RCEP: Was India right to Opt-Out?
(Based on Research (CCS Project) by Ms. Shreya Saraiwala & Ms. Vaidehi Agarwal; PGP 2019–21, IIM Bangalore)
Regional Comprehensive Economic Partnership (RCEP) is a future free trade agreement between the ASEAN countries and their free trade agreement (FTA) partners. The objective of the RCEP is to strengthen the commercial ties between the member nations, thus facilitating the free flow of goods and services. The RCEP discussions include trade in goods & services, investment, intellectual property, competition, technological collaboration, dispute resolution, e-commerce, small and medium-sized enterprises (SMEs) and other issues. The talks for RCEP have been undergoing since 2012. However, in Nov 2019, the Indian government decided to opt-out for specific reasons. Had the talks succeeded, RCEP would have become the world’s largest trade bloc.
India’s Decision to Opt-out
India had been an active participant in the RCEP discussions for seven years; however, when the Indian government finally decided to withdraw from the RCEP, a collective sigh of relief could be heard across the country, from farmers to industrialists and health activists. So, what were the reasons that led India to take such a decision which came as a big shock to other nations?
India had a trade deficit of US $105 billion with the RCEP members in FY19. There were apprehensions that signing the pact would further widen the gap, which would defeat the purpose of Indian joining the trade bloc. The Indian domestic industry is also not strong enough to compete with the foreign players yet in some sectors, and such a pact could lead to non-competitiveness of the Indian products. A massive chunk of the Indian population is, directly and indirectly, dependent on the agricultural sector. RCEP would have exposed the Indian dairy and agricultural sector to cheap and subsidised imports from Australia and New Zealand, affecting the lives and livelihood of millions.
But the biggest threat to India among the RCEP countries was China. India’s trade imbalance with China represents around 50% of the nation’s total trade imbalance. The deficit has only widened after China entered the World Trade Organization (WTO) in 2001. An FTA with China could have proved to be detrimental to the Indian manufacturing sector.
Another contention was with regards to the Intellectual Property (IP) Rights. Japan and South Korea, who are part of RCEP, were proposing clauses on intellectual property, which go well beyond the commitments under the Trade-Related Intellectual Property Rights (TRIPS) agreement of the WTO. Strengthening the IP clauses would have severely affected the Indian generic drugs industry, limiting access to generic economic drugs within India.
Lack of service pact in the RCEP was another aspect that caused much disagreement between India and the other RCEP countries. With its highly skilled workforce consisting of doctors, IT professionals, Chartered Accountants, etc. India could have gained a lot with free movement of labour. The service sector contributes about 2/3rd to India’s GDP, while the surplus in service trade funds 50% of India’s trade deficit. Nevertheless, most nations opposed any bold agreement in services under RCEP.
India’s trade flows with RCEP members
India’s existing trade flows with RCEP member countries can be divided into categories — countries with which we already have FTAs, countries with which we are negotiating FTAs, and countries with which we do no plan to enter FTAs as of now.
The first category consists of Thailand, Singapore, South Korea, Japan, Malaysia, and other ASEAN countries. The India-Thailand FTA (2004) was disproportionately beneficial to Thailand. Thailand’s exports to India expanded to 2,852 million USD in 2007 from 640 million USD in 2003. Simultaneously, India’s exports grew to 2,079 million USD in 2007 from 878 million USD in 2003. India-South Korea FTA (2009) again proved detrimental to India’s trade deficit with South Korea, increasing from US $4.5 bn in 2009 to $11.5 bn in 2018. A similar trend is seen with Japan, with India’s total exports to Japan declining from 2011 to 2017 after the India-Japan FTA was signed in 2011.
The India-ASEAN FTA was signed in 2010. Pre-AIFTA, Indian goods exports to ASEAN nations have rose from $3 bn in 2001 to $18 bn in 2009 with 22% CAGR while India’s goods imports from ASEAN countries have grown from $4 bn in 2001 to $24 bn in 2009 with 22% CAGR. Post-AIFTA, India’s merchandise exports to ASEAN nations increased to $36 bn in 2018 from $23 bn in 2010 with a 5% CAGR, while India’s goods imports from ASEAN countries grew from $30 bn in 2010 to $57 bn in 2018 with 8% CAGR. This shows that India has not been able to capitalise on the FTAs with these countries and have conceded them the advantage.
New Zealand and Australia are the countries with which we are negotiating FTAs. India is New Zealand’s 13th largest trade partner. More than 65000 Indians tourists visit New Zealand every year, while India is also the 2nd biggest source of intercontinental students. There is scope to develop trade in areas such as the in-country provision of education, aviation, healthcare, and professional services.
With Australia, a bilateral Comprehensive Economic Cooperation Agreement (CECA) has already been prepared for re-engagement, although the FTA is still in the pipeline. The trade balance is in favour of Australia. For the most part, Australia trades Coal, services (principally education), vegetables for consumption, gold, copper minerals, and concentrates, while India’s main exports are refined oil, services (professional services such as outsourcing), medicaments, pearls, diamonds, and adornments.
China is the largest economy in the RCEP and poses the biggest threat to India signing the RCEP. The trade balance is heavily skewed towards China. In the financial year 2019–20, China had over 5% of India’s overall exports and more than 14% of imports. According to Invest India, India has witnessed a 45x leap in imports from China since 2000 to reach over $70 bn in 2018–19. India was apprehensive that signing an FTA with China would further increase the trade deficit, while it could also harm India’s domestic industry.
Proposed changes to RCEP
India was looking for a more favourable deal than the one being offered under RCEP. India has several vulnerabilities which did not allow it to move forward with the agreement. Following changes could have still made it possible for India to stay in the talks:
· “Auto-trigger” safeguard mechanism — A mechanism of auto-triggering of safeguards would essentially protect sensitive domestic sectors by scrapping away the concessional duty under an FTA once the imports of the sensitive products exceed acceptable limits. Sectors like agriculture, dairy, manufacturing would most likely require these safeguards and protections.
· Market access to critical sectors — A negotiation for better market access in sectors where India is competitive would have been crucial for making RCEP a favourable deal for India. Assurance of removing non-tariff barriers and restrictions for Indian exports in sectors like IT, pharma and agriculture were critical.
· Trade in services — The proposed RCEP was particularly less committed to boosting trade in services. Given India’s large and skilled workforce, increased trade in services, especially that concerning movement of professionals could have still attracted India to sign the deal.
Carpe Diem
An initial glance at RCEP suggests that withdrawing from a trade deal in which India has a US$ 105 billion trade deficit with partner countries (out of which trade deficit with China stands at US$54 billion) is the only best solution. Internal weaknesses and inefficiencies of the domestic industry forced India to withdraw from the deal. However, it can be said that India lost a chance of greater integration with one of the fastest-growing regions of the world.
India already has FTAs with the present RCEP members. The wiser thing to do would be to renegotiate those FTAs to strengthen the business and trade relationship with these countries. India should actively leverage its “Make in India” program to attract FDI from these countries while also striving to solve the existing structural issues. With possibilities of structural changes in global value chains in the wake of COVID-19, a reordering in international manufacturing hubs and bases is likely. The short-run might present significant challenges for attracting manufacturers; however, India has the potential to grab a larger share in global trade over the long run.
Complete report: https://drive.google.com/file/d/1QDWKGO5W8wNjxP1FX2QKeT2-IXigkKFZ/view?usp=sharing
(Summarized by Mr. Rajat Gupta)
