RCEP – MC ARTICLE

In his speech at the RCEP summit, PM argued that India has been proactively,

constructively and meaningfully engaged in the RCEP negotiations since inception.

The draft RCEP agreement did not fully reflect the basic spirit and the agreed

guiding principles of RCEP and did not address satisfactorily India’s outstanding
issues and concerns.i1

Broadly, views on RCEP are divided between two schools of thought. The first

believes that the RCEP is vital for India as it accounts for 25 per cent of global GDP,

30 per cent of global trade, 26 per cent of FDI flows, and 45 per cent of the total

population. Furthermore, the size and growth of the market, potential opportunities to

participate in regional production networks, elimination of multiple trade agreements

and a close alignment with Act East Policy make both economic and strategic sense

for India to be the part of the agreement. On the contrary, the second states that

India’s experience with FTAs has not been good and its trade deficit with major FTA

partners has increased significantly. Therefore, India needs to be careful while

getting into an agreement with large economies such as China. So before making

any conclusion , first let us delve into the specifics of the deal and then make a
reasoned opinion

1
https://www.thehindu.com/opinion/lead/the-china-factor-in-indias-rcep-move/article29925057.ece
 The Regional Comprehensive Economic Partnership (RCEP) is a trade deal that was
being negotiated between 216 prospective signatories (including India) accounted for a
population of 3.4 billion people with a total Gross Domestic Product (GDP, PPP) of $49.5
trillion, about half of the world population and 39 percent of the world's GDP. They include
the 10 ASEAN members and the six countries with which the bloc has free trade
agreements (FTAs) — India, Australia, China, Korea, Japan, and New Zealand. The
purpose of the deal is to create an “integrated market” spanning all 16 countries.
This means that it would be easier for the products and services of each of these
countries to be available across the entire region.

After the global financial crisis in 2008, many mature economies are struggling to
regain ground lost. Emerging economies are in focus for growth opportunities. The
international trade focus has clearly shifted from the West towards developing
economies in Asia and other regions. The developing markets’ share of global trade
has doubled from 16% in 1991 to 32% in 2011 – which is an average increase of
0.8% a year. Since 2008, the rise has been almost twice as fast, at 1.5% a year. This
significant increase in South-South trade is turning established trade patterns and
practices on their head.3

The RCEP is also special because it is billed to be the “largest” regional trading
agreement as the countries involved account for almost half of the world’s
population, contribute over a quarter of world exports, and make up around 30% of
the global GDP. Negotiations to chart out the details of this deal have been on since
2013, and all participating countries had earlier aimed to finalise it by November
2019. It consists of three of the six largest economies of the world, especially, the
two fastest growing large economies — India and China.

India’s Concerns :
Trade deficits – India runs large trade deficits with at least 11 of the 15 RCEP
members. China alone accounts for $53 billion of India’s $105 billion trade deficit
with these.

FTA experience – India’s experience with FTAs has been underwhelming. Niti
Aayog suggested that FTA utilisation is in the 5%-25% range.

 India has been vigorously pushing for South-South trade through policies like “Look
East” unveiled in recent times.
 In 2018-19, 34% of India’s imports were from this region, while only 21% of India’s
exports went to this region.

China

2
"RCEP: Challenges and Opportunities for India, 25 July 2013, RSIS, Singapore" (PDF). rsis.edu.sg.
Archived from the original (PDF) on 30 December 2013. Retrieved 24 April 2018
3
https://indianexpress.com/article/opinion/columns/rcep-agreement-india-withdrawal-modi-6103246/
 China is the biggest trade partner amongst these countries and the major concerns
that India had throughout the negotiations were with regard to China.
 Cheaper goods – There is a fear that the imports of cheaper electronic and
engineering goods from China could increase further with RCEP. This could have a
negative impact on the manufacturing sector.

Electronics

 The move towards 2014 as the base year for tariff reduction,(While India asks for
2019 tax rate, because it has increased to a large extend in the past six years) an
automatic trigger mechanism to curb sudden surges in imports and the decision on
which products it doesn’t want to offer the same tariff concessions to all countries,
need to be sorted out.

Ratchet agreement

 Another area of concern for India is our unfulfilled want for exemptions from the
Ratchet obligations.
 As per the Ratchet mechanism, if a country signs a trade agreement with another
country where it relaxes tariffs and quotas on merchandise exports and imports, it
cannot go back on them and bring in measures that are more restrictive.
 India wants a clear exemption from the Ratchet obligations, so that it can bring
restrictive measures to protect the interests of exporters and importers, if needed.

