RCEP from India’s Perspective
What is the RCEP?
The regional comprehensive economic partnership, launched in 2012, is a trade pact between the 10-member ASEAN bloc along with China, Japan, South Korea, Australia, and New Zealand, which aims at forming a regional trading bloc. The purpose of such a partnership is to give preferential treatment for trade between the member nations either through lower tariffs, preferential market access, customs union (an arrangement which allows free trade within the customs union and a common external tariff), or free trade in some sectors. Late last year, India made headlines after pulling out of the RCEP, leaving experts divided.
Trade blocs lead to higher Foreign Direct Investments for member nations as supply chains get reoriented across the participating countries. Access to international markets would lead to increased competition between companies and overall higher trade volumes among the member nations because of low tariffs. It would be too impetuous to say that India would have benefitted from the increased FDIs as China and Thailand are emerging as a new services hub for attracting FDIs.
India’s Concerns
India was concerned about its domestic economy as the pact would have resulted in the dumping of cheap Chinese goods into India, thus increasing its already staggering trade deficit with China. Agriculture, dairy, textiles, and mining were a few of the industries which were considered vulnerable. The government believed that such a pact would turn out to be perilous for small and medium enterprises and hence decided not to sign the deal. Another critical factor is the historical data, which shows that regional partnerships haven’t done much good to India. India already has free-trade agreements with ASEAN since 2009, South Korea since 2009, and Japan since 2011. Between 2014-15 and 2018-19, India’s trade deficit with ASEAN has increased from $13 billion to $22 billion. Its trade deficit with South Korea and Japan has increased from $9 billion to $12 billion and $5 billion to $8 billion, respectively, which implies that such agreements result in a far greater increase in imports than exports. Some experts believe that India’s exports are much more responsive to income changes than price changes, and hence a tariff reduction could not boost the exports. In fact, India’s exports to these nations have witnessed a stagnation. India’s experience with opening up 74% of its market to ASEAN nations while wealthier countries like Indonesia opening up only 50% of their markets to India has also left it sceptical of such pacts. India has been reluctant to sign agreements with countries like China who have been often accused of circumventing rules 0f agreed-upon frameworks, for instance, using non-tariff barriers to prevent foreign firms from accessing their markets.
India also felt that its concerns regarding China’s economic model and policies were not addressed. China’s economy can be described as state-managed capitalism, where large subsidies are provided to the domestic industries, thus leaving the playfield uneven. It is highly likely that China will benefit the most from RCEP because of its size and increased attention to reorienting its economy towards consumption. Another key concern of India was the unavailability of the Most Favoured Nation (MFN) clause (MFN clause requires a country to provide any concessions, privileges, or immunities granted to one nation in a trade agreement to all other World Trade Organization member countries). Other technical issues included contention points on the choice of base year used for tariff reduction calculations, etc.
RCEP is also a statement that Asia-Pacific countries can finalize an agreement without American intervention and aim to help emerging economies catch up with the rest of the world.
Staying out of such a pact can be worrisome since Indian officials and firms will be left under no pressure to innovate and adapt, thus stagnating industries’ growth. Though India opted out of the RCEP, it might reconsider joining the RCEP in the future if the differences are resolved.
