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EFSAS Commentary

India’s sound decision to exit the China-led Asia-Pacific RCEP


One of the biggest free trade deals ever, the Regional Comprehensive Economic Partnership (RCEP) was signed on 15 November between the ten member-countries of the Association of Southeast Asian Nations (ASEAN) and five of its six trade partners, China, Australia, Japan, South Korea and New Zealand. The sixth, India, had in November last year opted out of the RCEP after participating in 28 out of the 31 rounds of negotiations over its formation ever since the proposal to create the economic grouping had been mooted in 2011. India said that its decision had been dictated by the RCEP’s inability to “address satisfactorily India’s outstanding issues and concerns”. The signing of the RCEP last Sunday has, quite expectedly, again ignited a vibrant debate on whether India’s decision to stay out will only serve to inhibit the potential rapid economic recovery and growth that a post-COVID-19 world will shriek out for. The counter argument has been that India’s decision to prioritize the immediate-term protection of its own farmers and businesses cannot at all be faulted, and that the desirability of exercising caution against any Chinese-dominated grouping had morphed into an imperative for India after the recent Chinese belligerence along the Line of Actual Control (LAC) in Ladakh.

The RCEP covers in excess of 2.2 billion people, and it accounts for 30 percent of the world’s economy. It was first proposed at the 19th ASEAN meet in November 2011 with the aim of creating a consolidated market for the 10 ASEAN member countries and their trade partners. It was formally announced in Phnom Penh, Cambodia in November 2012 as an initiative to encourage trade, and negotiations on RCEP involving all 16 countries that began in 2013. The guiding principles of RCEP state that “The objective of launching RCEP negotiations is to achieve a modern, comprehensive, high quality and mutually beneficial economic partnership agreement among the ASEAN member states and ASEAN’s FTA (free trade agreement) partners”, and that the RCEP aims to create a “liberal, facilitative and competitive investment environment” in the Asia-Pacific region. The RCEP is slated to progressively lower tariffs over the next 20 years, and it aims to counter protectionism, boost investment and allow freer movement of goods within the region. It also includes rules on intellectual property, telecommunications, financial and professional services, and e-commerce.

At the time that the RCEP was announced in 2012, talks for another major trade pact for the Asia-Pacific, the Trans-Pacific Partnership (TPP) led by the United States (US), were already underway. The key features of TPP included comprehensive market access, regional approach to commitments, inclusive trade, regional integration, and addressing new trade challenges. Even though RCEP negotiations were led by ASEAN, some observers viewed the RCEP as a Chinese counter to the increasing US influence in the region. US President Donald Trump, much to the delight of China, decided to pull the US out of the TPP in 2017 while describing it as a “potential disaster” for America, one that would harm manufacturing in the US. The remaining 11 countries in the TPP, however, went on to renegotiate the pact, and signed the renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018.

Analysts believe that the RCEP is a weaker trade deal when compared to the CPTPP. They base their view on the fact that tariffs among many RCEP member countries are already low given the existing bilateral or smaller multilateral trade deals among them. This will mean that the direct economic benefits will be limited. Gareth Leather, senior Asia economist at consultancy Capital Economics, for example, pointed out that more than 70 percent of trade among the 10 ASEAN countries is conducted with zero tariffs. Hence, additional tariff reductions under RCEP “will only come into force gradually, and it will be years before the treaty is fully operational”, Leather added. Others have opined that while China and some of the other larger economies of the RCEP could gain from the grouping, the potential benefits for smaller economies remained uncertain.

Most of the key countries in the RCEP wanted India on board, and they still do. Not only were India’s huge population and its huge market seen as being economically enticing, countries with a democratic inclination such as Japan and New Zealand, to name just two, also valued the strategic balance against communist China that India would provide within the grouping. Hence, other members of the grouping expressed hope that India would eventually join at a subsequent stage, even after Indian Prime Minister Narendra Modi told the RCEP Summit in Bangkok on 4 November 2019 that he had come to the conclusion based on the possible impact that the RCEP would have on the “lives and livelihood of all Indians, especially vulnerable sections of the society” that “The present form of the RCEP agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP. It also does not address satisfactorily India’s outstanding issues and concerns. In such a situation, it is not possible for India to join the RCEP agreement”. Singapore Prime Minister Lee Hsein Loong, for example, said that he was “hoping that India too will be able to come on board at some point”. The other member nations have also maintained that the doors will always remain open for India’s participation in the RCEP.

India’s reasons for opting out were many. The direction in which the negotiations were proceeding led it to assess that participation in the RCEP would expose Indian producers and manufacturers to a flood of cheap and mainly Chinese-made imports, which were often State-subsidized. The resultant unequal trade flow would have jeopardized millions of local businesses, industries and jobs. India’s exports, on the other hand, are often blocked by China’s recourse to non-tariff barriers. China already enjoys a huge trade surplus with India, which as per official Indian statistics hit $48.6 billion in the 2019-20 fiscal year.

