India’s RCEP challenge

Published: December 3, 2014 2:29 AM

The RCEP member countries should ensure that this arrangement does not end up pursuing the narrow objective of just seeking each other’s market

New Delhi is hosting the Sixth Round of negotiations of the most ambitious regional trading arrangement, the Regional Comprehensive Economic Partnership (RCEP). This trading arrangement is the outcome of the decision taken at the conclusion of the 19th ASEAN Summit in 2011 in which the ten South Asian countries decided to deepen the level of cooperation with their partners with whom they had concluded free trade agreements (FTAs). RCEP has thus been proposed as a platform for the agglomeration of the ASEAN+1 FTAs.

As an economic formation in the East Asian region, RCEP brings to the fore the collective strength of some of the largest economies in the world. In 2013, the countries that engaged in making the concept of RCEP a reality accounted for nearly 30% of the world’s GDP and a similar share in world trade. Collectively, these countries make up for nearly 50% of the world’s population. These figures indicate that if its collective strength is harnessed properly, the East Asian region can become a strong pivot for the world economy. This will require the countries of the region to develop in harmony, keeping in view the long-term interests of the participating countries, which can best be served by addressing the development gaps existing between countries and within the individual countries.

The New Delhi meeting is critical for this proposed regional formation for it faces challenges on at least two fronts. The first is its internal dynamics, which have not been very encouraging. Since the negotiations began in the middle of 2013, the RCEP members have made little progress towards defining the contours of the eventual agreement. The modalities are yet unclear, with the major proponents struggling to find an approach that will be acceptable to all the 16 members. Many would argue that this impasse does not augur well for the RCEP, as the members have agreed to complete the negotiations by the end of 2015.

The second and the more serious challenge for the RCEP comes from the recent agreement amongst the 21 members of the Asia Pacific Economic Cooperation (APEC) to initiate the process that will eventually lead to the formation of the Free Trade Area of the Asia-Pacific (FTAAP). Towards this end, the APEC members decided to “launch a collective strategic study on issues related to the realisation of the FTAAP by building on and updating existing studies and past work, providing an analysis of potential economic and social benefits and costs, performing a stock-taking of RTAs/FTAs in force in the region, analysing the various pathways towards the FTAAP, assessing impacts of the “spaghetti bowl” phenomenon on economies, identifying trade and investment barriers, identifying challenges economies may face in realising the FTAAP, and considering any recommendations based on the study’s findings”. While launching this initiative, the APEC members agreed that “the FTAAP should do more than achieve liberalisation in its narrow sense; it should be comprehensive, high quality and incorporate and address “next generation” trade and investment issues”. Although the phrase, “next generation” has not been amplified, it sounds very similar to the language that the US had used while pushing for the Trans Pacific Partnership (TPP), which is being negotiated with most of the major economies on two sides of the Pacific, with the notable exception of China.

The RCEP will have to measure up to the twin challenges squarely. It would have to take the decisions to provide momentum to the economic integration agenda, which has been actively pursued by several of its members who are also members of the TPP. This agenda brings with it the demands for market opening. Not surprisingly, the focus is on India, and also on Indonesia. The approach that is being talked about is to go beyond the commitments India has made in terms of tariff liberalisation in its FTA with ASEAN. India had agreed to eliminate tariffs on nearly 79% of its tariff lines when the FTA is fully implemented. Therefore, India is being asked to top up this commitment by undertaking a further dose of tariff liberalisation.

While India’s commitment appears modest given the ASEAN standards, most its partners in the region have also been rather conservative in opening their market to India. Six of the ten ASEAN members had made tariff elimination commitments comparable to that of India’s.

Singapore had agreed to fully eliminate its tariffs on imports from India, and Cambodia and Brunei had agreed to eliminate tariffs on 88% and 85% of their tariff lines. On the other extreme was Indonesia, which had agreed to eliminate tariffs on less than 50% of the tariff lines.

The offers that India had made do not capture the reality fully. Except for the exclusion list, which currently has about 10% of tariff lines, India has been rather open to imports from the ASEAN region. This has been reflected in the import numbers, which have swelled in recent years.

This phenomenon is in fact common to all of India’s trading partners that are negotiating for the establishment of the RCEP. All these countries have been able to expand their presence in India quite substantially, and have consequently put the country’s merchandise trade account under considerable strain.

Typically, India’s response has been to put a more proactive foot forward in the services negotiations, in order to find a semblance of balance in the trade deals. In pursuit of this strategy, India has been pushing for negotiations in goods and services on parallel tracks. This should clearly be the position that India needs to adopt in the RCEP negotiations as well. Alongside, India must look for balanced approaches in the areas of investment and intellectual property rights, and should insist that the development imperatives must be taken note of while dealing with these issues.

There is, however, a much larger issue for the countries participating in the RCEP. Their endeavour should be to ensure that this arrangement does not end up pursuing narrow mercantilist objectives of merely seeking each other’s market. The RCEP members need to realise the tremendous economic potential of the region through economic integration and this can best be done by bridging the development gaps. It may be pointed out that the ASEAN members’ initiative to establish the ASEAN Economic Community, which coincides with the conclusion of the RCEP negotiations, focuses on the need to narrow the development gaps in the region.

The need to address the “development gap” should figure prominently in the RCEP architecture. Members of this prospective arrangement should therefore address the issue of trade-related infrastructure so as to enable the participating countries to address their supply-side bottlenecks and problems of connectivity, both within and beyond the region. Such an approach will contribute to the economic dynamism of this region by ensuring that economies are not confined within limits of their comparative advantage, but are able to grow beyond.

By Biswajit Dhar
The author is Professor, Centre for Economic Studies and Planning  (School of Social Sciences), JNU

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