The repercussions of New Delhi’s absence from the mega Asia-Pacific deal that creates the world’s largest trade bloc
On November 15, 15 Asia-Pacific countries signed the Regional Comprehensive Economic Partnership (RCEP), the largest free trade agreement in history. India, an original negotiating partner since the regional bloc was conceived in 2011, did not sign on. It had dropped out of negotiations back in November 2019 itself.
India’s decision has divided opinion among economists and experts. Some believe it has missed an opportunity to tap into a huge market and raise its export-import game at a time when Covid-19 is bleeding its economy. Others believe India is right to stay out of a deal they claim to be backed by China solely to cement its position as a regional economic superpower.
This piece explores all aspects of the RCEP, including:
Before we begin, let’s first understand what a free trade agreement is.
The RCEP is an FTA between 15 Asia-Pacific countries – the 10 members of the Association of Southeast Asian Nations (Asean) plus five countries they have FTAs with. The Asean countries are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. Their five FTA partners are China, Japan, South Korea, Australia and New Zealand. The bloc accounts for almost a third of the world's population (2.2 billion) and 30% of its economy. The RCEP is, thus, set to create the world’s largest free trade zone, bigger than the European Union (EU) and the US-Mexico-Canada trade zone.
India – the Asean’s sixth FTA partner – was part of negotiations since they started in 2013. It participated in 28 out of 31 rounds of talks, dropping out in 2019 after its concerns went unresolved.
Many of the RCEP members already have FTAs with each other. So why would they be interested in an overarching agreement? According to this video analysis, a business with a global supply chain – one that manufactures a product with components made in different countries – might face more tariffs despite having an FTA with one or two countries. But under the RCEP, it would pay lower tariffs even if it sourced its components from multiple member countries.
The RCEP has been called a “low ambition trade deal”. Some reasons why:
Commentators have called the RCEP a China-backed alternative to the Trans-Pacific Partnership (TTP), signed in 2016 between the United States and 11 Pacific Rim countries – Australia, Brunei, Chile, New Zealand, Peru, Singapore, Vietnam, Japan, Malaysia, Canada and Mexico. Then touted as the world’s largest FTA making up 40% of the global economy, the TPP excluded China and was reportedly a US initiative to strengthen its position in Asia-Pacific. But, in 2017, American president Donald Trump withdrew the US from the pact before it had been ratified, claiming it would harm domestic manufacturing. The remaining members regrouped as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Compared to the RCEP, the CPTPP’s provisions are considered more far-reaching as it aims for 99% tariff elimination and offers greater clarity on environmental protection, labour standards and trade in services.
According to Indian prime minister Narendra Modi, the RCEP negotiations failed to address India’s concerns. The main reasons behind India’s pullout:
While the general view among experts seems to be that India’s decision is counter-productive, there are others who say it is right not to proceed with the pact. Here are their arguments for and against India’s stand:
“You don’t get into FTAs merely to provide your market to partner countries… Your objective is also to increase the presence of your products in the markets of your partners, and India hasn’t been able to achieve the latter objective.”
– Biswajit Dhar, trade expert and professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University
“India in RCEP will create a backdoor FTA with China.”
– Brahma Chellany, geostrategist
‘“I was very enthusiastic that India should go for RCEP. But there has been a problem at the border [with China] and those geopolitical reasons have the potential to spill over into the economic arena. I have changed my mind [about India signing the deal]. I think, geopolitically, we cannot trust China.”
– Arvind Panagariya, economist and former NITI Aayog vice-chairman
“I was disappointed that India didn’t join the RCEP. I think this was a setback for the Indian economy… Here you have this large market forming… and India alone says no, no, we’re not going to be part of that. Well, that can’t make sense.”
– Jeffery Sachs, economist and director of the Center for Sustainable Development, Columbia University
“Trade has, in effect, been sacrificed. Specifically, a rational approach to trade has been lost at the expense of crises and geopolitical constraints that were in some ways present before but not central to the decision.”
– Karthik Nachiappan, research fellow at the Institute of South Asian Studies, National University of Singapore
Indian industry and its institutions have welcomed India’s decision, even if some of them were initially in favour of New Delhi joining the RCEP.
As negotiations were underway, several sectors including dairy, agriculture, manufacturing, rubber and textiles had asked the government to keep them out of the deal. India’s dairy industry, made up largely of unorganised and small producers, was worried they would be destroyed by competition from Australia and New Zealand.
In 2019, Sharad Kumar Saraf, president of the Federation of Indian Export Organisation, India’s largest exporters’ group, had said duty-free imports from China would have “jolted manufacturing beyond recovery” and crippled exports. When India dropped out of negotiations, Engineering Export Promotion Council of India chairman Ravi Sehgal had called it a “wise decision”, adding, “Our MSME [micro, small and medium enterprises] unit members were concerned about the possible opening up to Chinese imports.”
Business organisations such as the Confederation of India Industry (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI) had also backed India’s stand. The CII had said the government’s decision reflected “the views of the majority of Indian stakeholders”. The FICCI had pointed out that the steel, plastics, copper, aluminium, machine tools, paper, automobiles, chemicals and petro-chemicals sectors, too, had apprehensions about the deal.
However, just before India’s announcement last year, the CII had said signing the RCEP would “give India the opportunity to tap large and vibrant economies and grow its exports” while “not being part of the bloc is tantamount to not having an even footing in terms of preferential access and losing export competitiveness”.
Several economists have expressed a similar view, with some saying India’s top exports (engineering goods, chemicals, pharmaceuticals, electronics) could see their market space decline as a result of lower tariffs in the bloc.
The Peterson Institute For International Economics says India’s decision could prove costly, with an expected loss of 1.2% of projected gross domestic product (GDP) in 2030. Exporters are worried this might hit expansion plans. Saraf conceded that the market access offered by the RCEP and common rules of origin were attractive prospects for exporters.
For now, the export-import industry can only look to India’s next steps.
In the RCEP: India can participate in RCEP meetings and economic cooperation activities as an observer. Having been an original negotiating partner, it can also join the bloc – without waiting out the 18-month period for a new member – under a special clause in the agreement. Japan, New Zealand, Vietnam and Malaysia are reportedly keen that India reconsider its decision. But reports say it is unlikely to change its mind as long as China is in the picture.
Outside the RCEP: India might review its existing FTAs – with RCEP members and other countries – with a view to correct its trade deficit. Some analysts also say India might explore being a part of the CPTPP, especially if a post-Trump US were to rejoin the bloc. Additionally, India is expected to revive trade talks with larger markets such as the US and EU.
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