Time for India to exit RCEP trade pact

Good negotiating skill is not just about delivering results. It is also about realising when saying ‘yes’ ceases to be an option. In the ambitious Regional Comprehensive Economic Partnership (RCEP) pact India is negotiating with 15 other nations including China, the rising pressure for opening up markets in goods is making negotiations unsustainable. India will not be able to justify its continued efforts to reach a compromise.

As trade ministers from the 16 member countries — including the 10-member Asean, India, China, Japan, South Korea, Australia and New Zealand — prepare to take stock of the negotiations in the Philippines this weekend, New Delhi needs to get assertive about what it cannot agree to, even if it means getting isolated in the talks.

The meeting, scheduled on September 10 in Manila, has added significance as it could be the last ministerial meeting of RCEP countries. The plan reportedly is that the ministerial will be followed up with a meeting of the RCEP technical network committee in South Korea in October. This will come up with an implementation paper based on which outcomes for the future negotiations would be set.

Commerce and Industry Minister Suresh Prabhu, who took charge this week, needs to take urgent note of the fact that what he agrees to or opposes at Manila, could have a significant impact on the final result of the negotiations, which members hope to conclude early next year.

For most RCEP members, the sky seems to have become the limit as far as ambitions in opening up markets for goods go. As has been reported, many members have demanded that import tariffs on goods — both agricultural and industrial — must be reduced to zero for more than 92 per cent of tariff lines. This would mean that India has to phase out duties on most items and dismantle the wall protecting its industry and farmers from indiscriminate competition. What is less known is that some RCEP countries have further suggested that tariffs should be reduced to less than 5 per cent on an additional 7 per cent of lines which would take the total coverage of items to 99 per cent.

To make matters worse for India, which is grappling with the demands already on the table, countries like Australia and New Zealand which want India to lower tariffs on items like wheat and dairy, are now insisting that the offers should not be just linked to tariff lines but to the value of the items. This means that agreeing to eliminate tariffs on a large number of items is not enough. The items should be of significant trade value too.

For a country with a large number of sensitive agricultural crops and labour-intensive industry sectors, bending to such demands is a near impossibility. What is especially giving Indian industry sleepless nights is the thought of unhindered flow of goods from China with which it already has a annual trade deficit of over $50 billion. A Free Trade Agreement (FTA) with no duties on most products could increase the deficit significantly.

One may ask why India participated in the negotiations for so long if it is not in a position to offer zero tariffs on many items. The answer is that New Delhi was never averse to the idea of eliminating tariffs on a considerable number of items — the length of the list depending on the country for which it was making the offer. However, it had no clue that it would be pressured into treating all members equally and offering tariff elimination or reduction on an exceptionally long list of items, giving it very little scope to protect its sensitivities.

The gradual cornering of India by RCEP partner countries is reflected in how the negotiations have progressed over the last two years. India’s first set of offer for tariff elimination based on a three-tier system — 42.5 per cent of tariff lines for China, New Zealand and Australia, a higher 65 per cent for its FTA partners South Korea and Japan and the highest offer of 80 per cent for Asean — was rejected by all members, including Asean.

Last August, India was forced to give up its proposal for a three-tier system at the ministerial meet in Laos in favour of a single offer for all. India had to satisfy itself with members agreeing to allow deviations to protect its vulnerabilities with respect to certain members (read China). The caveat, of course, was that the deviations can’t be too high.

Over the past year, despite fierce opposition from its farmer groups and industry lobby, New Delhi has indicated to RCEP members that it could offer to eliminate tariffs on about 70-75 per cent of items for all members with certain deviations for countries like China, Australia and New Zealand with which it does not have FTAs.

But the offer proposed by India has not satisfied the RCEP members. At the recent negotiating round in Hyderabad, India was pushed incessantly to improve its offers with Australia and New Zealand, insisting on increased market access in items like wheat and dairy. The existing situation is exactly what the Indian industry and farmer groups, protesting against the RCEP pact, were apprehensive about.

India’s expected gains in goods from the RCEP pact are not significant, given the fact that the existing levels of tariffs in member countries are relatively low and there wouldn’t be significant gains from further cuts. This is the main reason why India’s gains in goods have been much lower than that of the partner countries in its FTAs with Asean, Japan and South Korea.

While India’s gains in RCEP are to mainly come from services liberalisation, including easier work visa norms, the offers in the area have been almost non-existent. The Asean countries have refused to offer even the level of openness that exists among the 10 member group.

Moreover, many RCEP members are now insisting on inclusion of substantial commitments in the area of e-commerce and investment facilitation — the two areas where India wants to preserve its sovereign right for policymaking.

With the clock continuing to tick, it is high time India asked itself why it needs to be part of a pact where it runs the risk of putting the future of its industry and farmers at stake while getting almost nothing in return. Its fear of being the only major economy not part of a mega trade deal is no longer real. Negotiations on most large trade pacts such as the Trans Pacific Partnership, Transatlantic Trade and Investment Partnership and a new NAFTA have hit major road blocks after President Donald Trump took over in the US.

New Delhi has to realise that there is no shame in getting out of a bad deal. There is a world of wisdom in exiting while there is still time rather than signing a bad deal.

A free trade pact between the RCEP countries accounting for 45 per cent of the world population and over $21 trillion of GDP does seem attractive, but not at the price India is being asked to pay.

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