As India opts out of RCEP, it can’t stay out for long; here’s how it can renegotiate deal

Updated: November 5, 2019 4:38:53 PM

It needs to be kept in mind that India can ill-afford to stay out of the RCEP regional value chains which, once finalised, will cover 45% of world population, 40% of world trade and 34% of global GDP.

Prime Minister Narendra Modi with world leaders. (Photo Credit: AP)

By Satyajit Mohanty

In November 2012, exactly seven years ago, the ASEAN started negotiations with six of it’s Free Trade Agreement (FTA) partners to stitch an ambitious pan-regional mega FTA bloc. This was christened as the Regional Comprehensive Economic Partnership Agreement or as it is popularly known by its acronym these days – the RCEP. It was natural for India to actively participate in such negotiations given its strategic and economic interests in East Asia. The policies emanating from the diplomatic and economic corridors veered towards pushing for a larger footprint in East Asia. RCEP was seen as a logical corollary of this thinking- both in the North and South blocks. India was not only one of the fastest-growing confident economies in the world but was playing a more and more important role especially in Asia. The thinking was loud and clear- India cannot pursue strategies of isolationism and expect its presence to be felt in the regional comity of nations.

Fast forward to 2019. A lot has changed in the past seven years. Strong global headwinds of protectionism and withdrawal from regional trade blocs have engulfed the global trading system. The BREXIT referendum in the UK in 2016 jolted the spirits of the regional integration advocates. European Union was the shining example of regional integration and a model to emulate by other countries striving for regional blocs. America’s withdrawal from the mega Trans-Pacific Partnership (TPP) agreement came close on the heels of BREXIT and further dampened the pace of many FTA negotiations around the globe, including that of RCEP. The TPP was definitely nudging RCEP negotiators to conclude a deal at the earliest as seven countries negotiating the TPP were also part of the RCEP negotiations. The backdrop of the global economic slowdown and escalating economic tensions and tit-for-tat tariffs by global trade movers and shakers only resulted in RCEP negotiations becoming more tenacious and protracted.

Insofar as regional integration and FTA’s were concerned the winds of despair weren’t just blowing outside India. Even within, apprehensions that India shall stand to gain from RCEP started to build up strongly. Of late, as the domestic economy started to slow down, fears arose that critical sectors such as agriculture, dairy and steel, to name a few would be hit hard by India joining the mega FTA. Voices of protest arose not only from NGOs and activists but also from various quarters of the Government. Many informed studies including those emanating from the NITI Aayog warned of serious consequences if India joined the RCEP negotiations.

These debates were set in the context of the hit which India has taken from its previous FTAs, especially those with ASEAN, Japan and Korea. While imports from our FTA partners have increased by leaps and bounds, our FTA utilization rates and concomitant market access have been lukewarm. India drastically reduced its tariffs under the Trade in Goods (TIG) agreement with the ASEAN hoping to make good for these losses in the Trade-in Services Agreement. India prides itself in a strong competitive advantage in the services sector boasting of a large pool of skilled manpower especially in sectors like IT and ITES. Services negotiations, which were to follow the ASEAN-India Goods Agreement, unfortunately, never took off, given the reluctance of many ASEAN members.

The goods and the services sector negotiations are being held in parallel under RCEP alongside other sectors like investment and e-commerce. India has been a strong advocate of liberalization in the services sector including allowing cross-border movement of professionals with minimal restrictions are known commonly as Mode 4 access in WTO parlance. No less than the Indian Prime Minister Modi had urged for a linkage between the goods and services negotiations. Prime Minister Modi called upon RCEP members to offer commercially meaningful access in the services sector to ensure that RCEP lives up to its stated objective of being a mutually beneficial agreement. However, as countries have adopted a conservative position and exhibited a high degree of reluctance to open up these sectors, the possible gains to India thus far doesn’t appear to be rosy.

Ironically, to add worry to the woos, many partner countries have made ambitious demands from India to open up the markets for trade in goods. Many domestic industrial sectors are apprehensive that if the RCEP goods negotiations go through in its current form, they shall be beaten black and blue. The elephant in the room is definitely China. India’s combined trade deficit with RCEP countries last fiscal was in excess of 100 billion US dollars, with China alone accounting for about for over half of this figure. This gap has been widening over the years raising fears of Indian industries being wiped out by cheap imported goods.

Customs duties in India have historically been high unlike that of many other RCEP members translating into India offering a greater margin of preference vis-à-vis its trading partners. Incidentally, since 2014 the Government has hiked duties on about 25% tariff lines. However, RCEP has decided to use the 2014 MFN rates as the base rate year for effecting tariff cuts and partner countries have been urging India for substantial cuts in tariffs covering 90% of the products. India had insisted on a ‘tier approach’ with differential schedules of tariff reduction for RCEP member states as it does not have FTAs with China, Australia and New Zealand. India has agreed to reduce tariffs on Chinese commodities over a 20-year period. However, most of these commodities shall have duty free market access into India from ASEAN LDC countries rendering framing and implementation of Rules of Origin critical. An effective and easy to implement criterion would be to specify a certain percentage of value addition in the last country of export so as to prevent rerouting and avoid circumvention. India has also pressed for an Auto Safeguard Trigger Mechanism (ASTM) where higher duties shall be slapped to prevent surge in imports.

Other WTO plus provisions introduced by the rich countries of RCEP bloc pertaining to investments and e-commerce have serious ramifications for developing countries like India. Clauses proscribing mandatory transfer of technology and capping of royalty outflows under investments chapter and forbidding data localization under the e-commerce chapter greatly limit the policy space, if agreed to.

Given that the deadline to conclude RCEP has been missed quite a few times, it would not be a bolt out of the blue, if leaders agree to extend the date for concluding the agreement to 2020. This shall help iron out the contentious issues which various countries including India are grappling with and a couple of rounds of further negotiations shall help in achieving more balanced outcomes. The government of the day is known for its bold decisions and definitely is seized of the issues and concerns raised from various quarters. Shri Modi shall definitely articulate India’s concerns during his series of meetings with ASEAN and East Asian leaders.

It needs to be kept in mind that India can ill-afford to stay out of the RCEP regional value chains which, once finalised, will cover 45% of world population, 40% of world trade and 34% of global GDP. However, this shall require some more hard bargaining to assuage the concerns in the domestic quarters of a sub-optimal deal. From a foreign policy perspective also, India needs to be deeply entrenched in Asian Security and Economic Systems as interdependent and close-knit groupings foster economic prosperity and help in ameliorating regional political and strategic tensions. A modern and comprehensive RCEP deal should accommodate India’s interests and support its efforts in fostering deeper trade and strategic ties with countries on its eastern flank in line with its Act East policy.

  • Satyajit Mohanty is in the Indian Revenue Service. Views expressed are the author’s personal.
  • First published on 4 November 2019, before India’s decision to not join RCEP.

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