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THE CONTEXT: After recent months of back and forth attempting to negotiate a better trade agreement for India to join the Regional Comprehensive Economic Partnership (RCEP), the Indian government decided not to join the trade forum and be excluded from what has been seen as one of the biggest plurilateral free-trade partnerships in the world.
India had been a part of negotiations for almost nine years till it pulled out in November 2019, stating that inadequate safeguards and lowering of customs duties will adversely impact its manufacturing, agriculture and dairy sectors.
However, by staying out, India has blocked itself from a trade bloc that represents 30% of the global economy and world population, touching over 2.2 billion people.
Further, as the summary of the final agreement shows that the pact does cover and attempt to address some issues that India had flagged, including rules of origin, trade in services, movement of persons. Therefore, this makes the case of India to review its decision and look RCEP through the lens of economic realism.
REASONS FOR INDIA’S NOT SIGNING RCEP
India’s withdrawals from RCEP may be attributed to its trade and technical concerns:
TRADE CONCERNS
INDIA’S BILATERAL TRADE-DEFICIT WITH RCEP COUNTRIES
India has already a bilateral Free Trade Agreements (FTAs) with South Korea, ASEAN countries and Japan which are the part of RCEP. Though trade has increased the post-Free Trade Agreement with these countries, imports have risen faster than exports from India.
According to a paper published by NITI Aayog, India has a bilateral trade deficit with most of the member countries of RCEP.
TRADE & STRATEGIC CONCERNS WITH CHINA
India has already signed FTA with all the countries of RCEP except China. Trade data suggests that India’s deficit with China, without any trade pact with it, is higher than that of the remaining RCEP constituents put together.
India already has a massive trade deficit with China and a lower custom duty-invoked by this trade agreement, would have made its commodity markets extremely vulnerable to an influx of Chinese goods. This trade deficit is the primary concern for India, as after signing RCEP cheaper products from China would have flooded the Indian market.
Further, from a geopolitical perspective, RCEP is China-led or is intended to expand China’s influence in Asia.
PROTECTION OF DOMESTIC INDUSTRY
India’s withdrawal from RCEP is due to its possible negative effects on small and medium scale farmers, traders and industries, which are already experiencing a chronic slowdown. India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products like dairy, steel etc. For instance, the dairy industry is expected to face stiff competition from Australia and New Zealand. Currently, India’s average bound tariff for dairy products is on average 35%.The RCEP binds countries to reduce that current level of tariffs to zero within the next 15 years.
TECHNICAL CONCERNS
UNAVAILABILITY OF THE MOST FAVORED NATION (MFN) CLAUSE
One key issue for India was the unavailability of the Most Favored Nation (MFN) clause that would have made India to give the same treatment to RCEP nations that it gave to others.
NON-ACCEPTANCE OF AUTO-TRIGGER MECHANISM
To deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism.Auto-trigger Mechanism would have allowed India to raise tariffs on products in instances where imports cross a certain threshold. However, other countries in the RCEP were against this proposal.
LACK OF CONSENSUS ON RULES OF ORIGIN
India was concerned about a “possible circumvention” of rules of origin. Rules of origin are the criteria used to determine the national source of a product. Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs.
WHY INDIA SHOULD HAVE SIGNED RCEP?
More than the technical reasons, it is the concerns of cheaper inflows of imported goods from RCEP countries and trade deficit with them that may have given reasons to India for not signing this agreement. However,
- If India is not part of trade pacts with major countries, and the WTO process is in trouble, it will quite quickly run out of countries to trade with. Sure, India can continue to export to these countries, but it will suffer a disadvantage since, with the pact-countries, there will be no/low import duties on most goods traded while this will not hold for India.
- What makes an exports push all the more critical is that India’s high GDP growth in the past has been directly related to exports growth, not that of local consumption. In the boom years of 2003-08, JP Morgan chief India economist Sajjid Chinoy points out, India’s real exports growth averaged 17.8% annually while (public and private) consumption grew just 7.2%; a similar point has also been made by former chief economic advisor Arvind Subramanian.
