India and RCEP

JAN 5

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WHY IN NEWS?

In the recently held Regional Comprehensive Economic Partnership (RCEP) Summit in Thailand, India decided not to join the RCEP trade deal. The rest 15 countries have decided to move ahead and finalise a deal at the earliest, but will leave the door open for India to join on a later stage.

WHAT IS RCEP?

The Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement between the member states of the Association of Southeast Asian Nations (ASEAN) and its free trade agreement (FTA) partners.

It was introduced during the 19th ASEAN meet held in November 2011. The RCEP negotiations were kick-started during the 21st ASEAN Summit in Cambodia in November 2012.

The objective of launching RCEP negotiations is to achieve a modern, comprehensive and mutually beneficial economic partnership agreement among the ASEAN Member States and ASEAN’s FTA partners.

MEMBERS:

  • All 10 members of the ASEAN
  • Three ASEAN+3 members, namely Japan South Korea and China
  • Two members from ASEAN+6, namely Australia and New Zealand

ASEAN:

  • The Association of Southeast Asian Nations (ASEAN) is a regional intergovernmental organization comprising ten Southeast Asian countries
  • ASEAN was preceded by an organization called the Association of Southeast Asia (ASA). ASEAN itself was created on 8 August 1967, when the foreign ministers of five countries: Indonesia, Malaysia, the Philippines, Singapore, and Thailand, signed the ASEAN Declaration (Bangkok Declaration)
  • The creation of ASEAN was motivated by a common fear of communism 
  • Its member nations comprises of Indonesia, Singapore, Philippines, Malaysia, Brunei, Thailand, Cambodia, Laos, Myanmar and Vietnam
  • The group promotes intergovernmental cooperation and facilitates economic, political, security, military, educational, and socio-cultural integration among its members and other Asian states.

SIGNIFICANCE OF RCEP:

  • The RCEP’s participating countries including India, together accounts for almost half of the world’s population (3.4 billion people)
  • It contributes about 39% of global GDP and over a quarter of world exports.
  • In 2017, the 16 prospective signatories (including India) accounted for a total Gross Domestic Product of $49.5 trillion.
  • Small and Medium Enterprises make up more than 90 per cent of business establishments across all RCEP participating countries.

BENEFITS FOR INDIA:

  • More market access:
    • Reduced tariff and non tariff barriers would ensure greater access for Indian goods and services abroad. India has comparative advantage in areas such as IT- enabled services, healthcare and education services.
    • It also provides an opportunity for India to tap large and vibrant economies and increase its exports, thereby address its negative trade deficit
    • Lower barriers would also provide a major boost to the expansion of India’s established service sector industries
  • FDI gains: it would encourage greater foreign investments into India’s economy. Indian industries, like Petroleum, fertilizers and construction, could also benefit from the new investment opportunities abroad.  
  • Growth of supply chains:
    • Frictionless movement between the 16 members will ensure greater integration of India into the global supply chain, especially in the manufacturing sector.
    • This could be a major boost for India’s domestic production, especially in its MSME sector
  • Increase in employment opportunities:
    • With labour costs increasing in China, the large corporations are looking at newer jurisdictions. India with its large demographic dividend is an attractive market for the labour intensive industries. Joining RCEP could increase this attraction, thereby generating more employment.
  • An alternative to:
    • Asia-Pacific Economic Co-operation (APEC), in which India has been attempting to join APEC since 1993
    • Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which is a formidable group even without the USA
  • Counter protectionism and initiate reforms:
    • The shear value and potential volume of RCEP trade can act as a significant counterweight against rising tendencies of protectionism and anti-globalization by countries like USA
    • The group can play a major role in initiating changes in global trade environment, such as encouraging reforms in WTO.
    • Joining it could also provide India with an opportunity to lead the future globalization process
  • In line with India’s initiatives:
    • It aligns with Act East Policy which makes both economic and strategic sense for India to be the part of the agreement.
    • Close cooperation with ASEAN members like Thailand and Myanmar can help India improve its connectivity to North eastern states. This way, India can strive for faster completion of its initiatives like Kaladan project and IMT highway.
    • For India to make its ‘Make in India’ a global success, it must participate positively to become a part of the Asian value and supply chain which either begins or ends in India
  •  Geopolitical significance:
    • The pact can help counter the aggressive rise of China in the Indian ocean region. It can also help in counteracting the void created in Asia due to USA’s retrenchment
    • Also, it provides a platform to India for rebalancing the Asia strategy and  acknowledge its growing linkage with the Pacific Ocean

WHY INDIA DID NOT JOIN:

