Is RCEP a Panacea for India?

I. Introduction

The term ‘strategic partnership’ has entered the international trade arena in the late 1990s especially as a significant tool for improving the international mutual cooperation between the countries (Kay, 2000). Notwithstanding, the regional integrations in the East and in the Southeast Asia have yielded positive outcomes but such integrations have not been successful in the south Asian countries such as the South Asian Association for Regional Cooperation due to trust deficits and political tensions between the member countries (Kaul & Chowdhury, 2018). The successful integration and development strategies of the East Asia and the Southeast Asia in the forms of regional integrations such as the Association of Southeast Asian Nations (ASEAN) have motivated to convert these into mega regional groups, that is, the formation of the regional comprehensive economic partnership (hereafter RCEP) which is likely to have significant economic impacts on the member nations (Itakura, 2014; Li & Whalley, 2017). Literature has reported that the success of RCEP has largely been dependent on the ambition of the trade policy, the expected role of the ASEAN, the US–China geo-political trade war, and the associated defensive measures (Wilson, 2015), and ASEAN could play the catalyst role for the effective implementation of the RCEP (Fukunaga, 2015). The RCEP has been identified as a game changer which has been incorporated with all the 10 member countries of the ASEAN along with India, China, Japan, South Korea, Australia, and New Zealand. The RCEP has represented half of the world’s population, two-fifths of the world’s gross domestic product (GDP) around US$21.3 trillion, and trade, resulting in the shifting of the economic centre of gravity from the west to east in the passage of past four decades (Ranade, 2019) and has promoted foreign direct investment inflows amongst the member countries (Li et al., 2017).

The RCEP has remained under discussion in the political forums since 2012, which is likely to change the patterns and compositions of the Indian foreign trade and has reached its crucial phase as India was expected to sign the pact in the Bangkok summit in the early November 2019. But, under a collective resistance from the industries and farmers who have apprehended that China would dump its cheaper products for destroying the indigenous industries and rural economy, India has pulled back from the RCEP at the 11th hour after participating in 27 rounds of negotiations. Even though the bone of contention for pulling out from the RCEP has been centred with the threats of potential dumping by China and the associated tariffs, another underlying reason likely is the non-tariff measures (NTMs) which have been recognised as a norm inasmuch the world since 2012 has become more protectionist. Besides these, multiple issues have been identified such as the agreements on rules of origin (ROO) which are tantamount to simple circumvention of the conditions as finalised in the RCEP, reduction of tariffs from the 2019 levels instead of 2014 levels, and access to new markets for exports of selective services. Further, the trade pattern has been gradually changing from its shape as witnessed post World Trade Organization (WTO) formation timeline to plurilateral trade agreements where trade protectionism has become significant which also likely has contributed to India’s exit from the treaty. Furthermore, government officials have emphatically justified the exit decision citing that any free trade agreement (FTA) like the RCEP should be entered on mutually reciprocal terms with equivalent emphasis on the services along with the goods and not at the cost of domestic industries. Furthermore, prior studies have documented that the FTAs in the Asia-Pacific region could not fulfil the twin objectives, namely, trade liberalisation and widening of the regional economic cooperation, significantly (Capling, 2008; Dent, 2010; Wilson, 2012). Furthermore, a number of challenges of the FTAs have also been highlighted in the contemporary literature such as low utilisation rates, lower levels of preferential tariff margins, and complicated restrictive ROO (see Kawai & Wignaraja, 2011; Petri & Plummer, 2012; Zhang & Shen, 2011). Notwithstanding the studies of Indo-Japan comprehensive economic partnership agreement, 2011 have produced mixed outcomes such as India likely to gain more benefits by substantial reduction from China (Bhattacharyay & Mukhopadhyay, 2015), opposing a few others (e.g., Ahmed, 2010). India’s walking out from the RCEP has conveyed a strong message to the world, a more political judgement than economic judgement; that, it has shifted from its earlier policies and would only enter into agreements which are mutually beneficial to it as it has also opted out from the WTO deal and the FTAs with the United States in the recent past (Palit, 2019).