Analysis by Pravin Krishna of Johns Hopkins University, for the period 2007 to 2018, shows that India’s trade deficit—as a share of its total trade deficit—with the ASEAN fell from 9.9% to 6.6%. For all bilateral agreements that India has, such as with Japan, Korea, etc, this fell from 12.6% to 7.5%. Interestingly, the sharpest deterioration in India’s deficit is with China, a country with which it has no FTA.
INDIA’S POOR COMPETITIVENESS IS THE REAL ISSUE:
- The real issue that comes out is that of India’s poor competitiveness, and that has little to do with FTAs. To understand this better, let’s keep India out of the equation, just look at the overall exports of various countries.
- In the last 20 years (see graphic), India’s exports grew 9 times while those of China rose 13 times—on a base that is 5.5 times India’s—and Vietnam’s rose 23 times; as a result, from a mere 32% of India’s in 1999, Vietnam’s exports are 81.5% of India’s today. In other words, whether or not we sign a trade pact with these countries, chances are their exports will grow faster than India’s; the fact that their exports are growing faster than ours means they are more competitive.
- The same result, of lack of competitiveness, as it happens, is visible from India’s overall exports. From 16.8% of GDP in FY12, India’s exports fell to 10.9% in FY20; and while imports fell from 26.8% to 16.5%, imports are significantly higher than exports.
- Indeed, the production linked incentive (PLI) scheme that the government has finalised for mobile phones—and plans to do for 10 other sectors soon—is itself recognition of this reality since the PLI offered are meant to offset a part of the disadvantage of producing in India. One of the studies on the disadvantage in the case of mobile phones put this at 9.4-12.5% versus manufacturing in Vietnam; the cost of electricity (based on the amount used for production) added one per cent to the cost of production of a phone in India, expensive bank loans added 1.5-2% to the costs, logistics 0.5%, land one per cent, etc.
REASONS FOR INDIA TO REVIEW
GLOBAL ECONOMIC STAGNATION DUE TO COVID-19
With global trade and the economy facing a steep decline due to Covid-19 pandemic, RCEP can serve as a bulwark in containing the free fall of the global economy and re-energising economic activity.Further, the RCEP presents a unique opportunity to support India’s economic recovery, inclusive development and job creation even as it helps strengthen regional supply chains.
NEED FOR ECONOMIC REALISM
India should deter seeing RCEP only from the Chinese perspective.India should acknowledge that the trade bloc represents 30% of the global economy and world population, touching over 2.2 billion people, and staying out of RCEP may result in suboptimal economic growth without leveraging Asia-Pacific demand.
In this regard, India can draw inspiration from Japan & Australia, as they chose to bury their geopolitical differences with China to prioritise what they collectively see as a mutually beneficial trading compact.
STRATEGIC NEED
It is not just because gains from trade are significant, but the RCEP’s membership is a prerequisite to having a say in shaping RCEP’s rules. This is necessary to safeguard India’s interests and the interests of several countries that are too small to stand up to the largest member, China. Moreover, staying out of RCEP may also affect India’s Act East policy.
CONCLUSION: According to some experts, one of the ways India can offset the trade and strategic loss due to signing out of this RCEP is by signing FTA with both the USA and the EU. While it is theoretically possible India’s exports can grow faster should there be an FTA with both the US and EU—even so, China and Vietnam’s higher competitiveness is an issue—it is by no means a given that such an FTA can be signed quickly. Indeed, for decades, India has resisted opening up sectors that the US and EU have been interested in. That something like the import duties on Harley Davidson motorcycles was allowed to become a friction point between India and the US despite no serious manufacture of these motorcycles in India indicates just how inflexible India has been; imagine its ability to open up sectors or reduce duties in sectors where there are a large number of local producers who will be hit.
Given the economic and market power India wields, the RCEP members have left the door open for India. It would be in India’s interest to dispassionately review its position on RCEP and carry out structural reforms that will help India to mitigate some of the repercussions arising from the RCEP.
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