In a latest development, 15 countries solidified their participation in the Regional Comprehensive Economic Partnership (RCEP). Even as India opted to stay out after walking out of discussions last year, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.
The RCEP was first proposedat the 19th ASEAN meet in November 2011 with an aim to create a consolidated market for the 10 member countries and their trade partners.
Negotiations to chart out this deal had been on since 2013, and India was expected to be a signatory until its decision last November.
India pulled out of the agreement last year over concerns about cheap Chinese goods entering the country and was a notable absentee during Sunday's virtual signing.
It can join at a later date if it chooses.
Even without India, the deal covers more than two billion people.
The agreement to lower tariffs and open up the services trade within the bloc does not include the United States and is viewed as a Chinese-led alternative to a now-defunct Washington trade initiative.
What is RCEP?
Described as the “largest” regional trading agreement to this day, RCEP was originally being negotiated between 16 countries — ASEANmembers and countries with which they have free trade agreements (FTAs), namely Australia, China, Korea, Japan, New Zealand and India.
RCEP is essentially a China-led initiative for a regional trading blocthat will comprise of one third of the world’s population and 29% of the world’s GDP.
The purpose of RCEP was to make it easier for products and services of each of these countries to be available across this region.
The purpose of this trading partnership is to givepreferential treatment for trade between the member countries either through lower tariffs, preferential market access, customs union or free trade in specific sectors.
Why did India pull out of the mega deal?
On November 4, 2019, India decided to exit discussions over “significant outstanding issues”.
India had been “consistently” raising “fundamental issues” and concerns throughout the negotiations and was prompted to take this stand as they had not been resolved by the deadline to commit to signing the deal.
Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector.
The current structure of RCEP still does not address these issues and concerns.
Escalating tensions with China are a major reason for India’s decision.
While China’s participation in the deal had already been proving difficult for India due to various economic threats, the clash at Galwan Valley has soured relations between the two countries.
The various measures India has taken to reduce its exposure to China would have sat uncomfortably with its commitments under RCEP.
Major issues that were unresolved during RCEP negotiations were related to the exposure that India would have to China.
This included India’s fears that there were “inadequate” protections against surges in imports.
It felt there could also be a possible circumvention of rules of origin— the criteria used to determine the national source of a product — in the absence of which some countries could dump their products by routing them through other countries that enjoyed lower tariffs.
India was unable to ensure countermeasures like an auto-trigger mechanism to raise tariffs on products when their imports crossed a certain threshold.
It also wanted RCEP to exclude most-favoured nation (MFN) obligations from the investment chapter, as it did not want to hand out, especially to countries with which it has border disputes, the benefits it was giving to strategic allies or for geopolitical reasons.
India felt the agreement would force it to extend benefits given to other countries for sensitive sectors like defence to all RCEP members.
RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
How India’s decision can impact itself?
Impact on bilateral trade: There are concerns that India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc.
Less scope to tap large market: The move could potentially leave India with less scope to tap the large market that RCEP presents —the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.
Impact on pact in the Indo-Pacific: Given attempts by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific. It could potentially put a spanner in the works on informal talks to promote a Supply Chain Resilience Initiative among the three.
Assessing trade between India and RCEP members
However, India’s stance on the deal also comes as a result of learnings from unfavourable trade balances that it has with several RCEP members, with some of which it even has FTAs.
An internal assessment by the government has revealed that the growth in trade (CAGR) with partners over the last five financial years was a modest 7.1%.
While “there has been growth rate in both imports from and exports to these FTA partners”, the “utilisation rate” of FTAs both for India and its partners has been “moderate” across sectors, which covers pacts with Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, Republic of Korea and Malaysia.
India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing bilateral free trade agreements with several RCEP members to increase exports.
What lies ahead?
India, as an original negotiating participant of RCEP, has the option of joining the agreement without having to wait 18 months as stipulated for new members in the terms of the pact.
RCEP signatory states said they plan to commence negotiations with India once it submits a request of its intention to join the pact “in writing”, and it may participate in meetings as an observer prior to its accession.
However, the possible alternative that India may be exploring is reviews of its existing bilateral FTAs with some of these RCEP members as well as newer agreements with other markets with potential for Indian exports.
Over 20 negotiations are underway.
India currently has agreements with members like the ASEAN bloc, South Korea and Japan and is negotiating agreements with members like Australia and New Zealand.
Two reviews of the India-Singapore CECA have been completed; the India-Bhutan Agreement on Trade Commerce and Transit was renewed in 2016; and the India-Nepal Treaty of Trade was extended in 2016.
Eight rounds of negotiations have been completed for the review of the India-Korea CEPA, which began in 2016.
India has taken up the review of the India-Japan CEPA and India-ASEAN FTA with its trading partners.
There is also a growing view that it would serve India’s interest to invest strongly in negotiating bilateral agreements with the US and the EU, both currently a work in progress.
RCEP has now been signed without India. The ramifications of India’s decision to opt out of RCEP will be tested. When India chose to stay out of the Belt and Road Initiative in 2017, there was much commentary that New Delhi might be isolating itself. Three years later, India’s position has been recognised by like-minded democracies, and many have said that India’s decision was prescient.