Trade deals: The right Regional Comprehensive Economic Partnership strategy for India

India can build a RCEP strategy without formally joining the grouping. It can consider sector-specific FTAs with countries where complementarities exist, while working on building standards and making logistics cheaper.

Trade is now being seen more as a component to build competitiveness in sectors that need imported raw materials or intermediates, and not as a means to enhance economic diplomacy or to increase India’s presence in regional value chains.

By TS Vishwanath

November 2020 witnessed the signing of a significant plurilateral trade agreement, the Regional Comprehensive Economic Partnership (RCEP), by 15 countries—the 10 ASEAN member nations, China, Australia, New Zealand, South Korea and Japan. India, which was one of the founding members, walked out of the agreement in November 2019 as it felt that the membership of the RCEP would harm many sensitive sectors in the country. However, the 15-member grouping has decided to leave the door open for New Delhi to join at a later date, if it chooses to change its mind.

The membership of the RCEP has always remained a controversial topic in India since it was first proposed in November 2011. Some in industry, academia and in political circles have been critical of India’s membership of the RCEP as it has been viewed as a grouping driven by Beijing to meet its expanding economic aspirations in the Indo-Pacific. At the same time, supporters of India’s membership of this agreement have espoused the benefits of India being able to integrate with the markets in the East by becoming a part of the value chains in the region.

The discordant narrative in the country surrounding the RCEP reflects the different views on India’s participation in any free trade agreement (FTA)—though India has, over the last two decades, signed over 65 preferential FTAs including several comprehensive economic partnership agreements with important trade partners. Importantly, while there has been a lack of consensus on India becoming part of any trade agreement, the RCEP was the first agreement where India actively moved out of the negotiations despite being a founding member of the grouping.

This change in India’s stand in November 2019 provided a clear view of where New Delhi was heading in terms of its bilateral relationships. India’s tryst with FTAs started when, under Prime Minister Atal Bihari Vajpayee’s leadership, the country decided to Look East and felt that the best way to integrate with these markets was to use the economic route of FTAs. However, given China’s recent aggressive push in the region—both economically and, more importantly, militarily—India seems to want to build strategic partnerships with likeminded countries in the region based on security concerns as against having limited economic deals that have not led to any significant trade gains.

Driven by the global trends of increasing protectionism in the last few years, India has chosen to move down the path of atmanirbharta (self-reliance). Prime Minister Narendra Modi has, however, clarified that while India will become more ‘vocal for local’, it will continue to remain engaged with the world for trade and investment. The government, through several recent policy measures, including import bans on several products, has shown its intent to put more stress on pulling investments into the country instead of adopting a free trade model. Trade is now being seen more as a component to build competitiveness in sectors that need imported raw materials or intermediates, and not as a means to enhance economic diplomacy or to increase India’s presence in regional value chains.

It is important to note that the RCEP has only been signed and now countries will have to ratify it before the agreement is launched. This may give India some more time to consider if it will take up the offer of joining the RCEP at a later date.

A quick analysis by APJ-SLG Law Offices (ASL) of the RCEP agreement shows that India’s total exports to the RCEP countries were $64 billion in 2019, of which the top 25 products constituted $31 billion, which is nearly 50% of India’s total exports to these countries. Importantly, not all these products receive tariff benefits under the existing trade agreements that India has with many of these countries.

However, all these products have been put under a preferential tariff under the RCEP agreement, thereby providing the RCEP member countries a benefit over India in terms of tariff. The tariff preferences under the RCEP will come into effect over a 3-20 year period, giving India time to build competitiveness in these sectors. In this context, it may be worthwhile to look at a NITI Aayog study on FTAs that had stated India’s exports are more responsive to income changes as opposed to price changes, and hence a cut in tariffs does not necessarily boost India’s exports significantly.

If the current policy ecosystem continues, then India is not expected to take up the offer of joining the RCEP. However, the agreement provides India a reason to focus on some critical aspects to ensure that the country remains connected to the global markets. India can build a RCEP strategy without formally joining the grouping.

First, India needs to continue the work of building on standards across sectors. The government has already identified close to 500 products where it is creating mandatory standards, and this list needs to be expanded. Second, cut logistics cost for internal and external trade. The NITI Aayog study shows that the average logistics costs in India are about 15% of GDP, while such costs in the developed countries are about 8%. Third, consider sector-specific FTAs with countries where complementarities exist as these may be more beneficial than comprehensive FTAs. Finally, don’t look at FTAs as a diplomatic tool, but use these to build competitiveness across sectors.

(The author is principal advisor, APJ-SLG Law Offices)

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