A Step Too Far: Why India Opted Out of RCEP
it has much to do with a fear of massive imports from china and other members of the trade pact that it fears could disrupt its domestic economy.
India’s reservations about the Regional Comprehensive Economic Partnership — a major multilateral pact that would bring together 16 countries in an ambitious effort to liberalize trade — have been well known from months of negotiations. Many have to do with a fear of massive imports from China and other RCEP members that could disrupt its domestic economy. Still, it came as a surprise when New Delhi announced at a summit in Bangkok in November that it was opting out, at least for now, writes Rajaram Panda.
At the east Asia summit meeting that ended in early november in Bangkok, where the issue of concluding the much-hyped Regional comprehensive economic partnership (Rcep) agreement was at center stage, india ultimately decided to opt out, saying its key concerns were not addressed. Making a forceful argument in his address at the summit, indian prime Minister narendra Damodardas Modi said: “the present form of the Rcep Agreement does not fully reflect the basic spirit and the agreed guiding principles of Rcep.” elaborating, he said: “it also does not address satisfactorily india’s outstanding issues and concerns. in such a situation, it is not possible for india to join [the] Rcep Agreement.” Let me explain.
First, what is Rcep? it is a proposed free-trade agreement between the 10 member states of the Association of southeast Asian nations (Asean) — Brunei, cambodia, indonesia, Laos, Malaysia, Myanmar, the philippines, singapore, thailand, Vietnam — and what is now five FTA partners — china, Japan, south Korea, Australia and new Zealand. india, the sixth partner, quit the pact at the november Bangkok summit. in response, china announced that india would still be welcome to join Rcep whenever it is ready.
Rcep negotiations were formally launched in november 2012 at the Asean summit in cambodia. in 2017, the 16 prospective signatories accounted for a population of 3.4 billion people with a total gross domestic product (GDP) of Us$49.5 trillion, approximately 39 percent of the world’s GDP. had this mega-fta been concluded in Bangkok, this could have been the world’s larg
est integrated trading zone and the biggest trade pact since the World trade Organization (WTO) was formed. some observers say stepping away is a huge loss for india. however, the issue is complicated from india’s point of view.
what are NEW Delhi’s CONCERNS?
india feared that by joining the trade deal, its domestic market would have been swamped by imports, thereby putting its domestic industry and agriculture at risk, an issue that was not addressed at Bangkok. not joining Rcep also would boost Modi’s “Make in india” initiative and protect the country’s economic interests and national priorities. india runs a large trade deficit with Rcep countries and was looking for specific protections for its industry and farmers from a surge in imports, especially from china. the decision comes amid rising opposition to the pact, with leading political parties stepping up attacks on Rcep.
A joint statement by Rcep countries said that the 15 remaining nations will begin formal work towards inking the pact in 2020, while still trying to resolve india’s concerns and objections. new Delhi also has not shut the door on eventually joining. Academics and analysts in india believe the country should bargain hard in Rcep negotiations with the intention to join, which is the position Modi took in Bangkok. there is almost unanimity of opinion among analysts in india that the country’s current stance is consistent with this prescription. there is room on the indian side to give up on some of its current demands, but there is also room for india to win concessions on other demands. this was discernible from the fact that statements by the other 15 Rcep countries on india’s position were conciliatory, and neither side has closed the door on further negotiations. the position of the Ministry of external Affairs (MEA) was also that the move was the right step. it has given enough elbow room to india to be able to bilaterally resolve its issues with other countries. the onus is now on other members. if they are unable to resolve india’s concerns, india will remain out of the trade deal.
the stance of industry AND Dairy farmers
Domestic industry and dairy farmers have strong reservations about the trade pact. india’s trade deficit with Rcep nations is Us$105 billion, with china alone accounting for Us$53.5 billion. the main worry is over chinese manufactured goods and dairy products from new Zealand flooding indian markets. the trade agreement was also seen as being detrimental to the government’s Make in india initiative. india was looking for specific rules of origin to ensure that the pact was not abused by non-partner countries and it wanted an auto-trigger mechanism to protect it from a surge in imports. e-commerce and trade remedies were among other key areas of concern that were not satisfactorily addressed. new Delhi had proposed different levels of tariff concessions for china to safeguard its domestic industry from cheap imports. On the other hand, india did not get any credible assurance on market access and non-tariff barriers. india was also worried about keeping 2014 as the base year for tariff reductions.
