Reflections on RCEP and FTAS

India has decided not to join the 16-member Regional Comprehensive Economic Partnership because of concerns regarding sensitive sectors, the liberalisation of the services sector, mode 4 relating to movements of professionals, in particular, and the large trade deficit with China as well as with countries of the Association of Southeast Asian Nations (Asean). We are now thinking of negotiating free-trade agreements (FTAS) with other countries as well as undertaking a review of the India-asean FTA. At this point it may be useful to reflect on some aspects of FTAS, in general, and the Regional Comprehensive Economic Partnership (RCEP), in particular.

First and foremost, it needs to be accepted that mega regional trade agreements are inevitable in Asia.

These agreements are used by likeminded countries to align common interests and evolve rules and disciplines to facilitate multiple crossings of intermediate and final goods, which is essential to global value chains (GVCS) activity. The RCEP is one such mega regional trade agreement and entry into it would have been the means for India to participate in regional and global value chains. East

Asia has been the most dynamic hub of GVC activity after the global financial crisis and, in fact, GVC activity for both Europe and North America with the Asian GVC hub has also increased in this period.

Secondly, trade agreements work on the principle of reciprocity. While it is true that preferential access to the participating countries is inherent and basic to an FTA, this holds true for all member countries. If we give some preferences, we also get some preferences. While existing (static) comparative advantage is the basis of an FTA negotiation for preferential access, we must also provide for dynamic comparative advantage. As we participate in GVCS, the scope for developing comparative advantage in smaller intermediate tasks (as against products) increases. So, newer comparative advantages in manufacturing and accompanying service tasks may develop and evolve in the process. It is essential, therefore, that FTA negotiations be based on dynamic comparative advantage estimations rather than solely on static considerations.

In the process of evolving comparative advantage, some sectors will lose out. This, however, is not typical of FTAS but of all trade. Trade liberalisation and, in particular, preferential liberalisation under FTAS need to be accompanied by policies and programmes to assist labour in adjusting to trade-induced displacement in the losing sectors. Countries like Japan, South Korea, and Vietnam have implemented specific trade assistance programmes such as retraining, relocation allowance, education, and financial assistance as well as support to small and medium enterprises and their workers to cope with the consequences of FTAS, trade, and economic reforms.

Thirdly, as regards trade deficit, it may be worthwhile to consider that in an age of GVCS, simple export-import calculations that do not account for third-country participation in producing goods may not be the most efficient estimates of bilateral trade deficits. Given that China is both an assembly and re-export base for many countries, a trade balance estimation based on value added may be a useful exercise that we could undertake to get a more accurate picture of our trade imbalance with the country. Also, increase in exports and trade re-balancing, while desirable objectives, are not ex ante assured outcomes. Enhanced competitiveness of domestic industry, major factor market reforms, and establishing a conducive trade and investment climate are necessary for India to take advantage of FTAS. Smaller countries like Vietnam have sought membership in a higher grade Comprehensive and Progressive Agreement for Trans-pacific Partnership, aimed at far deeper integration relative to the RCEP, with the motivation of locking-in domestic economic reforms.

Fourthly, it may be useful for India to think beyond mode 4 liberalisation in services sector negotiations. Asean’s limited internal services sector liberalisation and the fact that the India-asean FTA in services has not yet been implemented should have been sufficiently indicative, a priori, of the difficulty in getting Asean on board. Services that accompany or are necessary to value-chain production such as business, financial, transport and logistics, or even high-end services like research and design may provide us with newer opportunities after entry into the RCEP. Identifying our potential comparative advantage in these areas will, therefore, equip us with some flexibilities in the negotiation process.

Fifthly, a low utilisation rate, as is true of India’s FTA with Asean, is not necessarily indicative of FTA ineffectiveness or its limited potential to impact trade. It could also be on account of limited understanding of the FTA by business people. In addition to preferential margins and rules of origin, government initiatives and supporting consultations for industry, particularly SMES, have helped raise FTA utilisation rates in countries like South Korea, which, like India, has been a latecomer to the FTA process. Doubts of trade creating and enhancing benefits of FTAS have been countered by government support mechanisms that include educational courses for companies, information dissemination through FTA portals, workshops, facilities for daily consultations, etc.

Sixthly, FTAS with the US and the EU are not substitutes for the RCEP as currently these are not the most dynamic regions in terms of growth or GVC activity. Trade negotiations by the US with other countries have followed the most unpredictable trajectory under the Trump presidency. In India’s case, FTA negotiations have yet to begin. With the EU, FTA negotiations started in 2007. Over 12 years and many rounds, the FTA has not been finalised and issues that have been hardest to resolve are, as in the case of the RCEP, liberalisation of agriculture, services mode 4, dairy sector, and intellectual property rights, among others.

Lastly, and perhaps most importantly, foregoing the opportunity to participate in the Asean-centric RCEP may make the case for establishing our relevance in the Asean-centric strategic construct of the Indo-pacific that much more difficult.

So, some rethink on joining the RCEP and using the next couple of months to work on a multi-pronged strategy with the help of trade experts and implementation of economic reforms is the need of the hour.