home, the Opposition Congress Party, which joined the RCEP negotiations seven years ago, too, decided that it was politically expedient to oppose the pact. Difficulties in the Indian economic landscape further compounded the problems. Strangely, the Swadeshi Jagran Manch (SJM), the economic wing of Rashtriya Swayamsevak Sangh (RSS),-- “the home base of ruling BJP” government-- fiercely opposed the agreement and even organised a ten-day nation-wide agitation in October against it. Ashwani Mahajan, the national co-convenor of SJM told The Wire, “When we talk to the industry, we find that they are simply not ready for it. They will not be able to withstand the competition coming from outside. Industries will close.”
Farmers and industry bodies vehemently opposed the agreement fearing an influx of cheaper goods particularly from China. Indian manufacturers of appliances, iron and steel, aluminium, electrical machinery, plastic articles and furniture, all feared that the RCEP countries dumping Indian markets making the survival of Indian industries very difficult. The farmers and the dairy industry protestors even burnt the effigy of Piyush Goyal, the minister in charge of negotiations. Cheaper milk and milk products from Australia and New Zealand posed a threat to the livelihood of Indian farmers.
The vast Pharmaceutical industry in India also feared it would have to suffer because of a clause that would give more years of patent monopoly to patent holders.
India’s decision on not joining RCEP has invited appreciation as well as criticism from observers. Not having adequate protection against a surge in Chinese imports is the key concern. Farmers and milk product dealers fear serious blow to their livelihood. In industrial sectors such as steel, leather goods, electronics, and textiles would be adversely affected by cheaper imports. The fears can come true in the absence of the rules of origin.
But others argue that there are also glaring disadvantages in remaining out. Even the Indian Chamber of Industries considers India’s non-participation a setback to her economic integrating with the world economy. RCEP is the largest trade agreement after WTO, accounting for 29 per cent of global gross domestic product (GDP) and almost one-third of the world's population. India with a vast growing economy cannot afford to remain out of the world trade system. "Indian government had to announce production-linked incentives (PLI) for 13 sectors so far with a financial commitment of Rupees 1.45 trillion as she decided to stay out of RCEP agreement. These sectors had to be offered protection via import tariff. It would make it difficult for India to enter RCEP”, wrote the Hindu Business Line of December 1, 2020. Smaller countries like the Philippines and Vietnam also face a trade deficit with China and some including Japan have territorial disputes with China. Yet they have decided to participate in the RCEP. Remaining out of RCEP might also have a negative impact on bilateral trade relationship. The Japanese initiated Supply Chain Initiative aimed to counter China may be adversely impacted.
The way out
There are cogent arguments on the pros and cons of the issue. India should actively lead the discussion with RCEP members and convince them that India’s trade imbalance needs to be adjusted. She can engage the members bilaterally, including China, while the door is still opened. India within the fold would add to the strength and productivity of the organization. At the same time, India needs to upgrade and streamline its manufacturing capabilities so that its products can match the world competition. But Indian policy planners should be able to handle the issue deftly.
* The writer has a PhD from Tehran University. He is the former Director of the Centre of Central Asian Studies, Kashmir University, India.