RCEP: India must safeguard its interests

In recent years, the three mega free trade agreements (FTAs) — Trans Pacific Partnership (TPP), Regional Comprehensive Economic Partnership (RCEP) and Trans Atlantic Trade and Investment Partnership (TTIP) — have been at the centre of trade policy debate worldwide. However, US President Donald Trump and Brexit have abruptly changed the entire scenario. While TPP and TTIP appear to be in ‘deep freeze’, RCEP is the only one where the steady progress is being witnessed.

The RCEP is an ambitious proposal which intends to bring in the three largest economies of Asia — China, India and Japan — into a regional trading bloc, along with ASEAN member-countries, Australia, South Korea and New Zealand. The trade area will be the largest in terms of population (3.4 billion or 49 per cent of world population), with a combined GDP of around $22 trillion and a trade share of 30 per cent. When fully established, it will become the largest trade bloc in the world.

As per conservative estimates, once implemented, RCEP would bring large income gains, of $260-644 billion, to the world economy in a decade or so. The RCEP can help regionalise the sophisticated global production networks that make Asia the world’s factory and will also integrate the region’s markets and production centres. It will also reduce the overlap among Asian FTAs, lest Asia becomes a confusing ‘noodle bowl’ of multiple trade rules.

India joined this mega grouping to advance its own trade integration. Although the country has entered into trading and investment agreements with ASEAN, Japan and Korea, its presence in the vibrant global supply-chains in the region is not commensurate with its manufacturing potential. India certainly cannot afford to be excluded from new regional trade chains and hence, its participation in RCEP is an imperative. However, legitimate concerns of Indian trade and commerce have to be addressed with a progressive look.

The strategy is also aligned to India’s Act East Policy which builds on the Look East Policy for closer partnership with the Asian region. Changing geopolitics and growing focus on the Asia-Pacific region influenced India’s decision to join RCEP. However, the biggest challenge India is facing in RCEP arises from its trade deficit with ten of the RCEP countries, particularly with China with whom India has a huge trade imbalance.

Tariff levels

It was to be expected that given the tariff levels in the important RCEP markets are already low, the negotiated tariff reductions from the Indian side will be relatively greater. Indian industry has been somewhat apprehensive about tariff reductions in RCEP, which would further open its markets to Asian goods, especially from China. Major sectors that may be impacted include steel, plastics, copper, aluminium, machine tools, chemicals, textiles and pharma, which would suffer from cheaper imports.

At the same time, India has been undertaking wide-ranging domestic reforms to make its manufacturing sector more competitive. The ‘Make in India’ initiative has targeted multiple areas such as investment facilitation, trade facilitation, and foreign direct investments with notable results. These efforts are now gaining increasing urgency and must be further fast-tracked to connect to the Asian production networks.

Another area where India can be particularly vulnerable is agri products. The huge concessions being sought by Australia in agri products can be an extremely sensitive issue for India’s farmers. Indian farmers need support from the government in view of their low productivity and low income levels.

Since the start of the negotiations, the Indian government, supported by industry, has emphasised the need for a balanced agreement through access to services market and investments. Services are India’s major trade strength, and it enjoys a 3 per cent share in global services exports, compared to 1.6 per cent in merchandise exports.

Indian industry has highlighted the need for parallel RCEP negotiations on all fronts of trade in goods, services and investments as ‘single undertaking’. There has been a push from some countries to harness the ‘tariff only’ component before negotiations on services and investments as a fait accompli . India has a clear interest in services in the RCEP market that can be taken forward in the dialogue for better outcomes. The RCEP negotiations seem to have entered a crucial phase as the 23rd round of negotiations was completed in July 2018. Members are in the process of making their revised/final tariff reduction offer. Indian industry has raised its concerns about tariff concession to China. In services, the discussions have not gained much traction and India seems to be not getting any meaningful market access.

The government has constituted a Group of Ministers to further deliberate on the contours of its stance regarding RCEP. With the 33rd ASEAN Summit approaching, India would continue to face pressure for conclusion of RCEP. India must safeguard the interest of Indian industry — services and the agriculture sector.

The writer is President, Confederation of Indian Industry.

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