India should hold off on RCEP agreement

Rahul Mazumdar | Updated on November 01, 2019 Published on November 01, 2019

It should resolve its structural issues and become globally competitive before getting into such arrangements

The RCEP (Regional Comprehensive Economic Partnership), which has been under discussion since 2012 and has the potential to alter trade expressively from its pattern to global politics, is reaching a crucial stage. Shakespeare’s analogy — paraphrased — “to do, or not do”, could not have been more apt for India in the given sticky situation. The members of this plurilateral framework put the obligation on India to persuade the other 15 economies on its demands by the end of October, failing which outstanding issues would be discussed before the heads of states scheduled to meet on November 4 in Bangkok to announce the conclusion of negotiations.

Bones of contention

Given that India already has existing FTAs with all the 14 members, sans China, the trade agreement would mean having a pseudo-FTA with China. India’s trade deficit with China has more than doubled since 2012. It is a no-brainer that the situation will not become favourable for India in the current scheme of things. The deal in India faces collective resistance from domestic industry and farmer groups, amongst others, who fear China will use it to dump cheaper goods into India. Turning a blind eye to the elephant in the room could be irreparable.

The concern is not unfounded. India in the last two decades has signed multiple trade agreements and ended up burning its fingers. The prime example being ASEAN, with which India has signed an FTA for goods in 2008, and members of which are already a part of RCEP. India’s trade deficit with the bloc has increased unabated from $6 billion in 2009 to $21 billion in 2018. India’s experiences with Japan and South Korea have also been similar. On the other side, Indian exports either increased marginally or had absolute declines during this period, with its overall exports share globally languishing at just 1.6 per cent in the last 10 years.

While the bone of contention for India in the RCEP is largely revolving around tariffs with China, there is also a wider issue of non-tariff measures (NTMs) which needs to be recognised. It may also be noted that since the RCEP negotiations began almost seven years ago, the world has become more protectionist; more than tariffs, NTMs have become the norm. Data show that China itself imposes the largest number of NTMs on India, more than any other country, which includes technical barriers to trade, followed by sanitary and phytosanitary measures.

To answer critics who may argue that the RCEP provides an opportunity to be a part of the global value chain and would increase India’s competitiveness, the fact remains that India is part of an agreement with ASEAN countries and has not benefited to any significant extent. In fact, India signing the WTO’s Information Technology Agreement-1 in late 1990s has been responsible for the virtual extinction of India’s hardware industry.

US negotiations

Amidst these developments, India and the US are apparently discussing a trade agreement. Details of the same are however not in public domain. While India has a $90-billion trade deficit with the negotiating members of the RCEP — which has increased unabated from $59 billion since the negotiation started in 2012 — on the other hand, India has attracted President Donald Trump’s wrath for the US experiencing a trade deficit with India, which averaged $21 billion in the last five years.

The bargain with the US may not be any different from that of with RCEP. Whilst India and the US try to weave an agreement, the irony is that both are among the most active petitioners at the WTO.

Washington will insist that Delhi shrink its trade surplus, cut tariffs that shield India’s manufacturing and agricultural sectors, and ease data localisation and e-commerce policies that guard the country’s sovereignty in its growing digital economy. Dairy and agricultural products may also be a concern for Indian industry in this deal as well.

Proper evaluation

The Indian economy is going through a lull, and the world economy a greater transition. The trade patterns dominating the world since the formation of the WTO are poised to change. Plurilateral trade agreements are increasingly becoming the flavour of the season, especially as trade protectionism occupies a singular position. Given such concerns about the trade agreements for India, the RCEP particularly could be a misadventure which India can ill-afford at this juncture.

At the same time, it will be naivety for India to consider replacing the RCEP agreement with a US deal, more so if it is to satisfy Trump’s constituency as he enters an election year in a few months. On the other hand, it will be equally undesirable for India to succumb to Chinese pressure — loss of the US market could only be made good if India makes a forced deal with China.

The RCEP, sans Australia, New Zealand and India, are all export-driven economies. FTAs so being negotiated should be on mutually reciprocal terms and should focus on services with equal vigour; and not have always goods preceding it. India is a huge market and it should not offer itself on a platter to others while hampering its domestic constituencies.

Industry should also proactively evaluate repercussions of such ensuing agreements independently and apprise the government of their concerns. The government,too, should take due cognisance of the lessons learnt from previous trade agreements and build in safeguard measures and auto-trigger mechanisms.

However, there is a flip side to India not signing trade agreements. For example, should the RCEP go ahead ignoring India’s presence, we could be facing tariff and non-tariff barriers from a united RCEP, and more so from China, thereby increasing the existing trade deficit — a call that India may not like to take. Policymakers, on the contrary, need to increasingly counsel Indian companies to manufacture and produce goods that find global acceptance, whilst getting them out of complacency zone.

There is little doubt that India is more integrated today, and trade has been a critical conduit. Nevertheless, for all practical purposes, an economy in the given setting with structural infirmities may like to keep trade agreements in abeyance, and in the interim become globally competitive so as to keep apprehensions during such negotiations at bay in future.

The writer is Senior Economist with EXIM Bank, India. Views are personal

Published on November 01, 2019
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