India Loses its Nerve

Business International Magazine

The eleventh hour wobble on joining the RCEP is a lost opportunity but a chance to set India’s economic priorities right

By Nissim Jacob

India’s decision not to join the Regional Comprehensive Economic Partnership (RCEP) at the last moment came as surprise to many. The groundwork for joining the world’s largest trade bloc had been prepared over several years of negotiation and prime minister Narendra Modi was present at the Third RCEP Summit in Bangkok where an agreement to conclude the deal by end-2020 was to be signed. To the shock of the leaders of the other 15 partner countries, he said the RCEP in its present form didn’t conform to India’s guiding principles and “outstanding issues remained unsolved.” 

While India could join the bloc at some future date, its decision not to join now is a missed opportunity to shape the terms of regional (even global) trade instead of forever remaining subject to rules set by others. Nitin Pai, director of Takshashila Institute, a Bangalore-based think tank, sums up India’s dilemma saying, “Being out of RCEP cannot be a cause for celebration, nor is it diplomatic/negotiation success. But joining RCEP without structural economic reforms would have been highly risky too.” 

The RCEP is a free-trade agreement (FTA) between 15 countries which includes the 10-member Association of South East Asian Nations and five major regional economies — China, Japan, South Korea, Australia and New Zealand. Its goal is to create an integrated Asia-Pacific market and facilitate free movement of goods and services across member countries by reducing protectionist trade barriers. It aims to lower tariffs, standardize customs rules and increase market access. 

Had India joined the bloc, RCEP would have accounted for a third of the world’s GDP, a quarter of the world’s exports and half the world’s population. Says Pravin Krishna, an economist who teaches at John Hopkins University in Baltimore, “RCEP would have been an easier agreement for India to sign, as compared to any potential agreements with the US or the EU, because its focus was on trade liberalisation. In contrast, agreements such as the Trans-Pacific Partnership (TPP) pose a greater challenge, since they require concessions over a range of contentious non-trade issues, such as environmental and labour regulations, intellectual property (IP) protection, and the operations of state-owned enterprises.”

One of India’s key concerns was lack of adequate protection against a surge in imports. Several industries have complained that joining the RCEP will lead to Chinese goods inundating the Indian market, which they claim will lead to severe losses for domestic producers. During the negotiations India pushed for an auto-trigger mechanism which would permit raising tariffs on goods when the imports increase beyond a permissible limit. 

Another concern was the absence of clarity on non-tariff barriers that India claims denies it market access to countries like China. Yet another sticking point is the rules of origin, which is used to determine the identity of the exporter. The rules in their present form allow a country to circumvent high tariffs by routing its exports through a lower-tariff jurisdiction. 

India also has a trade deficit with several of the member countries of the RCEP particularly with China, which has overshadowed the RCEP negotiations from the beginning. It has a trade of $105 billion with the RCEP countries of which the trade deficit with China itself is $53 billion. Given this imbalance, several experts have questioned the benefits of joining the RCEP. Critics of the deal say that the past FTAs to which India has been a signatory haven’t fulfilled expectations.

Says Vijay Bhaskar, general secretary of All India of Trade Union Congress (AITUC) in Bangalore, “Instead of focussing on increasing its exports to other countries, India should strengthen the domestic market to ensure food security for its citizens and stable wages for its farmers. Even two decades after liberalization our share of world exports remains the same. The free trade agreements that we have signed have benefitted only the MNCs. India has huge trade deficits with several countries.”

The RCEP is Asia Pacific’s largest regional trading block | Credit: Wikimedia

Another problem that arose during the negotiations was regarding the Base Year. The RCEP members want 2013 as the base year. However during 2014 – 2019 India increased the import duties on several products to protect the domestic industries. As 2013 is to be set as the base year under the present RCEP, the protections put by India would have been rendered ineffective had it joined the RCEP. Thus India pushed for 2019 as the base year but in vain.

While some sections of the Indian industry feel that joining the RCEP would have allowed them to access larger markets, others were apprehensive as they fear it will cripple their industries. Pharmaceuticals and cotton yarn industries were confident of benefiting from it but the dairy, steel and textiles felt that imports from countries like China would adversely impact their domestic market. The dairy industry in particular feels threatened by imports from Australia and New Zealand.

Adds trade unionist Bhaskar, “I do not believe that joining the RCEP would have given any access to foreign markets for Indian producers. Farmers would have been particularly affected as the flow of foreign goods into the Indian markets would have been to their detriment. In Karnataka, the dairy industry will be one of the sectors that will be particularly affected if India joins the RCEP. Several farmers in India carry out secondary activities such animal husbandry and they would be adversely impacted by this.”

India has trading strengths in the form of a large labour force and in services but several  member countries of the RCEP have restrictive immigration policies and won’t give India the market access it seeks in services.

However those supporting the RCEP say that World Trade Organisation rules allow India to impose safeguard and anti-dumping duties if China engages in unfair trading practices. They believe that being part of the RCEP would have increased competitiveness among Indian firms. By not signing the RCEP, they say, India is also forsaking the benefits that arise from being part of global value chains (GVCs), where a product assembled in one country from parts imported from others adds to its exports.

According to the World Bank, “GVCs allow resources to flow to their most productive use, not only across countries and sectors, but also within sectors across stages of production. As a result, GVCs magnify the growth, employment, and distributional impacts of standard trade.” Jobs associated with global value chains pay more than those associated with the domestic market. By not signing the RCEP, India is losing the opportunity of creating high paying work.

India’s decision to pull out of the RCEP is also seen as a big blow to its ‘Act East’ policy. Asean saw it as a welcome counter to China’s dominance in the region, especially in the context of the US steady disengagement from Asia under the Trump administration. Though, India’s Foreign Minister S. Jaishankar had said that withdrawing from the RCEP negotiations will not affect its Act East policy, it has eroded India’s standing among the ASEAN countries who view India’s last minute wobble as a reflection of its deeper inability to formulate a sound policy towards the region.

Says Pai of Takshashila Institute, “India must now deepen trade with the US, Japan, Singapore, Australia, Indonesia & others, on a bilateral basis. Otherwise our geopolitical partners will be drawn into China’s geo-economic orbit.” 

But the debate over the RCEP has helped focus attention on the need for policies that increase the competitiveness of Indian manufacturing and agriculture. As Pai explains, “There are no simple answers here except that economic reforms are long overdue and even more urgent now. The Modi-Shah government will have to resist protectionist impulses. The risk of going back to the 1970s is more real now than any time after 1991.”


Leave a Reply

Your email address will not be published. Required fields are marked *