why India opted out of RCEP? | 17th November, 2020

News: Regional Comprehensive Economic Partnership (RCEP) has been signed by 15 countries, without India.

About RCEP (Regional Comprehensive Economic Partnership)

RCEP is a trade deal that was originally being negotiated between 16 countries including India, after exit of India, now has been signed by 15 countries.

Members:

• 10 Association of Southeast Asian Nations (ASEAN) members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam
• 5 other FTA partner countries of ASEAN: Australia, China, Korea, Japan, and New Zealand.

Aim: To strengthen economic linkages and to enhance trade and investment related activities between participating countries.

Coverage Areas: RCEP will cover the following areas:

Trade in goods and services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, small and medium enterprises (SMEs) and other issues.

In its original format, RCEP was touted as the “largest” regional trading agreement to this day.

Why India decided not to join RCEP?

In November 2019, External Affairs Minister S Jaishankar, delivering the Fourth Ramnath Goenka Memorial Lecture on November 14, had said,

India’s stance was based on a “clear-eyed calculation” of the gains and costs of entering a new arrangement, and that no pact was better than a “bad agreement”.

Following are the issues that India faced in signing the RCEP:

• Market access to India: RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
• Trade Deficit: In financial year 2019, India registered trade deficit with 11 out of the 16 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.
  • India’s trade deficit with RCEP countries stood at $105 billion, out of which China alone accounted for $52 billion.

• Auto-trigger mechanism: India was unable to ensure countermeasures like an auto-trigger mechanism to raise tariffs on products when their imports crossed a certain threshold.
• MFN clause: It also wanted RCEP to exclude most-favored-nation (MFN) obligations from the investment chapter, as it did not want to hand out, especially to countries with which it has border disputes, the benefits it was giving to strategic allies or for geopolitical reasons.
• Opening up of sensitive sectors: India felt the agreement would force it to extend benefits given to other countries for sensitive sectors like defense to all RCEP members.
• Country of Origin: Signing of RCEP deal would have meant dumping of unwanted products by routing them through other countries i.e. possible circumvention of rules of origin criterion set by India to determine the national source of products.
• Tariff reductions: The RCEP deal format required India to abolish tariffs on more than 70% of goods from China, Australia, and New Zealand, and nearly 90% goods from Japan, South Korea, and ASEAN. This would have made imports to India, cheaper.
• Past Experience: The NITI Aayog, in 2017, had published a report that pointed out that free trade agreements have not worked well for India.
  • It analyzed multiple free trade agreements that India signed in the past decade. Among those were FTA with Sri Lanka, Malaysia, Singapore, and South Korea.
  • The Niti Aayog analysis showed that imports from FTA countries increased while export to these destinations did not match up.
  • The Niti Aayog found that FTA utilization by India has been abysmally low between 5 and 25 percent.
• Plantation products like rubber: Vietnam and Indonesia have very cheap rubber to export.
• Dairy Sector: New Zealand is the second-largest exporter of milk and milk products. New Zealand’s milk producers are more efficient than India’s small producers. Both Australia and New Zealand are waiting for free access to India for their dairy products.
• Services trade: India has “long pushed for other countries to allow greater movement of labor and services” in return for opening up its own market. Any agreement on trade in goods without simultaneous agreement on services trade and investment will only harm India’s interests.

Why not joining RCEP is the right decision for India?

• China Factor: In the backdrop of rising tensions at India-China borders and the strong presence of China as a center of RCEP trade deal, it would have been difficult for India to reduce its exposure to China’s products, at a time when India is striving hard to find alternatives for China-made products.
• Made in India: As India is pursuing its objective to become an Atmanirbhar Bharat, domestic industries are required to be shielded by the use of Tariffs. By joining RCEP, India could have to compromise on this front.
• Recession in India: At a time, when India is gripped under ‘Technical Recession’ and unemployment is on rise, giving a boost to domestic industries becomes of utmost importance.
• Existing FTAs: As per a few experts, RCEP hardly makes a difference as it has FTAs with ASEAN, and CEPAs (Comprehensive Economic Partnership Agreements) with Japan and South Korea already.
• Clarity of India’s strategic vision: India’s strategic vision seems clear by not joining the China-centric RCEP, whereas it raises questions regarding the strategic vision of other Indo-Pacific countries whether China is seen as a threat or as a partner by them. This step will have implications for the Indo-Pacific concept and the Quad.

What are the possible downsides of not joining RCEP?

• Bilateral trade: India’s decision of not joining RCEP would also negatively impact India’s bilateral trade ties with RCEP member nations, as they may find strengthening economic ties within the bloc, more profitable.
• Supply chain in Indo-Pacific: Japan’s failed efforts to bring India back into the deal may also impact the Australia-India-Japan informal talks to promote a Supply Chain Resilience Initiative in the Indo-Pacific.
• China’s dominance: RCEP shows that China can pursue its aggressive political and economic policies without cost, that it cannot be isolated, and that the world cannot delink itself from the Chinese market.

Way forward

India, as an original negotiating participant of RCEP, has the option of joining the agreement without having to wait 18 months as stipulated for new members in the terms of the pact.

• India required to make its domestic industries competitive and strong enough to compete in any international market. It will make negotiating any international agreement easy and profitable.
• Conclusion of 17th ASEAN-India Virtual Summit and adoption of ASEAN-India Plan of Action for 2021-2025 proves that despite conclusion of RCEP, ASEAN countries are welcoming towards India. India must try to find out possibilities of increasing trade with ASEAN countries.
• India currently has agreements with members like the ASEAN bloc, South Korea and Japan and is negotiating agreements with members like Australia and New Zealand.
• Reviews of its existing bilateral FTAs with some of these RCEP members as well as newer agreements with other markets with potential for Indian exports.
• India should invest strongly in negotiating bilateral agreements with the US and the EU.