Local industries

 Many farmers and milk cooperatives have raised their concern on RCEP.
 In India, several small and marginal farmers are dependent on milk for their daily
expenses as income from crops is seasonal.
 If India signs the RCEP, without exemptions for dairy and its products, it would allow
the dairy industry of Australia and New Zealand to unfairly target its huge market.
 New Zealand exports 93.4% of its milk powder, 94.5% of its butter and 83.6% of its
cheese produce. However, the government has given its assurance that it would
protect the interests of homegrown milk cooperatives through adequate safeguards

Chinese imports

 Key issues that have prevented India from coming on board include “inadequate”
protection against surges in imports.
 This is a major concern for India, as its industry has voiced fears that cheaper
products from China would “flood” the market.
 India had been seeking an auto-trigger mechanism that would allow it to raise tariffs
on products in instances where imports cross a certain threshold.
 India has also not received any credible assurances on its demand for more market
access, and its concerns over non-tariff barriers.

Rules of origin criteria

 Its concerns on a “possible circumvention” of rules of origin — the criteria used to
determine the national source of a product — were also not addressed.
 Current provisions in the deal reportedly do not prevent countries from routing,
through other countries, products on which India would maintain higher tariffs.
 This is anticipated to allow countries like China to pump in more products.

Trade deficit

 Despite India already having separate, bilateral FTAs with most RCEP nations, it has
recorded trade deficits with these countries.
 China India has an over $50 billion trade deficit is one of the major reasons for New
Delhi not joining in at this stage.
 During negotiations, it was also not able to get a favourable outcome on its demands
on the base year that would be used to reduce the tariffs on the products that would
be traded as part of the pact.

Investment issues

 India’s problems with RCEP are not restricted to China.

 There are several other aspects to the RCEP agreement which include investments
and e-commerce that are of major concern as well.
 India has agreed to the investment chapter of the RCEP agreement, which would
mean that the government can no longer mandate that a company investing in India
must also transfer technology to its Indian partners.
 The investment chapter also says that a signatory government cannot set a cap on
the amount of royalties an Indian company can pay to its foreign parent or partner.
 These aspects have also raised concerns since technology sharing was a major way
in which Indian companies were being able to compete globally.

Infrastructure issues

 Leveraging the benefits of RCEP would require overcoming several domestic

challenges, particularly related to infrastructure and input markets.
For instance, at present, road transport in India costs $7 per km, while the cost is
only $2.50 per km in China.

iiGiven the importance of RCEP to engineering exports of India, the Engineering

Export Promotion Councils (EEPC) has tried to understand the likely implications of
RCEP on the engineering sector of India. The Chart demonstrates that India’s

engineering trade with RCEP countries reached $108 billion in 2018 from $79 billion

in 2014. Exports increased from $15.34 billion to $17.20 billion in 2018 while imports

increased from $64.28 billion to $90.95 billion. The broad trade flows analysis

indicates that the Compounded Annual Growth Rate (CAGR) of imports was 9.06

per cent while for exports, it was 2.90 per cent during the period of 2014-2018,
reflecting higher growth of imports than exports.
 While looking at trade in engineering goods with individual members of RCEP, it is

important to note that India has a trade deficit with seven RCEP countries which

include China, Singapore, South Korea, Malaysia, Thailand, Japan and Australia.

But, China contributes 60 per cent to the total trade deficit of engineering goods of
India with the RCEP group of countries.

Product groups such as electrical machinery and equipment and parts thereof, and

machinery, mechanical appliances, nuclear reactors are major contributors to India’s

trade deficit in engineering goods with China. Liberalisation of tariffs under RCEP,

particularly with China, may have adverse impact on India’s domestic engineering

industry. Other than this, it can also disrupt existing value chain linkages with some

of RCEP member-countries, thereby reducing opportunities for Indian domestic

engineering firms to plug in RCEP-led engineering value chains.

Given the costs and benefits in RCEP, it is important for India to strike a balance

between domestic and external interests to minimise the adverse effects of RCEP on

its domestic engineering industry. At the same time, it is equally important to grasp

the possible opportunities that RCEP will extend to the Indian engineering industry

as some of RCEP countries, particularly China, are moving up the value chain and
vacating space for other low-cost economies.