Indian officials have revealed that India’s proposal to have an automatic trigger of increasing tariffs at a particular level of imports was not acceded to during the negotiations, nor was its request for tough rules of origin to prevent circumvention by China and consequent flooding of Indian markets with cheap Chinese goods. E-commerce and trade remedies were among other key areas of concern that were not satisfactorily addressed. Data localization under RCEP deal was also an issue for India, which wanted all countries to have the rights to protect data. An Indian government official was quoted by BusinessLine as saying that “India’s concerns were straightforward and were articulated several times during the negotiations. They remain the same. India could not join an agreement where its primary concerns were ignored”

India’s textiles, agriculture and dairy sectors, which employ hundreds of millions of workers, were seen as the most vulnerable to Chinese and other RCEP signatory imports. The vast majority of workers in these sectors are among the poorer sections of Indian society. Under the RCEP, India would have been required to steadily drop tariff levels. India was keen to have 2019 as the base year for tariff reductions, as against 2014 that the other countries finally agreed upon. This gave India the feeling that it was up against inflexibility. Further, Indian steel, machine tools, paper, automobiles, chemicals and tyre industries, to name just a few, are all protected in varying degrees from foreign imports and would face sudden stiff competition from RCEP nations if India joined the grouping. India’s large dairy industry, similarly, feared that Australian and New Zealand producers could flood Indian markets and kill off mainly unorganized small-scale Indian producers.

The Indian government’s decision to opt out of the RCEP was welcomed by most sections of the Indian political opposition, and by and large by its people. The farmer’s organization the All India Kisan Sangharsh Coordination Committee (AIKSCC) expressed satisfaction over it, and its convenor VM Singh said, “AIKSCC is happy that good sense has prevailed on this government and its decision to barter away the lives and livelihoods of crores of farmers, workers and small businesses has been averted”. The Indian Steel Association said that India's decision to not join the RCEP came as a “great relief” for the steel industry. It revealed that it had requested the government “that if signing the RCEP was inevitable, then steel items should be kept out of the agreement”. Dairy farmers also welcomed the RCEP news, along with small businesses, micro and small entrepreneurs, copper producers, e-commerce players, and data service providers, among others.

Although not yet a factor at the time last autumn when it pulled out of the RCEP negotiations, the rising anti-China sentiment in India after the 15 June attack by Chinese troops on Indian soldiers in the remote Galwan valley in Ladakh in which India lost at least 20 soldiers has become a major factor for the Indian government in anything relating to China. A deep distrust of China now prevails in the Indian establishment and its population alike. When India had walked out of the RCEP talks in November 2019, the understanding was that it would continue to negotiate the main contentious issues. However, this distrust of China that has taken shape in India, and to some extent the COVID–19 pandemic, meant that the talks did not move ahead.

India’s not signing the RCEP along with the 15 countries that did so does not, however, foreclose India’s options. An RCEP statement clarified the position when it said that “India has significant outstanding issues, which remain unresolved. All RCEP participating countries will work together to resolve these outstanding issues in a mutually satisfactory way. India’s final decision will depend on satisfactory resolution of these issues”. Gareth Leather pointed out that several RCEP member countries such as Japan considered India’s presence important to counter China’s economic weight. For the time being, though, India is not ready, as is underscored by the fact that Indian industry and trade experts have backed its decision not to join the RCEP.

A day after the RCEP was signed, India’s External Affairs Minister S. Jaishankar made it clear that India’s position had not changed. In an ill disguised reference to China he said that those who argue “stressing openness and efficiency” do not present the full picture. He emphasized that this was “equally a world of non-tariff barriers of subsidies and state capitalism”, in which “In the name of openness, we have allowed subsidized products and unfair production advantages from abroad to prevail”. He averred that “The choice was to double down on an approach whose damaging consequences were already apparent; or to have the courage to think through the problem for ourselves”. Subsequently, during a virtual discussion on 18 November at the Centre for European Policy Studies, Jaishankar said: “We saw that a number of our key concerns were not addressed. We had to take a call then whether to enter a trade agreement if our major concerns are not addressed”.

The US, meanwhile, will take satisfaction from the fact that its key regional ally in New Delhi has chosen to remain outside of Beijing’s orbit at a time when even countries in Asia that have strong security alliances with the US, such as Japan and South Korea, have signaled by joining the RCEP that when it comes to economic policy they do not want to choose between the US and China. Analysts have argued that given its deep distrust of China, India must look towards a new version of the competing CPTPP pact, particularly since the incoming US President Joe Biden has hinted that he will reverse Trump’s decision and rejoin the grouping. India’s Foreign Secretary Harsh Vardhan Shringla, while speaking on commercial ties between India and the US on 19 November, echoed the analysts by saying that New Delhi believed that the US was a “natural partner for India” in its quest to build a resilient economy.

India recognizes that it needs to accelerate negotiations on other trade agreements in order to make the country’s exports more competitive. It has already convinced ASEAN countries to review their FTA with India, and it has made similar requests to Japan and South Korea. It is also simultaneously negotiating a trade pact with the US and an FTA with the European Union. In contrast to China, where rules and decision making are opaque and market access tends to be offered based on strategic considerations, India enjoys more economic complementarities with these democracies.

India must also be awake to the reality that it simultaneously needs to shore up its sagging competitiveness through domestic reforms aimed at enhancing its long-term economic strength. While those reforms are being worked out, India has demonstrated through its decision to stay out of the RCEP that it is conscious of the perils of entering into FTAs that would merely provide its vast market for countries such as China to exploit.

In the final analysis, the Indian government fittingly chose sensitivity towards the large and vulnerable sections of its population that would, at least in the immediate term, be severely adversely impacted by its signing the RPEC over the 1.1 percentage points in real GDP that the think tank Peterson Institute for International Economics has estimated India could have gained by 2030 had it stayed in the pact.