  • Trade deficit:
    • India has massive trade deficits with at least 11 of the RCEP countries. India's trade deficit with these countries has almost doubled in the last five-six years - from $54 billion in 2013-14 to $105 billion in 2018-19.
    • Given the export-import equation with the bloc, a free trade agreement with the grouping would have increased it further. Also, widening trade deficit would empty foreign exchange reserve of India at a faster rate.
  • Fear of dumping:
    • India already has bilateral trade agreements with Japan, Malaysia, Singapore, Thailand and South Korea, as well as an FTA with Asean.
      As a result, for India, trade barriers would have been lower with only three countries: China, Australia and New Zealand. There was a fear that there would be a surge in imports of manufactures, primarily labour-intensive ones, from China.
  • China factor:
    • At present, India ships 20 per cent of all its exports to the RCEP countries and receives 35 per cent of all imports from them. China is the ringmaster of this export-import circuit. Of India's $105 billion trade deficit with RCEP countries, China accounts for $53 billion
  • Concerns over Industries and Farmers:
    • In agriculture, domestic players dealing in dairy products, spices- chiefly pepper and cardamom, rubber, and coconut would face dumping from the South Asian spice majors and Oceana countries. Eg: Vietnam and Indonesia have very cheap rubber to export. New Zealand and Australia one of the largest dairy sector in the world.
    • Domestic industry and dairy farmers had strong reservations about the trade pact.
  • Unresolved issues:
    • India had a few demands, but they couldn’t be negotiated. This includes:
      • Opening up the services sector so that Indian professionals and workers can have easier entry into their market.
      • Shifting the base year for tariff cuts from 2014 to 2019
      • Avoiding a sudden surge in imports from China by including a large number of items in an auto-trigger mechanism.
      • Stricter rules of origin to prevent dumping from China
  • Strict IPR policy:
    • The stringent IP provisions have been stumbling blocks for a while, with India arguing for these to be taken out of the agreement.
    • The provisions, if adopted, would have lead to domestic pharma companies not being able to launch or export affordable life-saving drugs across the world and farmers would have lost the right to save or sell seeds or the harvested produce from plant varieties that have been granted intellectual property.
  • State of the economy:
    • The Indian economy is currently experiencing a reduced growth rate due to numerous reasons. An FTA at this time could be detrimental for the economy, especially the MSMEs and farm sectors.

CONCERNS:

  • Missing out on RCEP is a huge loss: Once concluded, this would be world's largest integrated trading zone and the biggest trade pact after the World Trade Organization (WTO) was formed.
  • Only short term benefits:
    • The loss to the economy far exceeds the short-term perceived benefits of staying out of the pact
    • Manufacturing today requires greater integration with global supply chains. They could miss this with India retracting from joining RCEP
    • This action signals a shift towards a protectionist stance, which can greatly affect India’s performance in the ease of business index and thereby inhibit foreign investments
  • Strategic loss:
    • With the move, India has ceded space to China to have a greater say in the region.
    • Signing the agreement would have signaled an embrace of freer trade. It could have aided in the shift of companies out of China to India. 
  • Policy dilemma: 
    • India wants to become a manufacturing hub. Staying out of the RCEP reduces opportunities for trading with these countries, which account for roughly a third of global trade. 
    • India should have used this opportunity to push through contentious but necessary reforms that would boost competitiveness. 
    • It could affect Indian initiatives like Act East policy

CONCLUSION:

  • RCEP’s door is not closed for India, as the joint statement states that all participating countries will work together to resolve outstanding issues in a mutually satisfactory way. But it is high time India needs to look beyond RCEP.
  • What India needs now is an approach to FTAs based on the recognition of its core competencies. There has to be a renewed thrust on enhancing competitiveness of India and Indian industry.
  • Any aspiration of accessing larger markets and being part of the global value chain would have to be backed by a strong and competitive industry. Boosting manufacturing in India requires a number of difficult structural reforms, requiring immense political boldness and courage. Thus strong long term policy measures should be in place to encourage domestic industrial growth and improve competitiveness in the country.  
  • An advantage for the other countries of having relative heavyweight India in the trade pact would have been less domination by China, particularly at a time they see the United States as a less reliable trade and security partner. Some RCEP members, such as Japan, have even expressed that they will reconsider signing the pact if India is not on board. Thus, India’s present move can be seen as a pressure tactic, which could help India get a favorable RCEP deal in the future.
  • Without India, RCEP will be less significant, but its path to implementation has become much smoother. But, India is still the fastest growing economy, Asia's third-largest economy and houses a large consumer market. Thus the other nations cannot always ignore India’s significance in the global economy. What India needs to do from her part is to find the balance between opening up its economy while at the same time protecting her domestic industries.

Practice Question

Q. The refusal to join RCEP is neither a success nor a failure for India. Examine?