The Resilient Supply Chain Initiative (RSCI) proposed by India, Japan and Australia for building resilient supply chains in the Indo-Pacific has implications for regional trade agreements, including the upcoming Regional Comprehensive Economic Partnership (RCEP).
India’s decision to walk out of RCEP hasn’t stalled its progress. The ten-member ASEAN group of economies from Southeast Asia, along with Australia, Japan, China, New Zealand and Korea, are working on its adoption in the 4th RCEP Summit scheduled for November 2020. The latest RCEP ministerial meeting, held virtually on August 27, reaffirmed the implementation. It also ‘reiterated that the RCEP remains open for India’ and noted India’s potential to contribute to regional prosperity (bit.ly/3k3ovcZ).
India is unlikely to revisit the prospects of re-joining RCEP. Apart from the heavily circumspect view, it has on entering FTAs, premised by the focus on import-substitution arising from the drive on self-reliance, its relations with China are inconducive for joining a trade pact where China is the largest economy. In the meantime, however, it has decided to work with other prominent Indo-Pacific members of RCEP—Japan and Australia, who are also distinctly wary of China—on the RSCI.
The RSCI would build resilient supply chains that are either independent or barely dependent on China. The effort follows a fundamental lesson imparted by Covid-19. Supply chains relying excessively on a particular country—China, in this instance—are likely to be severely disrupted during pandemics like Covid-19. The collapse of production within China in the early months of the outbreak of the pandemic caused cracks in several supply chains. For countries like India, Japan and Australia, whose trade relations with China are deep and exhaustive, and whose producers and consumers are reliant on sourcing from China, the impact was catastrophic.
The economic imperative for pushing supply chains out of China has been compounded by worsening of political relations of RSCI countries with it. India’s current relations with China are at their lowest ebb in several decades. Australia and Japan are also experiencing various difficulties and discomfort in managing ties with China.
Bad blood with China is a common trait across much of the Indo-Pacific. With China’s relations with the US worsening rapidly, the Indo-Pacific has become a common ground for rallying against China. Promulgation of the RSCI by major Indo-Pacific countries, therefore, is hardly surprising. But, what does this mean for RCEP?
The RSCI is looking to expand by including more countries from Southeast Asia. All members from Southeast Asia are in the RCEP. Getting some of them to figure in the RSCI, for delinking substantive parts of regional supply chains out of China, would mean, on part of these countries, signalling to China their intention to be part of an anti-China alliance. This might affect the equilibrium in RCEP.
RCEP’s complications would increase if Southeast Asia, individually, or in small groups, tends to take positions on the basis of strategic loyalties to China, or the Indo-Pacific. ASEAN as a bloc would find it tough to handle increasing rivalries between China and the non-ASEAN members. Given Japan and Australia’s difficult ties with China, RCEP might well be in a situation where it finds it difficult to progress.
Ideally, most Southeast Asian countries would prefer staying neutral. They would wish to benefit from the prospects of RCEP, which is an ASEAN-centric FTA, and at the same time, by working with the RSCI. Indeed, relocations have begun taking place out of China to Southeast Asia, primarily among Japanese businesses. Japan’s decision to offer subsidies to its industries on relocating out of China has resulted in several of the businesses moving out to Indonesia, Laos and Vietnam. More are expected to follow as the initiative gathers momentum. The investment prospects for Southeast from RSCI are considerably attractive.
RSCI is an example of how regional supply chains might be repositioning in line with the emerging geopolitics post-Covid-19. As the US-China hostilities increase, the possibility of countries joining broader alignments on either side of the US-China divide, and the global economic order getting split accordingly, is substantial. RCEP is an agreement that begun negotiations nearly a decade ago when the geopolitical character of the region and the world was much different. In this respect, it might encounter unexpected problems from RSCI.
It is imminent that a serious push by RSCI would lead to its members agreeing on common rules for cross-border trade, investment and standards. Such rules, coming on top of multiple FTAs in the region, might burden the regional trade landscape even more. But, the core dilemma following such rules and the implementation of RCEP is, where do countries, common to both, invest more energy and resources in. Would they stay committed to RCEP? Or would they increasingly tilt to being part of an economic understanding pursuing organisation of cross-border production and supply chains into a ‘trustworthy’ grouping bound by common anxieties on China? Out of RCEP, India clearly would be hoping for the latter!
The author is Senior research fellow and research lead, Institute of South Asian Studies, NUS. Views are personal