Connecting Regions of Asia.

Behind India’s RCEP Pullback

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The Regional Comprehensive Economic Partnership is a Free Trade Agreement (FTA) between the ten members of the ASEAN (Indonesia, Thailand, Singapore, Malaysia, Philippines, Vietnam, Brunei, Cambodia, Myanmar and Laos), three additional members (China, Japan, and South Korea), and members with which ASEAN countries have FTA (Australia and New Zealand). It was formally signed on 15 November 2020 to become the largest free trade agreement in history, estimated to represent at least thirty percent of the global gross domestic product. It includes over three billion people, has a combined GDP of approximately $17 trillion, and accounts for about forty percent of international trade.

India remained the exception and despite active participation in the twenty nine rounds of RCEP negotiations, since 2012 withdrew from the RCEP at the last minute. It has been argued that this indicates that disengagement has become the most conspicuous feature of India’s trade policy, as domestic protectionist interests undermine an outward‐oriented economic vision.
Reasons behind India’s reluctance to join the RCEP
India’s bilateral relations with China have been problematic in recent months due to the military tensions in eastern Ladakh along the Line of Actual Control. India also held a maritime exercise with Japan, Australia, and the United States for the Quadrilateral Security Dialogue, which was perceived as an anti-China move. However, this did not impact Japanese and Australian decisions regarding the RCEP.

Secondly, India claimed that the agreement did not address its concerns satisfactorily, and there were certain ‘outstanding issues’ which demanded resolution. Some of these outstanding issues include inadequate protection against import surges, massive bilateral trade deficits; and exclusion of service agenda. Further, discouraging experiences with Free Trade Agreements (FTAs) with RCEP nations previously, and constraints related to the lack of domestic capacity and market competitiveness, compelled India to decline.

It has also been argued that India’s food and agricultural sectors could witness stiff competition from Australia and New Zealand in the dairy industry, and textiles would have experienced competition from China and Vietnam. Stakeholders, such as farmers’ organisations, trade unions, and industry associations, had a united viewpoint when it came to the adverse implications of the agreement, causing India to withdraw from the largest ever free trade partnership.

The potentially damaging effects of RCEP on domestic industries caused lobbies such as the Swadeshi Jagran Manch (SJM) to organise a national agitation against the RCEP in October, 2019. The SJM is an economic group advocating local produce and indigenous industries that is affiliated with the RSS (Rashtriya Swayamsevak Sangh).

However, the decision not to join evoked mixed reactions.

Criticism of the Indian Decision

Long Term Consequences: Despite opinions favouring India’s protectionist approach, the decision to withdraw from the RCEP has been critiqued as jeopardising consumer behaviour and industry in the long run. Backing out will result in significant geopolitical complications. An opportunity of integration with the regional and global chains has been compromised. Worries over a widening trade deficit are undermined when evaluating the evidence that suggests that a rise in imports will subsequently enhance exports by supporting Indian manufacturing units.

Isolation in GVCs: Via trade diversion, export opportunities have opened up for India through the trade war between US-China. Isolation of India in the global market and its global value chains (GVCs) will be an inevitable consequence of backing out of the deal. India has not succeeded in exploiting the potential of GVCs owing to an overly cautious approach when it comes to foreign services and goods. Inability to implement reforms in the domestic scene have also contributed to this. With the RCEP in action, India was presented with an opportunity to collaborate with the most dynamic economies of the Asia-Pacific region and partake in the revolution of the global value chains. Withdrawing from the RCEP would affect India’s attempts to increase its integration into regional and global chains, as preferential agreements facilitate investments and foster the growth of value chains.

Indian Bilateral and Multilateral Relations: The outcome could provoke the RCEP’s remaining members- the ten nations of ASEAN, alongside Australia, Japan, New Zealand and China, all of whom expected India to join the deal. As of now India is out of both of the economic blocs that will determine Asia’s future- RCEP and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. It has also meant that China will be emerging as the dominant power in the trade deal which entails a third of the global gross domestic product. For India this may also entail the loss of goodwill required to mobilise forces effectively at the World Trade Organisation, especially amongst its Asian allies and regional partners.

India’s Position as a Developing Country: Prior to the establishment of the WTO, by the Marrakesh Agreement, India was considered to be at the helm of the Group of 77 developing nations. Recently however, it has been unable to gather consensus regarding matters like cross-border e-commerce, whereas multiple developing countries have established common ground with proposals of developed countries. India’s refusal to join the RCEP, has indicated that it has opted for the prevailing status quo. Concerns over cheap import surges hurting the Indian dairy and agricultural sectors may have been averted, but the decision does not enhance India’s position as a competitor in the global market.

Conclusions: The Pros and Cons of the Deal

India has been attempting to check Chinese dominance in the subcontinent. It has been argued that as a member of the RCEP, India would have received an international platform with a forum to voice its concerns, in the context of geopolitical stability. This would have prevented China ‘weaponizing trade’, in the neighbouring regions.

India has bilateral FTAs, but does not have significant import partnerships within RCEP. Joining the deal, would have helped broaden the latter. However, it is also true that due to competition from Chinese products, expansion categories are limited. There was possibility of trade deficits worsening due to the drastic rise in imports into India. It would have been useful for India to adopt a simultaneous policy of cautious exports and protection of domestic industries from imports. Key commodities could have included agricultural products, metals and minerals, and pearls and gemstones.

Refraining from joining the RCEP will protect the Indian domestic industries from cheap imports. However, since the RCEP is a China-backed deal, the absence of Indian membership will consolidate China’s economic power. India’s aim is to become a manufacturing hub in the future. However, withdrawing from the RCEP reduces opportunities for trading with the nations which account for a third of the global GDP. Moreover, the process of manufacturing today requires increased integration with global supply chains. Joining the RCEP, would have implied an embrace of freer trade, which would facilitate the shift of companies from China to India. The Indian exit from the RCEP may also impact India’s Act East policy.

As it stands RCEP will help China strengthen its relations with its neighbours and accelerate Northeast Asian economic integration. As such it has both geopolitical and geo-economic significance. With time the RCEP could develop into a platform for stakeholders to deliberate on regional issues. Despite singularly speaking up, there has been no collective attempt to voice concerns against the Chinese actions in the South China Sea for instance. China’s influence is such that even the ASEAN was coerced to not include the UNCLOS verdict on the South China Sea in the joint statement. Upon the complete implementation of the RCEP, diplomats believe that China could be potentially compelled to arrive at a common table and bargain to avoid combined action by the fifteen nations.

Regional trade blocs are beneficial in cases where they are fair to all with all countries operating with agreed upon rules. India has been reluctant to join agreements with counties that are known to circumvent agreed upon frameworks. By staying away from the deal India has also signaled incentives to decouple supply chains that incorporate China and encourage their redeployment around India and the ASEAN. However, given the size of the Indian market the door has been left open for India to join the agreement at a later date.

The larger question is about whether the refusal to sign the RCEP signals India’s movement away from free trade agreements in the future and if so what it would mean for India’s trade and investment .

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