A discussion via video-conference on Discussion on "Towards New India, Towards Purvoday & West Bengal's Future" on Sunday, 31st May 2020 at 6 PM

India and the RCEP: A Principled Withdrawal

Nation-states seek to leverage maximum economic benefit either by joining or moving away from international trading arrangements. While the objective of international trade is economic gain, it is often modulated by geopolitical as well as ideological considerations. For instance, during the Cold War, economic interactions between nation-states were modulated through ideological frameworks. The Capitalist Bloc preferred to trade among themselves, and the Communist Bloc also did the same. With the end of the ideological contestation, there was a spurt in economic interactions between various countries and the globalisation process picked up momentum. In the recent past, there are concerns among the western countries that they are losing out in the globalisation process and they are also concerns that the non-democratic countries can rig the international trading system to their advantage.

India, as a fast-growing economy is cognizant of the need to scale up its trading relations to meet the 5 trillion dollar target by 2024-2025. At the same time, India is keen to ensure that the trading relations should be based on principles of mutual benefit, transparency and equity. It appears that the Indian leadership felt that the Regional Comprehensive Economic Partnership (RCEP) in its current form is not beneficial for India. Prime Minister Modi, in November 2019, at the 35th summit of the Association of Southeast Asian Nations (ASEAN) in Bangkok declared that the RCEP in its current form “does not address satisfactorily India’s outstanding issues and concerns…therefore, neither the Talisman of Gandhiji nor my own conscience permits me to join RCEP.” Over the past few years, India worked hard to be part of the emerging regional framework. There was genuine commitment to be part of the framework as the RCEP seeks to create a free trade agreement in the Indo-Pacific involving the 10 countries of ASEAN and Australia, China, Japan, New Zealand, South Korea and India accounting for almost 50 trillion dollars of combined GDP. It should be noted that the RCEP framework has not closed doors on India, and there is scope for further negotiations. As the ASEAN and RCEP Joint Leaders’ Statement notes: “All RCEP Participating Countries will work together to resolve these outstanding issues in a mutually satisfactory way. India’s final decision will depend on the satisfactory resolution of these issues.”

Why is India reluctant to join RCEP in its current form? First, India has huge trade deficits with many of the RCEP countries. Its experience from various trade agreements such as India-ASEAN FTA was disappointing. There is a perception in India that these trade agreements have increased access for goods from Southeast Asian to easily flow into the Indian markets without reciprocal benefits. The current RCEP deal would have meant that India would have to abolish tariffs on 70-90 per cent of goods from various countries. This would have resulted in even further enlargement of trade deficit. Further, India’s strength lay in the service sector and the RCEP countries are reluctant to liberalise the service sector, which would be beneficial for India.

Second, India, on an average, had over 50 billion dollars of trade deficit with China in the recent past. The RCEP was seen as a de facto free trade agreement with China, which would have opened up doors for Chinese goods even more. China, because of its trade war with US and economic slowdown, will look to export more to other countries and India needs to have appropriate safeguards from dumping activities. On the other hand, Indian goods were finding it very difficult to access Chinese markets due to Non-Tariff Barriers (NTBs). For example, in 2017-2018, Indian pharma exports to the US amounted to over $ 4 billion. During the same reporting period, Indian pharma exports to China was a mere $ 40 million, which suggests that NTBs were at play. The Indian negotiating team was also concerned that the RCEP framework did not have appropriate redressal mechanisms for non-tariff barriers.

Third, related to the above, India suggested strict rules of origin to ensure that goods of one country are not exported through another country. Recently, Vietnamese authorities have unearthed fraudulent cases wherein Chinese goods were smuggled into the country which were then subsequently exported to the US after getting relabelled as “made in Vietnam”. Similar concerns were also expressed regarding some goods exported from Cambodia. While these are fraudulent cases, India insisted that there should strict rules of origin based on the highest value addition to prevent third-country goods misusing RCEP provision to enter Indian markets. Many of the ASEAN countries are part of complex supply chains and therefore, were hesitant to endorse the strict rules of origin.

Fourth, India suggested an auto-trigger-mechanism that would automatically increase in import duties, instead of lengthy procedures, in case of a flood of imports that threaten domestic industries. Sadly, this mechanism was also not endorsed. Given the unwillingness to accommodate Indian suggestions, there was very little possibility of India joining the RCEP process. The decision to opt-out was welcomed by many industry associations/bodies in India. For instance, FICCI leadership noted that the government took a “very pragmatic decision towards safeguarding the interest of the Indian industry.” Amul welcomed the decision as it supported the livelihoods in the milk and dairy sector.

Some of the RCEP participating countries are also very keen that India should be part of the regional trading framework. For instance, Japan recently reiterated its desire to see India in the RCEP framework. While joining the RCEP on favourable terms is important for New Delhi, the presence of India in the framework is also important for many Southeast Asian and Northeast Asian countries as well. India constitutes an important market for many countries. Further, with the United States withdrawing from the Trans-Pacific Partnership (TPP), India not being part of the RCEP would result in imbalanced regional economic interactions. Therefore, it is imperative for the countries in the region to proactively consider India’s concerns. Going forward, India’s participation in RCEP will be contingent on the response that it gets from the member countries on its concerns.

(Sanjay Pulipaka is a Senior Fellow at the Nehru Memorial Museum and Library, New Delhi. The views expressed here are personal)

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