Service Industry Challenges :

 The more developed RCEP countries such as Australia and Singapore have
been unwilling to accommodate India’s demands to liberalise their services
regime and allow freer mobility of Indian workers
 India’s Gains :
Why RCEP is crucial?
The early conclusion of RCEP negotiations and its implementation offers several
strategic benefits to India.

A say in rule-making

 It will send a strong signal to the global trade community that the international trading
system is alive and kicking, and India is ready to participate in the rule-making
process for it.
 Given that RCEP countries constitute more than one-third of global GDP, close to
half of its population, and around 30% of its trade, not being party to it would be
counterproductive to India’s interests.

Extension of own policies

 India’s participation can be viewed as a natural extension of its Act East and Act Far
East policies, for it will enhance our maritime connectivity in the Indo-Pacific region.
 The RCEP holds enormous potential to facilitate economic growth and stability in the
region, and to help make it free, open and inclusive.
 It could also be used as a key instrument to balance Asia-Pacific and Indo-Pacific
constructs for shared prosperity with security.

Intra regional collaboration

 India can use RCEP as an anchor to launch several mini-lateral initiatives in the
region, with countries like Australia and Japan, to strengthen our maritime
connectivity and allow for the emergence of alternative power centres.
 RCEP can be leveraged by India to make investments in connectivity and
infrastructure development in our extended neighbourhood, such as the Sabang port
in Indonesia, and Cam Ranh port in Vietnam.
 It can also help Indian companies form joint ventures for exploring and sourcing
strategic resources, such as natural gas from countries like Vietnam and Myanmar.

Clinging to our Foreign Policy

 A mature vision has already been displayed by the PM, whose strong push in favour
of the country’s Act East and Act Far East policies.
 This has given Indian negotiators the vigour needed to quickly conclude negotiations
for the RCEP.
 National interests cannot be allowed to be hijacked by a few industries, and the
government must look at the greater good for the biggest numbers.

It is possible to take a macro view of the medium-to-long-term future, and act

accordingly to make the most of the economy’s trade potential.
 Reaping benefits for the demographic dividend

1. The vector of India’s demographic dividend is concomitant to the vector of the

“ageing” population in most RCEP countries
2. This skill-matching needs to be focused in the realm of RCEP negotiations by
signing an RCEP Agreement on Movement of Natural Persons Harnessing
Regional Skill-Complementarities

As the World Trade Organization (WTO) comes under mounting attack from the
Trump-led US administration, there is a clamour in India to negotiate regional trade
agreements with peer countries

It is perceived that this will boost exports and insulate India’s trade from the
uncertainties of the global trading system

The actual reason for fewer gains from RTAs

1. India’s inability to gain market share in these regions may be partly explained by
its lack of competitiveness in exports
2. India has various structural bottlenecks hurting its exports

Concerns with the decision

 Short term – The loss to the economy far exceeds the short-term perceived benefits
of staying out of the pact.
 Protectionism – This action signals a shift towards a protectionist stance
 Sector-wise approach lacking – Indian side should have made greater effort to
convince other countries for carve-outs for certain sectors, and for allowing a gradual
phasing out of tariffs to ease domestic fears.
 No focus on reforms – India should have used this opportunity to push through
contentious but necessary reforms that would boost competitiveness.
 Policy dilemma – On the one hand, India wants to become a manufacturing hub.
Staying out of the RCEP reduces opportunities for trading with these countries,
which account for roughly a third of global trade.
 Missed supply chains – Manufacturing today requires greater integration with
global supply chains.
 Chinese slowdown advantage – Signing the agreement would have signaled an
embrace of freer trade. It could have aided in the shift of companies out of China to
India.
 Strategic loss – With this, India has also ceded space to China to have a greater
say in the region.
Way Forward
 Economic isolation is not an option for India.
 Bilateral pacts – There are reports that India will move towards bilateral trade
pacts.
 Need domestic reforms – India will have to prepare itself more fully to take
advantage of such pacts. Domestic reforms will be the need of the hour.

i
https://www.thehindu.com/opinion/lead/the-china-factor-in-indias-rcep-move/article29925057.ece
ii
https://www.thehindubusinessline.com/opinion/the-nuts-screws-and-bolts-of-rcep-talks/article28190459.ece