RCEP: India must stop being a naysayer

Geethanjali Nataraj / Garima Sahdev | Updated on January 07, 2019

Worth bonding RCEP accounts for over a quarter of world exports   -  ISTOCK PHOTO

Though India has its share of concerns, the long-term benefits of joining the bloc far outweigh the short-run costs

The Regional Comprehensive Economic Partnership (RCEP) recently held its 24th round of negotiations. Much has changed on the international trade scene since this 16-member grouping led by the ASEAN and China started bargaining to get past their differences.

The negotiations on crucial issues at the WTO have been slow and unable to keep up with the ebbs and flows of international trade and investment — shifting the focus to mega-trade deals.

Trade protectionism has been are on the rise. The US and China are currently engaged in a bitter trade war. And, the UK voted for BrexitTrade conflicts are also mounting between India and the US, US and European Union. But while the CPTPP (the renamed TPP) has risen from the ashes and is ready for take-off, the RCEP is far from realising its aim with only five out of 18 chapters having being concluded so far.

The RCEP initiative linking ASEAN and the group’s FTA partners is the largest FTA negotiation in Asia, and the biggest FTA negotiation that India has ever participated in. If negotiated successfully, it would create the world’s largest trading bloc.

The grouping accounts for 45 per cent of world population, over a quarter of world exports, and has a combined GDP of $17 trillion. The RCEP aims at lowering trade barriers and securing improved market access for businesses in the region through recognition to ASEAN+6 in the emerging regional economic architecture.

It recognises the importance of being inclusive, especially to enable SMEs leverage on the agreement and cope with challenges arising from globalisation and trade liberalisation. SMEs (including micro-enterprises) make up more than 90 per cent of business establishments across all RCEP participating countries and are important to every member’s endogenous development of their respective economy. The negotiations, so far, have achieved steady progress in the market entry permits of goods and service trade and rule-making.

Slow progress

However, significant challenges remain after five years and 24 rounds of talks. To begin with, the unique element about RCEP that it includes developed as well as the less developed countries has resulted in slower progress in talks due to a combination of technical hurdles, domestic politics, and rising protectionism in the Asia-Pacific region.

While the members are keen on quick conclusion of the deal, limiting their ambitions to a common schedule promising more tariff cuts, a hurried deal for safeguarding strategic insurance might be difficult to sell to domestic constituencies of the grouping’s two largest democracies — India and Australia — which go to polls next year.

India, in particular, has been unwilling to yield ground on tariffs and greater market access sought by other members till it is granted equally meaningful reciprocal access elsewhere. This is where India’s demand for greater mobility for its service professionals assumes significance. India’s contention is significant considering that services exports — driven by IT and transportation — are not only a greater component of the Indian economy as compared to the manufacturing sector, but are critical for propelling the manufacturing sector too.

India’s share in global service exports stands at 3.4 per cent in 2016, which is double that of its share in global merchandise exports at 1.65 per cent. India bases its demand on AANZFTA (ASEAN-Australia-New Zealand FTA) which has transparent rules on tackling barriers to trade in services and procedures for liberalised movement of business persons engaged in trade and investment activities.

Some of India’s FTAs with the region, such as the services agreement with ASEAN and the bilateral FTAs with Singapore and Malaysia, have provisions for movement of professionals. But these have not produced the mobility that India expected. Most member-countries remain circumspect on India’s demand.

Priorities diverge

Indeed, this is where India’s foreign and trade policy priorities sharply diverge. The Indian resistance can further be traced to the disappointing outcomes of earlier FTAs with Singapore, Malaysia, Japan and Korea. These FTAs were motivated by India’s geo-strategic ambitions in the Asia-Pacific, complemented by the expectations of several Southeast Asian countries for India to play a balancing role in the region vis-a-vis China.

However, Indian industry accuses these FTAs of largely increasing imports into India from regional markets. India runs a trade deficit with 10 of the 16 RCEP countries at a whopping $104 billion — 64 per cent of India’s total trade deficit in 2017-18. This deficit has reportedly been growing in the past few years.

India has offered to relax tariffs on 86 per cent of traded goods to ASEAN, South Korea and Japan under the respective FTAs it has signed with them, and up to 74 per cent of traded goods with China, New Zealand and Australia — as against the demanded 92 per cent of traded goods. But this too has been rejected by the participating countries as being ‘too little, too late’.

The Indian sensitivities could be partly true, given that large cross-border businesses like automobiles have set up assembly bases in India and are extensively importing parts and components from the region.

At the same time, the fears could be exaggerated as studies point to limited use of most FTAs given the lack of greater knowledge about them.

India also faces a problem in liberalising its labour-intensive agriculture sector which, like the pharmaceutical sector, risks monopolisation. New Zealand’s exported dairy products may rule the Indian dairy market which will demolish the growth of the domestic sector.

The counter argument remains, however, that if India wants its ‘Make in India’ to become a global success it must participate positively to become a part of the Asian Value and Supply chain which either begins or ends in India. It is imperative to understand that the benefits of RCEP in the long run far outweigh the costs in the short run.

Apart from making the Indian economy competitive in the long run, the RCEP can substantially increase investment in India from countries like Japan, South Korea. India reportedly saw a cumulative FDI inflow of $18.9 from Japan and $1.67 billion from South Korea in 2017.

In an interconnected world, it is impractical to take an isolationist approach and spurn multilateral and regional trade pacts without risking trade diversion and loss of competitiveness in exports. An RCEP without India will still go ahead, but not without locking India out from Asia and spelling disaster for the economy expecting to grow at 8 per cent per annum.

India, thus, needs to have a clear strategy with respect to its free-trade agreements which would benefit its external sector, as India’s exports have been falling for more than two years now. To make RCEP a success, what is most required is de-emphasising the political element to make it more about economic integration.

The writers are Professor of Economics, Indian Institute of Public Administration , New Delhi, and Researcher in International trade and Investment Law, respectively.

Published on January 07, 2019

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