RCEP and India’s FTA strategy

Instead of insisting on both goods and services trade liberalisation to be taken up simultaneously, India should adopt a more pragmatic approach

The India–Australia Comprehensive Economic Cooperation Agreement (CECA) entering a “slow period” ( The Indian Express, August 9, 2018) is the latest example of India’s free-trade agreement (FTA) strategy getting into a sunset mode ( Business Standard, July, 24, 2018). The slowdown in FTA negotiations is partly because of the pressure India is facing from Association of Southeast Asian Nations (Asean) members to bring the Regional Comprehensive Economic Partnership (RCEP) to a conclusion. The RCEP countries have been struggling with the negotiations for the past six years, to a large extent on account of India’s offer of limited and differentiated tariff liberalisation and, more recently, insistence on a simultaneous negotiation of goods and services trade liberalisation. Given the global environment of the US-China trade war gaining pace and its likely impact on traditional export markets, the Asean member countries are serious about achieving their stated goal of concluding the RCEP negotiations and signing the agreement at the Asean summit in Singapore in November 2018. There is every possibility therefore that if India continues to be inflexible in its negotiating position, the other RCEP members will go ahead and conclude the deal without India. While Indian policymakers seem to be at ease with this possibility, there is a need to review India’s FTA strategy and move to adopt a more pragmatic approach to RCEP participation.

First, FTAs need not be seen as antithetical to multilateral/World Trade Organization (WTO) participation. In fact, FTAs are legitimate trade instruments allowed under General Agreement on Tariffs and Trade (GATT) Article XXIV for liberalisation of “substantially all trade” among member countries, over a pre-set time schedule among a set of countries (two or more) without raising tariffs for non-members. Preferential in nature, FTAs are ultimately aimed at contributing to free trade among more and more countries and hence towards the WTO objective of free and fair trade. Many developed and developing countries have followed the FTA route alongside multilateral trade liberalisation to their advantage. The FTA route has, of course, become more popular over the 2000s and after as the WTO process slowed down under the erstwhile Doha Development Agenda. Many countries found it easier to get market access in a bilateral or plurilateral arrangement with like-minded trade partners. Between 2000 and 2017 the cumulative number of regional trading arrangements (RTAs) in force grew from 79 to 287 with the goods FTA notifications being greater than the services notifications every single year. East Asia, one of the three poles of global trade (the other two being Europe and North America), has 83 RTAs in force, second only to the lead region, Europe, which has 97 RTAs.

Second, the present international trade context is dominated by the US-China trade war which, by negating the basic Most Favoured Nation (MFN) principle of the WTO, has weakened the multilateral system. The blockage by the US of appointments to the WTO’s dispute settlement appellate body has further reduced the effectiveness of the multilateral system. Also, in its bid for continued relevance, the WTO, under the influence of a few developed countries such as the US and Japan, may evolve rules in the area of e-commerce, transparency and caps with regard to state support/subsidy programmes, which may make India’s participation in the multilateral system in future quite challenging. India is already confronted with the US-initiated dispute on its export subsidy programme.

Third, while recognising that RCEP was conceived as a comprehensive agreement, with negotiations to be undertaken simultaneously for both goods and services, India is perhaps being unduly influenced by its experience of the FTA with Asean. The IndiaAsean services FTA was signed four years after the goods FTA and has yet to be ratified by all member countries. The goods FTA has not impacted bilateral trade significantly and the trade balance is in favour of Asean. While true, it is also a fact that India’s trade agreements with some of the Asean member economies and regional economies that have included services and investment have not been any different in performance. The India-Korea Comprehensive Economic Partnership Agreement (CEPA) is presently under review. Indian business has been unable to utilise the CEPA seemingly on account of stringent origin norms. Bilateral trade with Korea has increased but Indian exports to Korea have been approximately stagnant. The review process, while working towards easier rules of origin is also seeking expansion of the CEPA to services sectors favourable to India such as health care and education and improved Korean market access for certain products. India-Japan bilateral trade has remained stagnant or declined since the CEPA was signed in 2011. Trade with Malaysia reveals a similar trajectory. Even though Japan is among the top investors in India, the inflows are small and no major shift in investment is evident post the CEPA. Trade in services remains very small. The IndiaSingapore CECA, the first that India signed in 2005 with an Asean member economy, has been an exception with greater momentum evident in trade in goods (though only in the initial years), services trade increase but in favour of Singapore till 2015 and investment increase often reflecting third country investments routed through Singapore. India-Singapore CECA has also been through two review processes involving the provision of greater market access by India, flexibilities in rules of origin and revision of services liberalisation norms.

The key issue for India in the RCEP negotiations should not be whether trade liberalisation of both goods and services is taken up simultaneously or sequentially but whether participation in RCEP provides significant opportunities in the context of a major trade war and a weakening WTO-based system. Fear of an import surge from China should not be a compelling reason for dithering on RCEP. Exposure to competition may actually induce domestic producers to increase productive efficiency. As the US-China trade war intensifies and firms start to shift base away from China and relocate to other countries, India must be seen as an alternative location. This will happen only if India is linked to other regional value chains. RCEP provides opportunities for such linkages with regional economies. The government should, therefore, adopt a more pragmatic approach in RCEP negotiations. Goods trade liberalisation should be undertaken with carefully crafted sector-specific safeguard measures that can be incorporated to protect the interest of domestic producers. As for services liberalisation, areas of convergence can be negotiated/included in subsequent reviews on the basis of the ongoing CECA review process with help from these member economies.