II. RCEP Deal: The Rationale

The virtual collapse of the WTO has de facto opened the new vista for the growth momentum of the regional and bilateral trade agreements and India joining the RCEP had likely become de facto the need of the hour rather than just de jure. The growth of manufacturing should be commensurable with simultaneous growth in exports for which every country must chalk out successful strategy, notwithstanding the slump in Indian exports primarily contributed by domestic hindrances (Ranade, 2019). The provisions of RCEP have allowed its members to impose tariff quota restrictions on the duty-free products; hence, India could have imported the quality products at competitive rates which could have benefitted the billions of consumers. It should be noted that Chinese economy is in the state of rebalancing and China has announced to import US$12 trillion of goods and services in the next 5-year spell and, by joining the RCEP, India could have been able to access the exports market with selective products and services such as paramedical, software, and tourism. Further, by signing the pact India could have tapped the unexplored export market of RCEP member nations which, in turn, could have created new employments, value addition, and accessing the benefits of global value-chain. Literature has documented that the booming of East and Southeast Asian economies has been largely contributed by the suitable balance between the two extremes – export promotion and import substitution. The Ricardian theory of comparative advantage has posited that countries having comparative advantage in terms of cost would produce the goods and where these do not have such advantage would import the rest; but the reality largely deviates from there and production decisions have been channelised by social structure, economic distributions, and political wills, creating significant trade deficits for most of the economies. Unfortunately WTO has remained biased towards trading of goods and western economies have shown reluctances towards service trading creating roadblock for immigrations hence multiple FTAs such as RCEP and the like come into existence. It has been envisaged that RCEP would eliminate tariff by at least 92% on the traded goods amongst the participating nations, would strengthen the provisions of non-tariff measures, would improve the online consumer and personal information protection mechanism, would emphasise on paperless trading, would improve the transparency, and would simplify the custom procedures significantly.

III. RCEP Deal: The Concerns

It has been argued that India has apprehended that joining the RCEP could open the flood gate of cheap Chinese products which would be dumped to Indian markets for ruining the domestic industries severely and by rejecting the unfavourable terms and conditions India has firmly protected her industries from the Chinese aggressions. As far as the trade in agriculture (excluding dairy products) has been concerned, India has likely preferred to opt out of the trade pact from the balance of trade and balance of payment points of view rather than from protectionism. India’s decision of pulling out from the RCEP deal has been categorically pointed out by the government for the following reasons: RCEP members have turned down India’s proposal for imposing a cap on Chinese imports, favourable provisions for more trades in services, and commitment from the members for better market accessibility for the Indian products. Related literature has concurred that India’s past FTAs could not yield the desired outcomes in terms of exports surge rather her trade deficits with the partner countries have significantly increased (Pant & Sarma, 2019). Admittedly, India’s trade deficit has accounted for around 40% of her total trade deficits and it could have likely widened post RCEP joining, inasmuch imports from China would have surged significantly (Krishna & Panagariya, 2019). Furthermore, the food processing firms have apprehended to face acute competition from the imported cheese from New Zealand whereas the steel producers have been worried about substantial increase in imports from China (Forbes, 2019). Post signing, the RCEP member countries such as Australia and New Zealand could have exported their dairy products in Indian markets which could create lopsided competition for the resource-scarce Indian farmers. The Indian firms might have put pressures either by excluding the items from the FTAs or by extending the timeline for adjustments. The bitter experiences of the Indian farmers on the Indo-Sri Lanka FTA and Indo-ASEAN FTA on the plantation sector, such as tea, coffee, rubber, coconut, and on the oil seeds have likely precluded Indian government in signing the pact. The challenges of the sectors such as horticulture, aquaculture, floriculture, pharmaceuticals, seeds, and plantation, micro, small and medium enterprises due to the FTA with the ASEAN have been likely taken into cognisance before pulling out from the pact. Moreover, cultivators have been apprehended that cash crops like groundnut, mustard, oil palm, sunflower, pepper, cardamom, and soya bean could have been adversely affected. There has been a political consensus against the RCEP even within the BJP-led NDA-II alliance partners besides the opposition INC which likely has significantly contributed to India’s decision to exit from the RCEP (Verma, 2020). The farmers of Kerala have consistently complained about the inferior Vietnamese peppers routed through Nepal and Sri Lanka ruining India’s domestic market. The adverse effects of the Indo-Sri Lanka FTA which commenced in March 2000 worsened in 2001 when India signed the WTO treaty for waiving out the quantitative restrictions on imports which had significantly impacted the plantation farmers of Kerala. Another important reason behind India’s quitting has been regarding the principle of ‘country of origin’ where India’s claim for value addition of at least 35% for a good to be assigned as an export from a particular RCEP country (e.g., Vietnam who could re-export Chinese goods to India) could not be extended to all goods; rather the RCEP partners were reluctant to confine up to only 100 tariff lines (Pant & Sarma, 2019; Pattanayak, 2019). India has also raised her concern about technical issues such as change in the base year from 2014 to 2019 for tariff calculations and about intellectual property rights and has apprehended that entering into the pact could have significant adverse impacts on the generic pharmaceutical products as well (Pant & Sarma, 2019; Vijaykumar, 2019). In addition, the timing of the pact has also been referred to as crucial as Indian economy is currently passing through a phase of slowdown and the projected growth rate in the current fiscal has been scaled down to below 6%.

