Will RCEP make or break industry?

The trade architecture as far as multilateral agreements are concerned deserves a serious relook. The way things are moving, the proposed Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the US will perhaps not see the light of day.

At the same time, the much touted Trans Pacific Partnership (TPP) has been consigned to oblivion. For India, this decision was possibly a boon in disguise.

While on the one hand, India did envisage setting up facilities in TPP member countries such as Vietnam, which would have allowed India greater access to other members in TPP, on the other hand, it would have opened up new challenges for India to do business with TPP members.

The TPP was predicated on stringent conditions like intellectual property obligations, human rights and child labour stipulations, environmental commitments, and a host of other directives which Indian entities would have found difficult to comply with.

The North American Free Trade Agreement (NAFTA) on the other hand, which has been the pioneer of sorts in multilateral trade agreements seems threatened under the present dispensation in US. At the same time, the UK’s exit from the EU bloc is also a reality.

While India had consciously not been a part of the TPP, it is on the negotiating table of the Regional Comprehensive Economic Partnership (RCEP). This is an irony, because the big elephant in the 16-member RCEP block is China, with whom India suffers perennially from a huge trade deficit.

In fact, the trade deficit during the last ten years has increased linearly from around $7.8 billion in 2006 to $52 billion in 2015, with no signs of the deficit tapering in spite of numerous efforts.

The RCEP concept when mooted by Asean was an alternative to the TPP, but in hindsight it looks like the accord may be hugely detrimental for India given the size of the trade deficit it has with the proposed bloc. In 2015, India had an overall trade deficit of $97 billion in RCEP, with China occupying a share of 54 per cent.

This is despite the fact that India has frequently used anti-dumping duties, safeguard duties and other countervailing measures to protect the domestic industry from unfairly low-priced imports from China.

Coincidentally, within the RCEP, India has existing FTAs in merchandise goods with Asean, South Korea and Japan, and with all the three it has witnessed a higher trade deficit after signing the FTA.

While RCEP offers opportunities for greater market access, India’s tryst with trade agreements have not been great due to various reasons. Post-FTA, bilateral trade volumes did increase, but imports from partner countries have increased at a faster pace than India’s exports with partners.

Even if the current $97-billion trade deficit with the proposed RCEP as a bloc is discounted, results from India’s incumbent trade agreements support the aforesaid concern. Amongst the trade blocs, apart from Asean, India also has a trade deficit with Mercosur (Common Market of the South).

The South Asian Free Trade Area (SAFTA) however remains a one-man show and hence could be ignored. The ones with Afghanistan, Nepal, and Bhutan remain largely inconsequential given the size of those markets. The only bright spot has been Sri Lanka and Singapore, where India has been successful in achieving a positive trade balance.

In the absence of the TPP, the RCEP will emerge as the largest regional trading bloc in the world, accounting for nearly 45 per cent of the world’s population and with a combined gross domestic product of $21.3 trillion.

However, given the precedence in executing trade agreements, India needs to introspect as to what it can get from negotiating the proposed RCEP that it has not already obtained from prevailing trade agreements with Asean as a bloc or with Japan, South Korea, Singapore.

While the RCEP has chapters on intellectual property, investment, goods, services, telecommunications and e-commerce, the one on goods and services are the most crucial.

A poorly negotiated agreement will usher in grave consequences for Indian business and its people. Some of the RCEP members have already refused to agree to India’s three-tier approach to tariff reduction over a period of time. RCEP should not convert India into a dump yard for cheap imports from the Asia-Pacific, particularly China.

Under the ambit of RCEP, countries like China, South Korea and Japan are manufacturing powerhouses, and Australia and New Zealand have strengths in processed foods, wine, and dairy products, while Asean has comparative advantages in plantations, electronics and auto-components.

While consumers would benefit from FTAs, the Indian manufacturing sector which remains relatively uncompetitive vis-à-vis some of the RCEP negotiating partners would be at a disadvantage.

Sectors such as plantations, automobiles, textiles, pharmaceuticals, and engineering goods would be impacted negatively. A poorly negotiated RCEP could spell the death knell for India’s global manufacturing dream.

The non-tariff barriers in RCEP countries should be negotiated transparently before negotiating market access.

Among all the non-tariff measures imposed on Indian exports, sanitary and phytosanitary issues and technical barriers to trade measures are the most frequently used. These deal with product quality and standards.

Though a trade agreement in services preceding merchandise may seem utopian, India should seek to change this custom through RCEP. Asean has already expressed its reservations pertaining to the same, but India should up the ante.

India has achieved significant success in services, and hence should seek greater liberalisation of trade in services, including aggressively pushing for greater access for its professionals in these markets.

In fact, India should use services like the ‘pound of flesh’, and use it as a good bargain for giving access to the huge domestic goods market.

It must be noted that RCEP has the East Asian economies as partners, who have thrived on export-led growth model, unlike India whose domestic economy is its strength. India while choosing its trade partners needs to see the complementary nature of the relationship.

The writer is an economist with Exim Bank. The views are personal

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