India’s withdrawal from the the Regional Comprehensive Economic Partnership agreement (RCEP) was not entirely unexpected, given that key stakeholders had not been in favour of it. India put forward genuine reasons for its decision to withdraw, for the time being, from the negotiations undertaken by 16 countries of the RCEP grouping, which make eminent sense from the economic perspective. The decision brings relief to industry as well as farmers, who were rightly apprehensive about the wide-ranging impact it was likely to have on their livelihood.

Following the adverse experience with the Japan and Korea FTAs, the goods segment was concerned with possible impact of the RCEP, since it would effectively mean a FTA with China. For most of the merchandise trade, China accounts for a significant share of the global capacity — in sectors like steel its nearly 50 per cent. Even the slightest variation in demand and supply in China has severe repercussions on global markets and prices. For example, when the Chinese economy slowed down in 2016, steel imports to India from China increased by more than 200 per cent, while prices crashed. The Indian steel industry’s concerns with the RCEP related to trade diversion and regional accumulation for value addition.

Services sector

Work on the RCEP, which was proposed to further lower tariffs and non-tariff barriers on goods as well as expand trade in services and investment arrangements, commenced in 2012. However, it was obvious from the beginning that services and investments were taking a back seat in the negotiation process, with goods trade accorded primacy. Given that the other 15 countries already have very low or zero tariffs for goods traded amongst themselves under the alphabet soup of FTAs in place, India is the only country which would have been bound to cut its tariffs for the other members under the RCEP.

However, with its service interests not adequately factored into the discussions over the years, the benefits to India from the RCEP were questionable. India’s services trade has continued to grow robustly, even while the goods trade has been impacted by the global trade slowdown. Exports of services expanded from $16 billion in 2001-02 to $106 billion in 2008-09 and $208 billion in 2018-19. India’s share in global services exports increased from 1.1 per cent in 2000 to 3.5 per cent in 2018, as compared to its share in global merchandise exports, which has remained at 1.7 per cent. Clearly, the importance of the services sector for growth and employment generation in India cannot be overstated, and the short shrift given to it in the RCEP was a disappointment.

Economic stance

One of the key points put forward initially as a rationale to enter and continue in the RCEP initially was that open trade with competitive countries would force India’s hand in undertaking economic reforms. The pace of reforms has indeed been rapid, with introduction of the GST, opening up of FDI, facilitative ease of doing business and numerous sectoral reforms. However, India needs to take up reforms at its own pace and in a manner that is suitably calibrated to meet the interests of diverse sections of the economy, such as farmers and small businesses.

While announcing its exit from the arrangement, India highlighted that the rising trade deficit from China was unsustainable and would be further exacerbated as a result of the RCEP. This position has been taken up continuously by India during the discussions as well as in bilateral platforms. It is, for example, difficult to understand why Indian drug exports to China are worth only $46 million. India’s exports of pharmaceuticals to the world stands at over $14 billion in 2018 — including $5 billion to the US — after meeting stringent approval processes, and China itself imports drugs worth $28 billion from the rest of the world.

Reciprocity is also crucial. For example, in the steel sector, imports from Japan and Korea after signing the FTAs doubled while exports to these countries continued to remain negligible.

Ties with China

It is unlikely that the unrelenting attitude of China regarding India’s market access interests over a long period of time would have been altered once the RCEP was in force. The possibility of industry sectors in India suffering from import surge would thus have been very real. In addition, Chinese products are already being routed through ASEAN countries, with which India has an FTA. With lax rules of origin proposed in the RCEP, even the longer time period given to reducing tariffs with respect to goods made in China would have been ineffective.

It is indeed unfortunate that China could not provide India with a way out of its apprehensions relating to Chinese goods swamping Indian markets, either bilaterally or through the RCEP. This situation extends to the services sector as well. China has seen huge appetite for Indian movies, yet only 3-4 Indian films are allowed entry into its market each year. Our IT sector is similarly disadvantaged in China.

India’s competitiveness vis-à-vis China is unlikely to benefit from economic reforms that India may undertake in the future. To assuage India’s concerns, China must bilaterally work with us and resolve our market access issues in areas across pharmaceuticals, agriculture and manufactured goods. Only when we see a real improvement in our exports to China will the Indian industry become confident about lower tariffs for Chinese products and can accede to regional arrangements like the RCEP.

The writer is CEO and MD, Tata Steel

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