Is India Correct in Not Joining the RCEP?

What is the RCEP?

The Regional Comprehensive Economic Partnership (RCEP) is a Free Trade Agreement (FTA) came into negotiations of the ten ASEAN members during the East Asia Summit in Phnom Penh, Cambodia, in 2012. The idea of RCEP caught on and in the next two years, the group expanded to 16 countries, including China and India, collectively home to more than 3 billion people, with a combined GDP of USD 22.7 trillion, and accounting for almost a third of global trade.

Essentially, an FTA is a step-up from a Preferential Trade Agreement (PTA). A PTA is a basic tie-up between two or more countries providing concessions in tariffs to member countries yet maintaining differences in tariffs for different member countries. An FTA reduces the tariffs further, making them extremely low and negligible among member countries; the India-ASEAN FTA is a good example. Further escalation in cooperation leads to customs unions (CUs), common markets (CMs) of which the Benelux region (Belgium, Netherlands, and Luxembourg) is a good example, and ultimately, an economic union, of which the European Union is the prime and only example currently.

Problems and Opportunities of RCEP for India

India’s economy is ‘fairly open’; its total trade constitutes of around 40% of its GDP. India has seen imports rise steadily over the past few decades. India’s trade deficit has shot up from USD 6 billion in 2000-2001 to USD 109 billion in 2016-2017.

Many experts feel that the RCEP will enable India to reap benefits of ASEAN’s economic dynamism and will provide a basis for broader regional integration. It would also counter the ‘noodle bowl’ effect i.e. overlapping of too many bilateral and regional agreements and provide tangible benefits such as potential improvements in market access, more coherent trade facilitation, and a better framework of regulatory rules and cooperation.

However, FTAs have their downside as well. In the past, participating countries have experienced an inherent bias favouring members countries in terms of lower tariffs. This typically causes regionalism and leads member countries into indulging in intra-regional trade. As trade further integrates, supply chains integrate too, and interdependence within the smaller blocs increases. Hence a level playing ground is necessary.

India’s concerns are on similar lines, and very prominently related to China. It has questioned the Most Favoured Nations (MFN) obligations and does not wish to hand out MFN benefits to China, who is clearly and overwhelmingly the dominant player in the entire arrangement, and with whom India has border disputes and turbulent geopolitical equations.

Escalating tensions with China in the Galwan valley earlier this year also impacted India’s decision. India’s moves reducing its exposure to China (such as banning a host of apps) would not gel well with commitments expected in the RCEP.

During the negotiations process, India was unable to rope in other countries to forge an auto-trigger mechanism which would raise tariffs on products whose imports would have crossed a certain threshold.

India has already signed FTAs with ASEAN, South Korea, and Japan, however, with increased trade, India’s imports have grown faster than exports. As per a paper published by the NITI Aayog, India has bilateral trade imbalances with most of the RCEP member countries.

Till date, India’s exports to FTA countries have not outperformed total production growth or exports to the rest of the world. According to the 2016-17 Economic Survey, FTAs have had a larger effect on importing, and not exporting, metals and textiles. As India’s exports are more responsive to income changes than price changes, a tariff reduction/elimination does not significantly boost its exports.

India has not signed an FTA with China, yet its bilateral trade imbalance with China is greater than that with other member countries of the RCEP. This trade deficit is India’s primary concern, as signing of the RCEP would lead to even cheaper Chinese imports flooding the Indian market. Further, from a strategic point of view, the RCEP is China-led initiative, planning to extend the role of China in Southeast Asia, and India must be cautious about it.

Under RCEP, its member countries, notably Japan and South Korea, promote TRIPS plus, a stricter version of the Trade Related aspects of Intellectual Property Rights (TRIPS) agreement signed by all members of the WTO. TRIPS plus in turn promotes ‘data exclusivity’, which aims to preserve clinical research data of new drugs sent to regulatory bodies and under certain conditions, prohibit suppliers of generics from obtaining it. This provision can directly hurt one of India’s major exports, generic pharmaceutical products,

India had also proposed to phase out its tariffs in three different phases – first to ASEAN countries, then to Japan, Australia, and other non-ASEAN members except China, and then in the last phase, to China. However, RCEP members insisted that Inda make deep concessions and commit to future tariff cuts on 92% of tariff lines across all countries. Among RCEP members, India had one of the highest average tariff rates, hence it effectively meant that India would be making the largest tariff cuts for all member countries in one sweep.

Is it a good decision to not join RCEP?

In an article in the Indian Express, trade expert Biswajit Dhar, professor at JNU’s Centre for Economic Studies and Planning, says, “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.”

Many experts were in favour of India signing the agreement, yet the RCEP has led to a sharp divide in opinions. Even as India declined, RCEP member countries kept a clause allowing India to join later. In a remark in the Foreign Policy magazine, experts Harsh Pant and Nandini Sarma have clarified that until India addresses  its own economic problems, the RCEP may do India more harm than good.

Conclusion

India is already a member of 15 regional trade agreements. As per this NITI Aayog Report, these agreements have led to greater trade, but with imports exceeding exports.

Part of the reason could be India’s duty system which taxes finished goods at a rate lower than raw materials, rendering domestic products uncompetitive. The 2018 Economic Survey also points out that India’s logistical costs are at 13-14% of the GDP, much higher than the 8% figure in developed countries. Inflexible labour laws are also an impediment in the growth and global competitiveness of private sector firms. The RCEP wouldn’t change this much.

While addressing these internal issues, India must also review its existing FTAs and their benefits for domestic industry and consumers, trade complementarities and changes in global trade dynamics in the past few years. It should strive to negotiate for terms which are mutually reciprocal. It must also seek appropriate protection and quality standards so that unsafe and poor-quality products do not get dumped into the Indian market.

The key pain point is lack of growth in exports hence India should negotiate FTAs with a focus on its products and services which have maximum export potential. Only then it can be worthwhile to enter into regional arrangements such as the RCEP and reap its benefits.