The Regional Comprehensive Economic Partnership (RCEP) had come into our attention after it made headlines that India chose to opt out of it. Be that as it may, it is important nevertheless to discuss the implications of India being, or not being, a part of this multilateral trade partnership.
Introduced at the 19th ASEAN Summit in November 2011, the Regional Comprehensive Economic Partnership (RCEP) is an international trade agreement connecting 16 of the world’s heavily trading nations which include most major Southeast Asian nations and several other countries which serve as their trade partners. The objective is of ‘Achieving a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement among the ASEAN Member States and ASEAN’s FTA Partners’. Recognising the great influence of the ten ASEAN countries along with their six Free Trade Agreement (FTA) partners, the RCEP was initiated with the vision of unified and equitable economic development. For the same, several aspects of international trade including goods & services, investment, tariffs, competitive markets, technology and overall economic cooperation were included under its purview. What makes it an alliance to look out for is how vast the RCEP spreads in its ambit, being the largest trade deal ever signed in terms of population or Gross Domestic Product (GDP). The 16 countries together account for almost 50% of the world population and 40% of the world’s total GDP.
Following the 27th round of RCEP negotiations and the 3rd RCEP Summit, India officially opted out of the trade deal in November 2019 at the ASEAN+3 summit in Bangkok. Citing differences in mutual agendas, the country still is the only country to have pulled out of the agreement. Without India’s participation, the remaining 15 members of the RCEP now constitute 30% of both the world population and the total GDP.
Indian Prime Minister Narendra Modi and the Minister of External Affairs Subrahmanyam Jaishankar expressed concern relating to the country’s exposure in industries like e-commerce, agriculture and vulnerability in international trade.
With an outstanding trade deficit of $105 billion with its allies in the RCEP, India felt its requirements unmet when its proposed tariff reductions were not accepted at the Regional Comprehensive Economic Partnership Summit, which existed on as much as 90% of its total imports. India’s suggestions of a three tiered tariff reduction system were opposed by most, and even though its own recommendations included tariff reductions up to 86%, remaining members desired for Indian tariffs to be cut down by over 90%, which would have reduced earning of the government significantly. Senior officials further announced how India’s efforts to safeguard against flooding of markets was not taken up even though it is a matter of utmost importance.
An important provision of the deal is its ingenious Rule of Origin. Most goods are produced across a number of countries, that is, parts of a particular good can be made in one place and assembled in another. Thus it sets guidelines in cases of disputes among countries about the true ownership of a particular commodity. India felt the idea of the RCEP’s Rule of Origin to be looser than required. While the rule is key towards determining the country from which a particular product originates, which in turn makes sure that the country then receives all recognition and related benefits, guidelines stated the rule to apply to all members equally. India called on its resources of manufacturing and representatives of the country felt that the leniency of the rule would hurt it the most, allowing member nations to take undue advantage of India’s prowess in production. Its suggestions, including a minimum 25% threshold, were rejected by more than 10 member countries.
China’s entry into the World Trade Organisation had already led to an exponential rise in India’s trade deficit with the country. Furthermore, India’s participation in the erstwhile India-China FTA of 2007 had led to a steep rise in the country’s trade deficit rising by a whopping 1000% from 2004 to 2014. The fact that most of India’s existing trade deficit is in fact with countries who are part of the RCEP meant greater risk for India had it joined, especially given the fact that its trade with countries which are members of agreements like NAFTA has risen significantly in the past even when it has never been a member country itself.
Added to these, growing dissent from within the country made the issue worse. Stiff opposition came from the sectors of agriculture and small businesses which stated the need to promote a stronger domestic economy in line with the present government’s India oriented policies like Make in India.
It then became necessary to showcase India as something more than just a market, with strategic needs of its own. While the country has always been at the forefront when it came to improving trade relations with East and Southeast Asia ever since 1992, continuing with the current provisions of the deal would not have catered to the country’s desire for mutually advantageous partnership which met the requirements of all involved.
THE BAD AND THE UGLY
India does face to lose a landmark opportunity in establishing itself in the global trade market. Amid the Coronavirus pandemic, if at all the country can negotiate the terms of involvement, thereby ensuring its return to the partnership, the initiative would go a long way in ensuring India re-establishing its prominence in international trade.
Critics of India’s decision lashed out, citing reasons like political chaos rather than economic considerations. Those opposing India’s stand claimed it to be nothing but a political ploy, in an attempt to play it safe and appeal to certain sections of the country rather than looking at the bigger picture. Concerns about flooding of Indian markets by partners like China (manufacturing), New Zealand (dairy) etc. stood on shaky grounds as experts claimed partnerships like the RCEP have mandatory clauses in cases of such agreement violations. Arguments focusing on data security and small business protection must have not been region specific that is arriving at mutually agreeable guidelines on these fronts should not have been difficult had further negotiations taken place. Give how much the country has to offer, the buck then fell on India’s negotiators who were criticised for not ‘doing better’ by insisting on amendments rather than opting out of the deal entirely.
Furthermore, given the fact that India has ongoing trade deals with more than half of the member countries in the RCEP, analysts suggested little to no such major change in its current position had it joined the RCEP. The importance of reciprocity would have allowed for all participants to benefit from the tariff reductions in terms of market access. Addressing the issue of trade deficits in a new light, giving up on an opportunity which could have boosted India’s exports, is a cause of serious concern. Even if India faces stiff competition in sectors like manufacturing and dairy, its prowess in the service sector could have, in fact, helped prove the RCEP a great investment for the country. Moreover, increased imports, regulated of course, would have brought down prices which would have proven beneficial for India’s massive consumer base. As Devashish Mitra, Professor of Economics at Syracuse University in New York, put it, ‘The effects of the RCEP on producers would have clearly been trumped by the effects on consumers, including those in poverty’.
Last but not the least, following the changes in the United States’ position in the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership soon emerged as the hottest of all upcoming international partnerships. Reinvigorating the tiff between China and the US, the RCEP came to be seen all around as a strong partnership which sought to facilitate free trade and pooling of resources for a greater mission of economic cooperation, vis-à-vis the latter’s continuous emphasis on protectionism. With such a background, India’s sudden withdrawal from the RCEP invoking reasons of national interest did not sit well with many senior officials.
The case of Indian participation in the Regional Comprehensive Economic Partnership (RCEP) isn’t just a matter of great importance for India’s future but it is also a grey area. Despite there being a number of reasons on both sides including politics, economics and the like, the country needs to focus on the end line, which is India re-establishing itself in the global market.
Written By: Riya Mathur
(Riya is a pre-final year Economic Honors Student at Shri Ram College of Commerce)