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Why Did India Decide Against Joining the RCEP?

Editor, TRANSFIN
Nov 19, 2020 1:46 PM 4 min read
Editorial

Thomas Jefferson said in his inaugural pledge in 1801: "Peace, commerce and honest friendship with all nations…entangling alliances with none."

Wonder how Jefferson would square the recently signed Regional Comprehensive Economic Partnership (RCEP), a multilateral economic alliance between 15 Asia-Pacific nations, with the economic realities of its most high profile absentee nation - India? 

Backdrop

The RCEP is a Free Trade Agreement (FTA) that was launched by 10 ASEAN member states and six ASEAN FTA partners (Australia, China, India, Japan, Korea and New Zealand) in 2012. The aim is to create an integrated market with 16 countries and liberalise trading in the region.

India has been a part of the negotiations since 2013. 

However, on November 4th 2019, India pulled out from joining the agreement saying 

  1. The agreement is not reflective of its basic spirit and guiding principles
  2. It doesn't satisfactorily address India's outstanding issues and concerns

On November 15th 2020, the remaining 15 countries, with a combined GDP of over $26trn (roughly 30% of world GDP), contributing over 25% to global exports and forming a third of the world's population, signed the RCEP.

 

 

What Will RCEP Do?

Under Article XXIV (GATT) and Article V (GATS) of WTO Trade Agreements, developing nations are allowed to enter into regional trade agreements to facilitate trade without raising barriers to trade with the outside world. 

RCEP conceptually fits that bill. It aims to reduce and gradually eliminate a range of tariffs on imports within the next 20 years. It is also expected to reduce costs and time for companies by allowing them to export anywhere within the bloc (crucial focus on e-commerce) without meeting separate requirements for each country. 

RCEP has a mix of WTO-commitments and regulatory-fixing objectives. Its uniqueness lies in incorporating dedicated chapters on Small and Medium Enterprises, e-commerce, dispute settlement and technical cooperation between member countries.

To be fair, the RCEP isn't a breakthrough step for trade-liberalisation in the region. It is more of a harmonising exercise. There are many FTAs that exist between countries in the Asia-Pacific region (AFTA, SPARTECA, SAFTA, BIMSTEC etc.), including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an ambitious agreement that would have raised the trade-optics in the region had it not been for the US's departure early on.

 

What Are India's Reservations?

This has to be looked into from a pros/cons perspective. 

Pros. One. India could have tapped into a huge market helping us gain considerably in the pharma, cotton and services industry. 

Two. Excellent opportunity for us to integrate into regional and global value chains, raise exports through the "frictionless" duty-free regime that was handed to us on a platter. As per latest UN data, domestic industry can benefit up to $125.6bn from the agreement potentially.

Three. Historically, we have fairly benefitted from bilateral and plurilateral trade commitments. Exports have systematically increased and imports have stabilised. As far as deficits go, a significant rise in nominal magnitudes is difficult to overlook in the context of our rapidly expanding economy. 

Four. RCEP is less strenuous to commit to because it conveniently excludes concessions in a number of non-trade issues (labour, environment regulations, IPR-protections, rights of PSUs etc.)

 

 

Cons. One. The People's Republic of China is one of the prime architects of RCEP. Thus it may be diplomatically disingenuous to enter the agreement in the midst of ongoing geopolitical tensions between our two countries. 

Two. Politics aside, India has a HUGE trade deficit with China (accounts for 40% of our overall deficit). PLUS our trade deficit with all RCEP countries combined is $105bn. RCEP is designed in a way to release import restrictions which could result in our markets overflowing with Chinese exports and widen this deficit even further. India’s request for an auto trigger safeguard mechanism, which allows them to put safeguard duties in case of import surges, became a bone of contention.

Three. One of the defining clauses in RCEP is about common "Rules of Origin". These are rules which determine which country the goods/services originate in for the purpose of customs clearance. RCEP has 16 countries, each currently with different approaches to issuing these origin certificates, with thousands of different products to cover, making it a fairly complicated issue. It is feared that post RCEP harmonisation, China can potentially circumvent local Rules of Origin by shipping goods indirectly to India via other member countries. 

Four. RCEP's coverage of sectors is erratic, at best. For instance, it allows for our dairy industry to be opened up to countries like China, New Zealand, and Australia while allowing countries like Japan to maintain high import duties in some "sensitive" agro-products like rice, wheat, beef, pork, sugar and even dairy! (Because these are covered for Japan under the CPTPP.)

 

Where To Go From Here?

No doubt, the agreement calls for a regional tilt in China's trade influence. But free trade in exchange for bad samaritans is also not preferable.  

Afterall, New Zealand, Japan, Vietnam and Malaysia are known to be lobbying India to reconsider its stand with regard to the RCEP. But as Brahma Chellany, noted geostrategist commented: “India hasn’t benefited from FTAs as it is not an export-driven economy but an import-dependent one. India in RCEP will create a backdoor FTA with China.” 

Strategic protectionism thus is a perfectly reasonable and viable strategy to nurture local industries, and expedite a long-term export oriented economic path.

Trouble comes when protectionism itself becomes and stays the end point. 

FIN.

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