India And Regional Comprehensive Economic Partnership

Context

India decided to withdraw from the RCEP due to the concern about the size of its trade deficit. The tension with China in Ladakh is also a factor.

Background

At the East Asia Summit meeting that ended in early November in Bangkok, where the issue of concluding the Regional Comprehensive Economic Partnership (RCEP) agreement was at center stage, India ultimately decided to opt out, saying its key concerns were not addressed.

Making a strong argument in his address at the summit, India said that, the present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP, India added that it also does not address satisfactorily India’s outstanding issues and concerns.

Although, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.

RCEP and India’s Concerns

It is one of the largest regional trading agreement, it was originally being negotiated between 16 countries, free-trade agreement between the 10 member states of the Association of Southeast Asian Nations (ASEAN), Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam and countries with which they have free trade agreements (FTAs), namely Australia, China, Korea, Japan, New Zealand and India.

RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia. In 2017, the 16 prospective signatories accounted for a population of 3.4 billion people with a total gross domestic product (GDP) of US$49.5 trillion, approximately 39 percent of the world’s GDP.

This FTA was concluded in Bangkok, this could have been the world’s largest integrated trading zone and the biggest trade pact since the World Trade Organization (WTO) was formed. Some observers say stepping away is a huge loss for India. However, the issue is complicated from India’s point of view.

Concerns of India are as follows

India pulled out of the China-backed trade agreement as negotiations failed to address its core concerns. These were threats of circumvention of rules of origin due to tariff differential, inclusion of fair agreement to address the issues of trade deficits and opening of services.

The deal would have brought down import duties on 80% to 90% of the goods, along with easier service and investment rules. Some in Indian industry feared that reduced customs duty would result in a flood of imports, especially from China with which it has a massive trade deficit. India’s trade deficit with other RCEP countries was also rising.

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 wanted that RCEP should 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.

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.

Including, RCEP does not have clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.

Stakes of India

The opt out 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.

The move could potentially leave India with less scope to tap the large market of RCEP nations, the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.

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.

There are concerns that pulling out of RCEP is an act of economic self-harm, as India will stand isolated and continue to under-perform in terms of exports and growth.

Conclusion

India has entered into numerous bilateral and regional trading agreements over the years, currently India has preferential access and FTAs with about 54 countries and Comprehensive Economic Cooperation Agreements (CECA)/FTAs with around 18 countries.

In an FTA, tariffs on items of bilateral trade are eliminated between the partner countries while they continue to maintain tariffs on non-member countries. CECA is a more integrated package of agreements consisting of trade in goods and services, investments and economic co-operation and intellectual property.

Whether FTAs are welfare-enhancing or not depends on their trade creation and trade diversion effect. Trade is created when a member of an FTA has a comparative advantage in producing an item, and is now able to sell it to its free trade area partners because trade barriers have been removed.

Trade is diverted with the formation of an FTA that replaces lower cost imports from a country outside the trading bloc.

Connecting the Article

Question for Prelims : In relation to the Regional Comprehensive Economic Partnership, which of the following statements is/ are not correct ?

1. It is an ASEAN centred proposal for a regional Free Trade Agreement.
2. It includes trade only in Goods and Services.

Select the correct answer using code given below:

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Question for Mains : India recently decided to withdraw from Regional Comprehensive Economic Partnership. What are the key concerns of India which led to this decision ? What implication would it have on industrialization and agriculture in India ?