IV. RCEP Deal: A Lost Opportunity

India has decided to restrain herself from entering in the RCEP and accordingly has lost her opportunity to accelerate the ‘Make in India’ program. Moreover, being an integral part of the RCEP, it could have been likely to attract the foreign investors at the strength of her huge domestic market which could be used as a base to export to the free trade zones. Interestingly, agreement with the RCEP could have been comparatively smooth for India with her focus on trade liberalisation, when compared to entering agreements with the United States and the European Union. India’s position also likely has weakened against the United States and the European Union for not joining the RCEP. The agreements with the European Union have remained stalled for the past few years due to excessive lobbying by the auto sector for favourable terms in domestic market, while in those with the United States the reversal of price controls in medical equipment, pharmaceutical, solar panels, and electronics is mostly expected. Another argument that India likely to miss the opportunity to exports more in the European Union and the United States by not joining the RCEP has little relevance as her uncompetitive exports unlikely to accelerate by signing the bilateral FTAs. Majority of the RCEP members have expected that India’s joining in the group could facilitate them to counter China’s aggressive competitions. The high-level advisory group constituted by the Government in its report notwithstanding has strongly recommended for joining in the RCEP, but, it has been presumed that government has preferred to defer the decision as a number of economic reforms should be initiated before attaining the full benefits of the RCEP joining. The critics have argued that successive governments have miserably failed to increase the Indian industries’ competitiveness and accordingly India has pulled out from the RCEP agreements for the phobia of acute competition from the RCEP member countries. Further, such withdrawal has also lost her the golden opportunity to trade with the large population and GDP which could significantly contribute to her own GDP, improving the current account deficit. The eventual exclusion notwithstanding has been vehemently justified by the government and the ruling political party, emphasizing the Gandhian principle which has argued that the poorest should be benefited mostly from the government policy decision, but such logic unlikely be supported. On the contrary, greater openness of trade could have benefited the poorest by raising their ability to purchase the products which have been manufactured at competitively cheaper rates. India’s concerns for ROO and China’s non-market nature of the economy could have been well addressed in the roundtable negotiations with the remaining 15 members of the RCEP rather than pulling out without deeper strategic analysis about the pitfalls of such exclusion. Staying out from the RCEP deal has resembled India’s protectionist image, contrary to its ministers and high officials’ overenthusiastic arguments in favour of the perceived benefits from the RCEP, which has significantly indicated her inward turn instead of accessing the opportunities for competitiveness with the peers and associated reforms for placing the sectors globally competitive. It has been estimated that, India’s exports target likely to cross the US$1 trillion by 2025 and her quit decision unlikely to achieve such target. Furthermore, trading without regional blocks in an era where multilateralism has been significantly weakening at a faster rate, the achievement of the targeted exports probably is unfeasible. Experts have estimated that by joining RCEP, India’s GDP could have been raised by 0.15% (Jaipragas, 2019) and even the trade flows likely are confined within the RCEP member countries (Choudhury, 2019). Interestingly, India’s exclusion from the RCEP has literally indicated that it has reduced the bilateral trade agreements with the countries and likely has ensured market access with its quality exports basket. The RCEP exclusion has indicated India’s inward focus raising import duties which likely to turned as less competitive, increasing the probabilities of grey marketing.

