Implications of India opting out of RCEP

Context: India had withdrawn from the RCEP in November 2019, concerned about the size of its deficits. In November 2020, 15 countries signed the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement. 

Relevance:
Prelims: Current events of national and international importance.
Mains: GS II- Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

• The Regional Comprehensive Economic Partnership is the free trade agreement (FTA) being negotiated under the ASEAN (Association of Southeast Asian Nations).
• It includes 10 ASEAN members and 5 FTA partners of ASEAN (China, Japan, South Korea, Australia, and New Zealand).
• The ASEAN member countries are Thailand, Indonesia, Malaysia, Singapore, Philippines, Vietnam, Brunei, Myanmar (Burma), Cambodia, Laos.
• It covers nearly a third of the world's population and accounts for almost 30% of global gross domestic product.

                   

• The RCEP was first proposed at the 19th ASEAN meeting in November 2011 with an aim to create a consolidated market for the 10 member countries and their trade partners.
• Objective: RCEP negotiations is to achieve a modern, comprehensive, high quality, and mutually beneficial economic partnership agreement among the ASEAN member states and ASEAN’s FTA (free trade agreement) partners.
• Aims: To create a liberal, facilitative, and competitive investment environment in the Asia-Pacific region.
• The RCEP was later also conceived by the ASEAN members and China as a response to the US-led Trans-Pacific Partnership (TPP) – later renamed as Comprehensive and Progressive Agreement for Trans-Pacific Partnership – after America opted out of this deal in 2017. 
• The key features of TPP included comprehensive market access, regional approach to commitments, inclusive trade, regional integration, and addressing new trade challenges.

• Trade Deficit:
  • In the financial year 2019, India registered a trade deficit with 11 out of the 16 RCEP countries.
  • India’s deficit with RCEP countries stood at around $105 billion, out of which China alone accounted for $52 billion.
  • At present, India has 20% of all its exports to the RCEP countries and receives 35% of all imports from them. 

• Inadequate protection against dumping:
  • There are concerns related to the dumping of cheaper goods such as dairy and farm products, and electronic items, especially from China.
  • The RCEP deal format required India to abolish tariffs on quite 70% of products from China, Australia, and New Zealand, and nearly 90% of goods from Japan, South Korea, and ASEAN. This would have made imports to India, cheaper.
• Market access:
  • India did not receive any assurances on its demand for more market access and its concerns over non-tariff barriers. 
  • RCEP participants like China are known to have used non-tariff barriers within the past to stop India from growing its exports to the country.
• Base year concern:
  • India had sought to safeguard the interests of its domestic industry through measures like seeking a 2014 base year for tariff reductions instead of 2013, when negotiations on RCEP began, as it has raised import duties on several products between 2014 and 2019.
  • Using a base year before 2014 would mean a drastic drop in the import duties on these products.
• Country of Origin:
  • Its concerns on a “possible circumvention” of rules of origin were also not addressed.
  • Current provisions within the deal reportedly don't prevent countries from routing, through other countries, products on which India would maintain higher tariffs.
  • This is anticipated to permit countries like China to pump in additional products.
• Concerns in the Agricultural Sector:
  • RCEP will permanently bring down import duties on most agricultural commodities to zero which can cause countries looking to dump their agricultural produce in India which might cause a drastic drop in prices.
  • Spices, chiefly pepper and cardamom, and coconut would face dumping from the South Asian spice majors. Sri Lanka is already giving a tough time to Indian spice growers.
• 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 expecting free access to India for his or her dairy products.
• Services trade:
  • India has “long pushed for other countries to permit greater movement of labour and services” reciprocally for opening up its own market. Any agreement on trade goods without simultaneous agreement on services trade and investment will only harm India’s interests.
  • The ITA was established through a Ministerial Declaration on trade Information Technology Products which was concluded on 13 December 1996 at the WTO Singapore Ministerial Conference.

• The RCEP is seen to be China-centric and is expected to elevate its economic and political influence in the region.
• India has an unfavourable trade deficit with China. While China’s share in India’s imports is roughly 14%.
• India’s exports to China are a meagre 5% of its exports to the rest of the world.
• The unfavourable trade balance is further compounded by the composition of exports and imports.
• While India’s exports to China mainly consist of primary products like ores, minerals, and agro-chemicals, imports from China consist of high-value items like capital and manufactured goods like machinery and engineering goods. An FTA has the potential of giving disproportionate gains to China.
• India’s exports to China are different from its exports to the rest of the world 75% of its export basket comprises manufactured goods, of which engineering goods’ share is 24%.

• India has a trade deficit with most RCEP countries. 
• While India serves as a huge market for its trading partners, its industries do not stand to gain materially from the trade deal.
• India has entered into numerous bilateral and regional trading agreements over the years, it currently has preferential access and FTAs with about 54 countries and Comprehensive Economic Cooperation Agreements (CECA)/FTAs with around 18 countries.

• The impact of FTAs on India’s trade balance has been ambiguous.
• A research paper on ASEAN-India FTA finds a reduction in export flows following the implementation of the FTA.
• A study by the NITI Aayog on the costs and benefits of FTAs for India has laid down certain facts about India’s exports trajectory.
• The key findings of the study are that India’s exports to FTAs have not outperformed exports to the rest of the world.
• FTAs have led to greater imports than exports.
• India’s exports are much more responsive to income changes as opposed to price changes, and hence a cut in tariffs does not boost India’s exports significantly.
• High logistics costs and supply-side constraints make Indian exports less responsive to price cuts.

• Relation with member nations:
  • India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc.
  • The move could potentially leave India with less scope to tap the large market that RCEP presents —the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.

• Other deals:
  • Given attempts by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific.
  • It could potentially put a spanner in the works on informal talks to promote a Supply Chain Resilience Initiative among the three.
• Missing opportunity:
  • India’s stance on the deal also comes as a result of learnings from unfavourable trade balances that it has with several RCEP members, with some of which it even has FTAs.
  • An internal assessment by the government has revealed that the growth in trade (CAGR) with partners over the last five financial years was a modest 7.1%.
  • While “there has been growth rate in both imports from and exports to these FTA partners”, the “utilisation rate” of FTAs both for India and its partners has been “moderate” across sectors, according to this study, which covers pacts with Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, Republic of Korea and Malaysia.
  • India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing bilateral free trade agreements with several RCEP members to increase exports.

• “Foreign demand will always be bigger than domestic demand,” which means India needs to resist “the misleading allure of the domestic market.”
• The global trading order has been disrupted by the pandemic and by U.S.-China tensions. New supply chains are being explored; new connections are being made; trading infrastructure that will last for decades is being built. If India misses out on attracting some of that infrastructure, it could be locked out of several years of growth.
• With China, India’s trade seems to be skewed and may lead to a surge of imports into India.
• Reducing the cost of doing business through infrastructure investment and improving the business environment holds the key to improving India’s export prospects. These reforms would ensure that India stands to gain in terms of greater market share from the various regional trade agreements.

• While it may be hard for India to rejoin RCEP, there are other free-trade agreements worth exploring.
• One with the European Union is overdue, for example. Geopolitical considerations, India’s history, and economic common sense all say that’s a deal worth signing.
• If India holds back, somebody else will benefit; Vietnam signed its own pact with the EU this year.
• Protectionism, not openness, is what will really “hurt” India.