India’s U-turn from the RCEP– Signaling National Interest

At the recently concluded 3rd Regional Comprehensive Economic Partnership (RCEP) Summit held in Bangkok, Thailand, India pulled out of the much-anticipated free trade agreement (FTA) with the grouping. Prime Minister Narendra Modi on 4th November, 2019 said in his address to the gathering, “When I measure the RCEP Agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the Talisman of Gandhiji nor my own conscience permit me to join RCEP.” The FTA saw unanimous opposition from within the BJP and from the left and right opposition parties alike, from RSS affiliates such as Swadeshi Jagran Manch (SJM) and Bharatiya Kisan Sangh (BKS) and from the MSME sector. Amidst rising domestic pressure and no assurances on various aspects of the trade pact, India stood its ground and rejected the deal. As the rest of the fifteen nations went ahead, it yet again left India all alone in international trade negotiations, portraying us as being a spoilsport, always shying away from FTAs.

RCEP: Background

A free trade agreement aims to reduce trade barriers such as tariffs and quota and promote free flow of goods and services amongst trading partners. Negotiations for the RCEP began six years ago in 2013 between 16 countries. These included Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam- the 10 ASEAN countries plus six others – Australia, China, India, Japan, New Zealand and South Korea. This bloc (including India) would have created one of the largest free trade markets in the world, comprising half of the world’s population, a quarter of the global GDP and a third of global trade. RCEP stood as the China-led counterpart to the now defunct US-led Trans Pacific Partnership which included many emerging south-east Asian economies. The key difference between them is that RCEP, unlike TPP, wouldn’t require partner countries to enforce laws for the protection of the environment and intellectual property rights or other liberal economic reforms. Failing to reach an agreement in the previously held negotiation, PM Modi took the final call himself and rejected the deal in national interest. India’s exit means RCEP lost the third largest economy in the bloc and has been reduced to 15 countries only. However, China says that India is welcome to come back whenever it wishes to.

Poor past record of India with FTAs

The important question here is that if RCEP would have indeed opened doors for India to 15 other markets, vastly increasing its business, then why did we back out at the last moment? The answer lies in the past record of India with FTAs which has shown dismal results for our country. So far, we have implemented 13 trade agreements. The trade deficit has only widened for us after the deal instead of decreasing. Due to sluggish growth in the manufacturing sector and increasing competition from other economies, India’s merchandise import has been rising when compared to the exports. Looking at the India-ASEAN Comprehensive Economic Cooperation Agreement (Ceca), trade deficit raised from $8 bn in 2009-10 to $22 bn in 2018-19. Under the Comprehensive Economic Partnership (Cepa), trade deficit with Japan doubled from $3 bn in 2009-10 to $6 bn in 2018-19, whereas with South Korea, it rose to $12 bn from $5 bn in the same financial years. Indian manufacturers have not been efficiently utilising FTAs. No wonder, India’s FTA utilisation rate stands at a mere 25 per cent as per the Asian Development Bank.

China: The real thorn in the flesh

India’s trade deficit with China has been widening, reaching $53 bn; accounting for 50 per cent of India’s total trade deficit. India majorly exports primary agricultural goods to China whereas imports finished products that are technologically highly advanced and way cheaper than Indian products. Currently, India imposes tariffs such as import duty and anti-dumping duty on Chinese products to safeguard domestic producers. Agreeing to the RCEP would require India to exempt 74 per cent of items from any such tariffs. This obviously will raise alarm amongst Indian MSMEs as they fear losing the market due to the flooding of Chinese goods. China also is looking at its own self-interest. It has to take care of its own manufacturers as the pressure mounts due to the US-China trade war. It has to find alternatives for its products. India joining the RCEP would be an ultimate victory for China as it would have tariff-free access to the second most populous country in the world.

Pressing concerns of India with RCEP

India had a few conditions for joining the RCEP which would help allay the fears of its domestic industry. First being the base year on which tariffs would be decided; India wanted 2019 instead of 2013 as proposed by the RCEP. This is because in 2014, India raised its custom duties on many products and 2013 as the base year, would force India to reduce tariffs for around 90 per cent goods. India also proposed an auto trigger mechanism to safeguard its domestic market by applying some duties in case of a deluge of imports. Returning to tariffs and duties after entering into an FTA is called ratchet obligation which India had asked for. Another important concern was data localization as India strongly wanted to protect the movement of its domestic data abroad so as to protect the privacy of its people and sovereignty of its nation. Obviously, no common ground was reached on these issues, hence India took the appropriate decision of backing out of the RCEP. Moreover, many industries would have been threatened by this FTA. New Zealand and Australia have been trying to penetrate the Indian market and this was a golden opportunity for them to destabilize India’s flourishing dairy industry. China posed serious threats to the automobile and steel industry whereas Vietnam would have badly hurt the textile sector. Indian spice exports could have been drastically affected by imports from other spice economies of south-east Asia.

Domestic reforms: The need of the hour

India has had a poor image when it comes to multilateral trade agreements and organisations such as the World Trade Organisation. It has many times in the past shied away from opening its markets to other highly competitive economies out of a fear of harming domestic producers. But how long can a country, which envisages itself as a $5 trillion economy by 2024, continue to close its doors and maintain a protectionist stance? Added to this, India is trying to ramp up its image in the international arena in all aspects by now taking the role of a strategic power instead of the erstwhile submissive one. For this purpose, it will have to increase its trade engagement with other blocs so as to raise its share in global merchandise exports from the current 1.7 per cent as compared to China’s 12.8 per cent. India-US trade related cases are quite frequent at the WTO and recently India lost a case again. This should push the policy makers into bringing in various challenging reforms in the economy to make our domestic exports more competitive. The European Union is India’s largest trading partner. An FTA with the EU and USA are highly likely to benefit India. But for materializing an agreement like this, India will have to bring in the policy of standardization in its export products. Like the 1991 LPG reforms, India needs yet another push for liberalization, privatization and globalization. Agricultural exports need to be standardized and regulated. Red tapism and the bureaucratic rule need to go away. Even though India jumped to the 63rd rank in Ease of Doing Business in 2019, there are many glitches with respect to GST returns which impede the speed of business transactions. Besides merchandise exports, service exports are also declining. India should look up to its close neighbor Bangladesh which is faring well in terms of exports and manufacturing.

India has yet again missed an opportunity to integrate its market, although for national interest, but this policy in the future will only hurt our national interest more if the domestic industry is not reformed and we keep evading such trade partnerships.

Picture Courtesy- Nikkei Asian Review

Most Popular

To Top