Mega trade deal – RCEP deadlock: Why India needs to reform its domestic economy

Given there is still the danger that TPP could be revived, it is only apt that India reforms its domestic economy

Mega trade deal – RCEP deadlock: Why India needs to reform its domestic economy
A large number of officials from nearly 16 countries have gathered in Hyderabad since July 18 till July 28 to negotiate the mega trade deal, the regional comprehensive economic partnership agreement (RCEP).

A large number of officials from nearly 16 countries have gathered in Hyderabad since July 18 till July 28 to negotiate the mega trade deal, the regional comprehensive economic partnership agreement (RCEP). These are the 19th round of negotiations for concluding the deal. RCEP accounts for 28% of world trade and covers nearly half of the world population. The legally binding RCEP covers a wide range of issues including trade in goods and services, investment, intellectual property rights, competition policy, dispute settlement and economic and technical cooperation. The negotiations were officially launched in November 2012 at the ASEAN Summit in Cambodia. However, the ongoing negotiations are proceeding on a slow track due to major differences between the member countries on issues including e-commerce, services and market access issues. Till recently, I had strongly advocated that India must push forward with the trade deal to give a boost to its slowing export sector and also to reverse its image as a tough negotiator obstructing talks and learn to balance economic and strategic calculations. But a lot has changed in the last one year and it would be safe to say that India is better off adopting a cautious approach towards RCEP. One of the major reasons why RCEP negotiations have become slow and tardy is because of the tough stance by several countries on not giving market access to India in services, India being strongly opposed to inclusion of e-commerce norms in the agreement and also steep reduction in tariffs affecting several of its domestic sectors.

In services, India is looking at opening up issues under Mode 4, which deals with cross-border migration of service professionals. Indian industry is weary of steep reduction in tariffs as it could lead to surge in imports from across the border, especially, China. This as India has offered to eliminate tariffs on 80% of products with a margin of 6% depending on the level of development of the other country. If India adheres to this then it may have to eliminate duties on 74% of its traded goods with China over the long run and given the past experience, this is worrying for India Inc. In addition, countries such as Singapore which have near zero tariffs on most goods, and Malaysia where 90% of trade carries a negligible customs duty are pressuring India to lower barriers. According to an internal estimate of the commerce ministry, the signing of RCEP could result in revenue loss due to tariff reductions to the tune of nearly 1.6% of GDP. Further, the government is aware that (except with Singapore) India has been faring poorly with its FTA partners such as South Korea and Japan. They were negotiated with little foresight and haven’t brought in sufficient gains. The poor utilisation rate of the RTAs has only re-enforced India’s belief in the multilateral system led by the WTO, where rules are less complex. It’s the WTO which addresses issues such as anti-dumping and subsidies which are crucial for India. It is evident that before going ahead with any of the mega trade deals, India needs to aggressively undertake a few of the pending reforms. These include domestic as well as trade reforms, (India has successfully launched GST recently), changes in land and labour laws and reduction in subsidies.

The reforms in labour laws, especially in sectors like textiles, are crucial as RCEP would bring in investment in several labour intensive sectors including textiles. Trade reforms would include reducing tariff barriers for partners and ensuring a level-playing field for international partners including in protection of IPRs. If not immediately, but in due course, India would be forced to consider a relatively ambitious tariff reduction plan for RCEP membership negotiation. More important, India is weary of China at the moment. China appears to be keen to quickly push through and wrap up the RCEP negotiations by the end of the year and establish its hegemony in the Asia-Pacific region. India is also deeply sceptical of China’s belt road initiative, which includes projects that cross through Pakistan occupied Kashmir. On the economic front, while China is India’s largest trade partner today, concerns about trade imbalance between the two countries remain. During 2016, the trade deficit between the two countries was a whopping $50 billion. It is also evident that most of the member countries especially ASEAN are inclined towards China which makes things difficult for India.

India firmly believes that for RCEP to succeed it would be important for leading countries like Japan, South Korea, China and Australia to understand that only a modest agenda would be politically feasible under the RCEP. Globally, public opinion is turning against FTAs. Any attempts to pursue an ambitious agenda may provoke strong political backlash, thereby jeopardising the future of the entire agreement. Given that there is still the danger that the TPP could be revived in another form, it is only apt that India continues to try to reform its domestic economy, especially focus on implementing the trade facilitation agreement and continue its efforts at integrating in the regional production networks through the RCEP. In the given circumstances, it is indeed a blessing in disguise if RCEP doesn’t go through immediately giving India sufficient time to establish its position better on all contentious issues.

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First published on: 25-07-2017 at 05:54 IST