V. The Way Forward

The RCEP has provided a platform for integrating India with the world’s best countries and by extending the adjustment period, phase-wise tariff cuts on excluded items which have opened a new vista for negotiations as supported by nations like Japan and Singapore. It has been argued that before signing the mega FTA such as the RCEP, central government must address the states’ concerns about the consequences inasmuch the presence of China, Japan, Australia, and New Zealand in the RCEP could have significant impacts on the Indian economy especially on sectors like diary, sericulture, plantation, horticulture, and floriculture. Integration with the global economy in a better way should be prioritised rather extending subsidies or the other export boosters, a few of which have been struck down by the WTO. The competitiveness of the Indian produces should be accelerated for which India is required to invest in the infrastructure and logistics, along with time-sensitive administrative clearance and initiating labour reforms in no time. Introduction of safeguard duties to cope up with the increased imports has been preferred and India should emphasise for transparent provisions for exports of goods and services in China and the ASEAN countries along with changing the present base year for tariff reduction as well. Economists have pointed out that around 90% of India’s bad exports have been contributed by the internal challenges while the rest has been influenced by the external environment which must be addressed strategically in a phased manner for accelerating the export growth engine. Indian export strategy has to focus on twin pronged approaches – accelerating competitiveness and targeted promotional activities; emphasising more trades with the countries of West Asia, Africa, and Latin America, in addition to the conventional trade partners. Trade agreements with 12 RCEP member countries which are already existing should be explored in their full potential for attracting trade investments, enhanced exports, and even for re-exports in other geographical territories as well. Economic reforms, specifically in the factor markets such as land, labour and capital would likely to accelerate manufacturing investments as it has been alleged that the cost of capital has remained highest in India, precluding foreign investment. Notwithstanding, multiple export promotion institutions have been operating since long but India should create an overarching export promotion institution covering several agencies fully managed by marketing professionals which would create linkage between the potential buyers and exporters at home and overseas simultaneously. One of the strong arguments in favor of India’s withdrawal from the RCEP could be protecting her diary sector but such lobbying unlikely is supported in as much the industry has not protested when India has entered bilateral agreements with Australia and New Zealand.

Interestingly, the problem of Indo-China trade deficit has been treated separately notwithstanding India has same trade results with rest of the RCEP members. Accordingly, India’s decisions to quit from the RCEP unlikely to address her export problems unless export produces have become competitive. Economists have shown their reservations and have concurred the prime reason behind India’s quitting probably is the poor competitiveness of the products rather than the underlying conditions of the RCEP (Jain, 2020). The apprehension about deluge of cheap Chinese products in the Indian market which could ruin the MSME, abolishing jobs and hurting the poor especially in the post COVID-19 pandemic scenarios, is unlikely to be fully nullified but it has reinforced India’s protectionist image inasmuch as it could block any such product by introducing countervailing duties or any such measure. Accordingly, the government should initiate to draft mutually beneficial FTAs with Australia and New Zealand and should negotiate with China for investments in India and allowing Indian exports of services such as IT and pharmaceuticals. The possibilities of imposing tariff and non-tariff barriers from the united RCEP members along with possible implementation of the ROO and the like unlikely be entirely ruled out (Ciuriak & Singh, 2015). Those could likely to increase the trade deficit; accordingly, the policymakers should encourage the manufacturers to produce quality goods for keeping India’s presence in the sustainable global competition. As the role of the WTO has been reducing progressively with corresponding emphasis on the unrestricted trade and investment inflows especially in the developing economies, global trade would likely be channelised on the principles of reciprocity where standardisation, specifications, and intellectual property safeguards and environment standards would be preferred vis-à-vis tariffs (Saran, 2020). It has been well settled that India’s contribution to the world exports has remained insignificant, merely 1.8% for goods and 3.5% for services, which has itself isolated her in the world trade which will unlikely be resolved by signing with the RCEP instead of improving the quality of export produces. Academic research should be conducted for unearthing the reasons of underutilisation of the FTAs by the exporters with remedial strategies for accessing the optimal benefits deduced from these. The policymakers should shift from the complex, costly, inconsistent, and overlapping bilateral FTAs to the regional FTAs for accessing the advantages of multilateral trading system, in tune with the global peers. Finally, since India has dismal probability to join the RCEP in future, it should instead initiate Indo-Pacific trade pact for relocating her supply chains beyond China, accessing the benefits of resilient supply chain initiative, that is, minimising the risks from disruption and enhancing the resilience (Palit, 2020).