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Burning Issues

[Burning Issue] India’s exit from RCEP

India’s decision to stay out of the China-backed Regional Comprehensive Economic Partnership, or RCEP, Asia’s mega free-trade agreement (FTA), has been met both with a sense of approval and disappointment and divided economists on the issue.

Context

  • Last week, the Regional Comprehensive Economic Partnership (RCEP) was signed by 15 countries led by China, Japan, South Korea, Australia, New Zealand, and the 10-country ASEAN group.
  • It is billed as one of the world’s largest Free Trade Agreement (FTA), accounting for nearly 30% of the global GDP covering 30% of the world’s population.
  • After long negotiations, India exited the grouping last November, saying it wanted to protect its economy from rising trade deficits with a number of RCEP members.
  • India’s decision is still the subject of much debate, and the RCEP has left a special window open for India to rejoin at a future date.

Regional Comprehensive Economic Partnership (RCEP)

Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) between –

  • The 10 members of ASEAN = Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam
  • Additional members of ASEAN +3 = China, Japan, South Korea
  • Members with which ASEAN countries have FTA = Australia, New Zealand

What is the objective of RCEP?

  • RCEP aims to 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 the following:

Trade in goods and services, investment, intellectual property, dispute settlement, e-commerce, small and medium enterprises, and economic cooperation.

China in RCEP

  • RCEP was pushed by Beijing in 2012 in order to counter another FTA that was in the works at the time: The Trans-Pacific Partnership (TPP).
  • The US-led TPP excluded China.  However, in 2016 US President Donald Trump withdrew his country from the TPP.
  • Since then, the RCEP has become a major tool for China to counter the US efforts to prevent trade with Beijing.

Significance for China

  • The beginning of RCEP is a major development that will help China and trade in the Asia-Pacific region in the post-Covid-19 scenario.
  • It will give China access to Japanese and South Korean markets in a big way, as the three countries have not yet agreed on their FTA.
  • While China already has a number of bilateral trade agreements, this is the first time it has signed up to a regional multilateral trade pact.

RCEP and India

  • India ended negotiation on RCEP over terms that were perceived to be against its interests.
  • The ties with China in recent months have been disturbed by the military tension in eastern Ladakh along the LAC.
  • In the meantime, India has also held a maritime exercise with Japan, Australia, and the United States for the “Quad” that was interpreted as an anti-China move.

Why did India walk out?

  • India decided to exit RCEP negotiations over “significant outstanding issues”.
  • Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector.
  • The current structure of RCEP still does not address these issues and concerns.

 (1) Escalated tensions with China

  • Escalated tension with China is considered to be a major reason for India’s decision.
  • Major issues that were unresolved during RCEP negotiations were related to the exposure that India would have to China.

(2) Surge in imports

  • This included India’s fears that there was “inadequate” protection 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 this, other partner countries could dump their products by routing them through other countries that enjoyed lower tariffs.

(3) Rules of origin criteria

  • Its concerns on a “possible circumvention” of rules of origin — the criteria used to determine the national source of a product — were also not addressed.
  • Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs.
  • This is anticipated to allow countries like China to pump in more products.

(4) Inability for countermeasures

  • 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, especially to countries with which it has border disputes.

(5) No assurance of market access to India

  • RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
  • The agreement would have forced India to extend benefits given to other countries for sensitive sectors like defence to all RCEP members.

(6) Trade balances paradox

  • India’s stance on the deal also comes as a result of learnings from unfavourable trade balances that it has with several RCEP members, with some of which it even has Free Trade Agreements.
  • Taking the current scenario, India only exports 20% to the RCEP countries, while the import is accounted for 35%.
  • Furthermore, RCEP members like China are well known for using non-tariff barriers against Indian products in the past, preventing India from growing its export to these countries.

(7) Protecting domestic industries

  • Several sections of the Indian industry have raised concerns over RCEP.
  • They have argued that some domestic sectors may take a hit due to cheaper alternatives from other participant countries.
  • For instance, the dairy industry was expected to face stiff competition from Australia and New Zealand. Similarly, steel and textiles sectors have also demanded protection.

