29 April 2021 • 25 min read
How India’s RCEP Decision Will Affect?
Know about the RCEP trade deal, its expectations & limitations. The pros & cons of India's decision to opt-out of the trade deal. And how does this decision impact the Indian exporters & importers.
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:
- What is the RCEP?
- What is it expected to achieve?
- Why did India opt out?
- Is India’s decision right or wrong?
- What is the impact on Indian exporters and importers?
- The way forward for India
Before we begin, let’s first understand what a free trade agreement is.
- Free trade agreement (FTA): A treaty between two or more countries to facilitate trade and reduce or eliminate trade barriers is called a free trade agreement. It aims to eliminate tariffs over a specific period of time and create an open and competitive international market.
What is the RCEP?
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.
Why the need of RCEP?
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.
What is the RCEP expected to achieve?
- To eliminate tariffs on imports over 20 years. These would be imports that already qualify for duty-free treatment under existing FTAs, says this report. Member states will be allowed to retain import tariffs in sectors they consider important.
- To increase trade within the bloc as a result of lower tariffs.
- To set new rules on intellectual property, telecommunication, financial and professional services, and e-commerce.
- To set common standards under its rules of origin for how much of a product must be produced within the region for the final product to qualify as duty-free.
- The Peterson Institute for International Economics estimates the deal will increase global national income by $186 billion annually by 2030 and add 0.2% to each member’s economy.
- Market watchers expect global companies avoiding US-imposed tariffs on Chinese goods to shift their focus to Asia.
- In the long term, the RCEP has the potential to bring more countries into its fold and make Asia a unified trade bloc like the EU or North America.
What are its limitations?
The RCEP has been called a “low ambition trade deal”. Some reasons why:
- It excludes trade in most services
- Has few provisions on reducing non-tariff trade barriers (restrictions, quotas, etc)
- It is silent on environmental protection and labour standards
- It doesn’t cover legal work, accounting and other cross-border services
- Its intellectual property rules reportedly provide shallow protection
- It excludes India, a regional powerhouse
Under CPTPP’s shadow
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.
Why did India opt out of the RCEP?
According to Indian prime minister Narendra Modi, the RCEP negotiations failed to address India’s concerns. The main reasons behind India’s pullout:
- Tariff cuts: With some of the highest tariff rates on imports among RCEP members, India would have had to make the deepest cuts. So, it proposed a three-tiered plan to phase out tariffs, starting with an initial reduction on 65% of goods from Asean countries, 62.5% of goods from FTA partners Japan and South Korea, and 42.5% of goods from China, Australia and New Zealand, with which it doesn’t have FTAs. Though India later made further concessions on this point, its proposals were all rejected.
- Flood of Chinese imports: India feared a flood of cheap Chinese imports and sought an auto-trigger mechanism that would allow member states to raise tariffs if imports crossed a certain threshold. This suggestion, too, was shot down.
- Preserving domestic industry: India felt local producers – especially in agriculture, dairy and manufacturing – would lose out to cheaper imports. To protect them, it unsuccessfully demanded that 2014 and not 2013 be made the base year for reducing tariffs. India had raised import duties on several products between 2014 and 2019, and having 2013 as a base year would have meant a significant drop in import duties.
- Rules of origin: India felt the RCEP left room for non-RCEP countries to route their goods through the member countries.
- Market access, non-tariff barriers: India said its concerns over market access and non-tariff trade barriers weren’t adequately addressed.
- Trade deficits: India’s FTA experience doesn’t raise confidence. It has trade deficits with 11 of the 15 RCEP countries. (A trade deficit is a gap between imports and exports). In 2018-2019, China exported $53 billion more in goods to India than it imported from India, thereby accounting for half of India's total trade deficit of $105 billion with the RCEP countries.
- China border row: Beyond economics, growing tensions with China over a border dispute was said to be a major factor. Ties between the two have collapsed rapidly in recent years, even before their standoff at Galwan Valley in June that left 20 Indian soldiers dead. In 2017, too, India had rejected being a part of China’s Belt and Road Initiative, a massive infrastructure project stretching from East Asia to Europe.
Is India Right to not sign the RCEP?
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:
Yes, India’s decision is right
- India’s concerns over certain provisions of the RCEP agreement and its demand for protective measures weren’t addressed.
- Signing the deal would’ve worsened India’s trade deficit with RCEP countries, says the Centre for Advanced Trade Research. It estimates that post-RCEP, India’s annual imports would have grown by $30 billion and its exports only by $5.5 billion.
- India’s FTA experience suggests more trade diversion than trade creation, according to economist Ila Patnaik. A trade diversion, she explains, is when a non-FTA country routes its goods to India through an FTA country to take advantage of the lower tariffs.
- Patnaik also suggests a trade deal is not the only way to boost manufacturing, competitiveness and investment. In India’s case, improving its infrastructure and court systems could have the same impact.
- Another argument is that India cannot trust China and is wise to avoid a deal where Beijing is a major partner.
“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
No, India should have signed on
- By preserving industries that are uncompetitive, India is harming its own economy, says former Singapore diplomat Kishore Mahbubani.
- It has failed to look out for it consumers, who would have benefited from cheaper, better quality imports.
- It has lost a chance to attract global supply chains. The RCEP states are more likely to build value chains among themselves, leaving India isolated.
- India’s trade deficit and geopolitical issues with China aren’t reasons enough to not sign the RCEP, say experts. They point out that RCEP members Indonesia, Vietnam and the Philippines also have trade deficits with China while Japan and Vietnam have territorial disputes with it.
- By joining the RCEP, India could have been an effective counter to China, bringing balance to the bloc and influencing the direction it took.
- India’s decision might hurt its bilateral relations with RCEP countries such as Japan, which has worked hard towards a pact that includes India. The India-Australia-Japan network and its efforts to build strong supply chains to counter China could also be hit.
“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
What Does India's RCEP decision mean for Indian Exporters/Importers?
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.
What Next for India?
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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