1. Have negotiations for RCEP – world’s largest trade bloc of which India will be a part – run into trouble?

Have negotiations for RCEP – world’s largest trade bloc of which India will be a part – run into trouble?

India has to refrain from holding extreme positions and reverse the perception of it being a tough negotiator obstructing talks

By: | Updated: June 3, 2016 8:45 AM

The Regional Comprehensive Economic Partnership (RCEP) is an initiative to link the ten ASEAN member states and the group’s free trade agreement (FTA) partners—Australia, China, India, Japan, South Korea and New Zealand. In total, the grouping of 16 nations includes more than 3 billion people, has a combined GDP of $17 trillion, and accounts for about 40% of world trade. RCEP is the largest FTA negotiation in Asia, and also the one with the biggest membership, largest scale and widest influences that India has ever participated in.

If negotiated successfully, RCEP would create the world’s largest trading bloc and have major implications for Asian countries and the global economy. Negotiations among the 16 parties began in early 2013 and are scheduled to conclude by the end of 2016. So far, 12 rounds of negotiations have been completed, with the 13th round scheduled to take place during June 12-18 in Auckland.

RCEP seeks to achieve a modern and comprehensive trade agreement among members. The core of the negotiating agenda would cover trade in goods and services, investment, economic and technical cooperation, and dispute settlement. RCEP would be a powerful vehicle to support the spread of global production networks and reduce the inefficiencies of multiple Asian trade agreements that exist.

India is a major player in RCEP negotiations and is under pressure to bring about steep reductions in its tariffs. In fact, a steep tariff reduction for goods from China has been the biggest threat for negotiators and the industry, fearing a rush of cheap goods from across the border. In addition, countries such as Singapore, which has near-zero tariffs on most goods, and Malaysia, where 90% of trade carries a negligible customs duty, are exerting pressure on India to lower barriers. According to an internal commerce ministry estimate, the signing of the 16-country RCEP agreement will result in a revenue loss of as much as 1.6% of GDP and this has forced the negotiators to tread cautiously.

According to the latest report, the serious adverse effects of joining the agreement have made India more aggressive in the ongoing negotiations. It is said that India is seeking greater market access in services to be able to justify the closing of the deal at home, where an apprehensive local industry views it as equivalent to signing an FTA with China. This has been the norm and a problem that India has faced since it started negotiating regional trade agreements (RTAs) and RCEP is no exception.

Like in all FTAs and RTAs, one of the objectives of RCEP is eliminating nearly 95% of tariffs. This is an easy proposition for most ASEAN member states whose tariffs are less than 5%. But for a country like India, with average tariffs at around 15%, drastically reducing them to zero or 2-3% is difficult and would entail giving up much greater market access than what it would get in return. However, given the importance of the deal—especially since the Trans-Pacific Partnership (TPP) has already been signed which is likely to hurt Indian exports—India has offered several concessions to member countries in RCEP. For instance, with those with which India has already signed FTAs, such as ASEAN, India has proposed to eliminate tariffs on 80% of items. Similarly, for Japan and South Korea, it has offered to open up 65% of its product space. For Australia, New Zealand and China, Delhi has proposed to eliminate duties on only 42.5% of products. As India does not have any kind of FTA with these three countries, its offer is less. But the expectations from India are high and members are demanding much more. Hence, going ahead with RCEP and other pending FTAs is a politically difficult prospect for India.

India’s interests lie mostly in services, the removal of technical barriers to trade such as those taken under sanitary and phytosanitary measures, and trade in goods such as pharmaceuticals and textiles. India has been negotiating hard for liberalisation on mode 4 (movement of professionals from one country to another) of services agreement to offset the revenue loss from goods liberalisation. The country thinks its best bet is in services export, through which it can supply its burgeoning skilled professionals to other countries, thus partially meeting the demand for jobs from a million people joining the labour market every month. At the same time, there are serious limitations to this as well, as many opine that India’s services trade with ASEAN is not significant and the country faces stiff competition on this segment from countries like the Philippines.

It is high time India decides whether it wants to go ahead with RCEP and conclude it. Procrastinating and delaying the process for which India has earned the ire of many member countries is not good. India needs to have a clear vision and strategy with respect to its FTAs and move forward quickly. This would benefit the country’s external sector as its exports have shown a negative growth for more than a year now. The government needs to act tough and realise that RCEP’s potential future as a major trade bloc will remain uncertain until there is enough political will to go through the arduous negotiation rounds and conclude them. Most importantly, India would need to refrain from holding extreme and established positions, and make a little leeway and reverse the perception of it being a tough negotiator and obstructing talks. The country has to show that it is serious about moving forward with the talks in a positive way.

RCEP will no doubt face stiff opposition from various interest groups within the participating countries. But now that India has decided to join, it will need to balance economic and strategic calculations and prepare to lead in the Indo-Pacific century.

The author is visiting fellow, Bruegel, Brussels, and Observer Research Foundation, New Delhi

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