The global hoax of FTAs

  • Our External Affairs Minister has inferred that the mantra of an open and globalised economy was used to justify unfair trade and production practices against India.
  • In the name of openness, we have allowed subsidised products and unfair production advantages from abroad to prevail.
  • The effect of past trade agreements has been to de-industrialize some sectors, said EAM without mentioning RCEP directly.
  • The consequences of future ones would lock us into global commitments, many of them not to our advantage.

Gains from opting out

India comprises half of the world population and accounts for nearly 40% of global commerce and 35% of the GDP. Without India, the RCEP does not look as attractive as it had seemed during negotiations.

(1) A Diplomatic win

  • ASEAN has been keen on a diversified portfolio so that member states can deal with major powers and maintain their strategic autonomy. Without India, the ASEAN has no major partner except China.
  • India signalled that, despite the costs, China’s rise has to be tackled both politically and economically.

(2) Not becoming China’s dumping ground

  • China provides enormous subsidies to its domestic products and goods. Consequently, this makes it vulnerable to the Indian market which becomes a dumping station.
  • China also needs greater access to the Indian market as Chinese companies have been suffering because of the US-China trade war that affected Chinese manufacturing companies in the past 2 years.
  • So, it could have proven to be a detriment to the Make in India initiative.

(3) Relief for Indian Farmers

  • Farmers opine that RCEP deal could have aggravated the agrarian crisis.
  • The input prices are heavily taxed in India and thus the Indian farmers are not being provided with the profitable prices which result in significant losses and also throwing farmers into a debt trap.
  • India after green revolution emerged as a self-sufficient country in agricultural product.  It could have brought India’s ‘food sovereignty’ at stake as opening markets.

Limited benefits that RCEP would have offered

(1) Boosting the existing ties

  • Clubbing with the ASEAN has always been a principal policy priority for India’s Act East Policy.
  • The RCEP agreement would have complimented India’s existing FTAs with the ASEAN and some of its member countries.
  • It would have also helped achieve its goal of greater economic integration with countries East and South East of India through better access to a vast regional market ranging from Japan to Australia.

(2) Expansion of services sector

  • The RCEP would have created opportunities for Indian companies to access new markets.
  • India is well placed to contribute to other countries in RCEP through its expertise in services.

(3) Counterbalancing China

  • Both geopolitically and geo-economically, China now looks set to dominate the Indo-Pacific.
  • India’s allies in Southeast Asia, as well as Australia, wanted India to join it to balance China.
  • Some of these are founded on opacity that surrounds the Chinese government’s decision making.

Wait! Did we miss the bus?

(1) Capturing Foreign Markets

  • Trade with RCEP nations was a chance for Indian service, IT, health and education sectors to prove its leverage. That is to say, India’s service sector had huge export potential in RCEP.
  •  ‘Rules of origin’ could have also provided a possible chance for India to become a major hub in coordinating with the regional partners and establishing a trustable value chain.

(2) Could have helped boost exports

  • Confederation of Indian Industry (CII) has called for signing RCEP agreement, as India could have also served as a major market for final good.
  • RCEP could have helped India in further export to the 3rd world nations, and primarily to West Asia, Africa and few European countries.

(3) Isolation from global value chain

  • India’s absence in integrating with global value chains will impact India’s internal and external ambitions.
  • India’s own evidence shows that jobs linked to global value chains earn one-third more than those jobs focused on the domestic market.
  • The inability to accede to the RCEP and ensure India’s integration into these emerging global value chains means India will lose out on a key opportunity to create such high-quality, high-paying jobs.
  • Moreover, India’s absence in both of Asia’s two key economic architectures will take away from India’s goals as a regional and Indo-Pacific power, as well as a prospective global power.