india had been consistent about raising these issues from the start of Rcep negotiations. Many of its earlier trade agreements had been lopsided and hurt domestic industry, and new Delhi is keen not to make the same mistakes again. the Modi government feels that previous governments engaged in poor negotiations in reaching free-trade agreements, which is why it wants to review its trade pacts with south Korea and Asean. india is now expected to pursue separate trade agreements with some of the countries
that will be part of the bloc, such as Australia and new Zealand, as well as those with which negotiations have not made substantial progress in recent years, such as the european Union.
the decision to stay away from the megatrade deal has resulted in a political blame game between the ruling party and the party it ousted from power, congress. it is the United progressive Alliance led by the congress party that agreed to explore an india-china FTA in 2007 and join Rcep negotiations with 2011-12. the Modi government now blames the UPA for negotiating a lop-sided deal. the impact of these decisions resulted in india’s trade deficit with Rcep nations increasing from Us$7 billion in 2004 to Us$78 billion in 2014, leaving domestic industry reeling under the impact of those decisions. therefore, india made a strong case at the Rcep summit for an outcome favorable to all countries and all sectors. in 2018-19, while india’s total imports from Rcep countries was Us$172.9 billion, its exports accounted for only Us$67.8 billion, leaving it with a deficit of Us$105.1 billion. Figure 1 shows the breakdown of import/export figures by country, but in short, the balance of trade for india with all 15 nations in the Rcep group is unfavorable.
Modi said that “when i measure the Rcep Agreement with respect to the interests of all indians, i do not get a positive answer” and “therefore, neither the talisman of Gandhiji nor my own conscience permit me to join Rcep.” it was a strong rebuttal to the position of the other 15 states. Modi also said that in the last seven years of Rcep negotiations, many things, including global economic and trade scenarios, had changed, and india cannot overlook this. indeed, india had been proactively, constructively and meaningfully engaged in the Rcep negotiations since their inception and had worked for the “cherished objective of striking a balance, in the spirit of give and take.”
the confederation of indian industry (cii) said it will continue to support and work with the government in its endeavor to integrate with the global economy through mutually beneficial trade agreements. While welcoming the Rcep leaders’ joint statement acknowledging india’s legitimate concerns, it hoped that the concerns would be addressed soon to the mutual satisfaction of all Rcep countries.
Dairy farmers welcomed the Rcep news along with small businesses, micro and small entrepreneurs, copper producers, bicycle manufacturers, e-commerce players, data service providers and others. Besides laying down the template for future trade negotiations, the Rcep decision also underscores the need to make the country’s exports more competitive. india has already convinced Asean countries to review the FTA with india, and it made similar requests to Japan and south Korea. it is also simultaneously negotiating a trade pact with the Us and an FTA with the european Union. Both of these jurisdictions are seeking similar concessions as those deliberated in Rcep, which includes free flow of data, integration of the agriculture market, and so on. india finds both the Us and china as among the most difficult jurisdictions regarding market access. so, will india concede? in view of the ongoing trade war between the Us and china, it remains unclear what india’s stance would be.
India feared that by joining the trade deal, its domestic market would have been swamped by imports, thereby putting its domestic industry and agriculture as risk. Not joining also would boost Modi’s ‘Make in India’ initiative and protect the country’s economic interests and national priorities.
arguments for AND against
some have argued that Rcep could have resulted in opportunities in the manufacturing sector related to the global value chain (GVC). Others, however, take a contrarian view, saying that this too would have been neutralized because of the lack of infrastructure in india. GVC manufacturing allows large corporations to use multiple countries, thus reaping the benefits of cheaper labor. With labor costs increasing in china, these corporations are looking at newer jurisdictions such as indonesia, Vietnam, thailand and india to manufacture products. But the fear in india was that chinese companies would use this window to dump many of their products here. in the past three years, india’s anti-dumping duties against chinese companies have been the maximum against any country.
Although at the Rcep negotiations india refused to concede space on framing policy seeking local storage and processing of data, its tasks at home are clear cut. india will have to accelerate reforms to make exports more competitive.