The regional trade agreement has been signed by 15 countries, without India. A look at the factors leading to India opting out, how China’s aggression firmed the decision, and the economic implications of the move.
On Sunday, 15 countries solidified their participation in the Regional Comprehensive Economic Partnership (RCEP). Even as India opted to stay out after walking out of discussions last year, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.
What is RCEP?
Described as the “largest” regional trading agreement to this day, RCEP was originally being negotiated between 16 countries — ASEAN members and countries with which they have free trade agreements (FTAs), namely Australia, China, Korea, Japan, New Zealand and India.
The purpose of RCEP was to make it easier for products and services of each of these countries to be available across this region. Negotiations to chart out this deal had been on since 2013, and India was expected to be a signatory until its decision last November.
On November 4, 2019, India decided to exit discussions over “significant outstanding issues”. According to a government official, India had been “consistently” raising “fundamental issues” and concerns throughout the negotiations and was prompted to take this stand as they had not been resolved by the deadline to commit to signing the deal. Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector. According to officials, the current structure of RCEP still does not address these issues and concerns.
How far is China’s presence a factor?
Escalating tensions with China are a major reason for India’s decision. While China’s participation in the deal had already been proving difficult for India due to various economic threats, the clash at Galwan Valley has soured relations between the two countries. The various measures India has taken to reduce its exposure to China would have sat uncomfortably with its commitments under RCEP.
Major issues that were unresolved during RCEP negotiations were related to the exposure that India would have to China. This included India’s fears that there were “inadequate” protections 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 which some countries could dump their products by routing them through other countries that enjoyed lower tariffs.
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 chapter, as it did not want to hand out, especially to countries with which it has border disputes, the benefits it was giving to strategic allies or for geopolitical reasons. India felt the agreement would force it to extend benefits given to other countries for sensitive sectors like defence to all RCEP members.
RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
What can the decision cost India?
There are concerns that India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc. The move could potentially leave India with less scope to tap the large market that RCEP presents —the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.
Given attempts by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific. It could potentially put a spanner in the works on informal talks to promote a Supply Chain Resilience Initiative among the three.
However, 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 FTAs. An internal assessment by the government has revealed that the growth in trade (CAGR) with partners over the last five financial years was a modest 7.1%. While “there has been growth rate in both imports from and exports to these FTA partners”, the “utilisation rate” of FTAs both for India and its partners has been “moderate” across sectors, according to this study, which covers pacts with Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, Republic of Korea and Malaysia.
India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing bilateral free trade agreements with several RCEP members to increase exports.
“You don’t get into FTAs merely to provide your market to your partner countries. While you accommodate your 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,” said trade expert Biswajit Dhar, professor at JNU’s Centre for Economic Studies and Planning. “Our share in the imports of RCEP partner countries have either stagnated or fallen,” he said.
What are India’s options now?
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. RCEP signatory states said they plan to commence negotiations with India once it submits a request of its intention to join the pact “in writing”, and it may participate in meetings as an observer prior to its accession.
However, the possible alternative that India may be exploring is reviews of its existing bilateral FTAs with some of these RCEP members as well as newer agreements with other markets with potential for Indian exports. Over 20 negotiations are underway.
India currently has agreements with members like the ASEAN bloc, South Korea and Japan and is negotiating agreements with members like Australia and New Zealand. Two reviews of the India-Singapore CECA have been completed; the India-Bhutan Agreement on Trade Commerce and Transit was renewed in 2016; and the India-Nepal Treaty of Trade was extended in 2016. Eight rounds of negotiations have been completed for the review of the India-Korea CEPA, which began in 2016. India has taken up the review of the India-Japan CEPA and India-ASEAN FTA with its trading partners.
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.