(4) Missed opportunity with ASEAN

  • The large size of the Indian economy and its negotiating heft would pose a valuable counterpoint to China within the grouping.
  • Several RCEP countries still hope India will reconsider its decision of staying out.
  • For ASEAN countries that led the RCEP negotiations, India’s presence would provide weight to the centrality of the ASEAN grouping in the region.
  • It is for this reason that Japan led the drafting of the special statement on India, which would waive the 18-month mandatory waiting period if India applied formally to rejoin the group.

Why should India review its decision?

The COVID-19 pandemic has left the global economy in a state of disarray. For the first time in 60 years, nearly every country in the RCEP grouping is facing a recession.

(1) For a speedy economic recovery

  • With global trade and the economy facing a steep decline due to Covid-19 pandemic, RCEP could serve as a bulwark in containing the free fall of the global economy and re-energizing economic activity.
  • Further, the RCEP presents a unique opportunity to support India’s economic recovery, inclusive development and immediate job creation even as it helps strengthen regional supply chains.

(2) Rhetoric vs reality

  • While deficits have increased for India in all foreign trade, India’s FTAs or PTAs (Preferential Trade Agreements) do not account for a bigger chunk of the trade deficit than they did before.
  • The growing trade deficits come from the downturn in India’s GDP since 2016, and the decline in manufacturing.
  • It is said that imports from China would have flooded had India entered RCEP, but haven’t they already flooded the country?

(3) Learning from allies

  • In this regard, India can draw inspiration from Japan & Australia, India’s Quad partners.
  • They chose to bury their geopolitical differences with China to prioritize what they collectively see as a mutually beneficial trading compact.

(4) Balancing the block

  • It is not just because gains from trade are significant, but the RCEP’s membership is a prerequisite to having a say in shaping RCEP’s rules.
  • This is necessary to safeguard India’s interests and the interests of several countries that are too small to stand up to the largest member, China.

(5) China is too big to defeat

  • Even before the RCEP, China was an important player in regional trade and regional supply chains, and RCEP made its position stronger.
  • Interestingly, even with the Covid-19 pandemic, other countries went ahead and signed the RCEP agreement without India.
  • China now has an advantage vis-a-vis India in the 14 markets of RCEP. It also has more bilateral agreements in the region than India.

(6) Doing away with Protectionism

  • It has been argued that Indian industry has hidden behind a wall of protectionism for far too long, and must open itself to global competition.
  • There is a tendency in Indian industry to seek protection, whenever any steps towards globalization are taken.
  • However, it is an acknowledged fact that globalization did benefit the Indian economy; it brought in newer technology and made Indian industry far more competitive.

Way forward

  • 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.
  • A possible alternative for India is to review its existing bilateral FTAs with some of these RCEP members as well as newer agreements with potential for Indian exports.
  • 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.
  • Nor is the problem only China, because India has a trade deficit with virtually every country in the Asia-Pacific.
  • The problem is a broader one, of India’s competitiveness, which has to be improved so that opening up leads to more benefits than costs, to industrialisation and not it’s opposite.

Conclusion

  • Economic isolation can never be a not an option for India. It does not seem a good idea for India to be out of the agreement from its inception, only to join it later.
  • Given India’s own ambitions to generate growth and jobs within India, and becoming a key player and rule-maker on the world stage, India’s decision to withdraw from the RCEP is debatable.
  • India must now translate this withdrawal into a commitment for domestic reforms to prepare itself for the next opportunity to integrate itself into the global value chains and unleash Indian manufacturing.
  • However, having no deal is far more prudent than signing up for a bad one.
  • It is easy to succumb to the rapturous sound of global applause, but far tougher to make a tactical retreat in the larger national interest.

References

https://www.thehindu.com/business/a-day-after-rcep-jaishankar-slams-trade-pacts-globalisation/article33110309.ece

https://www.thehindu.com/opinion/lead/indias-no-to-rcep-could-still-be-a-no/article33145957.ece

https://www.hindustantimes.com/analysis/why-india-was-right-in-staying-out-of-rcep/story-IbGTgBnZBwS4vvJbzxITxH.html

https://www.business-standard.com/article/opinion/india-rcep-and-economic-theory-120112300193_1.html

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