On Sunday, 15 countries consolidated their partnership in Regional Comprehensive Economic Partnership aka RCEP. Even though India walked out last year in the middle of discussions, the new trading bloc has shown its clear intentions of welcoming India with open arms if it decides to come back to the negotiating table.
Starting with the basics, What exactly is RCEP?
RCEP is the biggest regional trading agreement. It negotiated between 16 countries originally, the 10 ASEAN members and India, China, South Korea, Japan, New Zealand, and Australia. The intention of RCEP was to make sure a smooth flow of products and services from one member country to others.
The negotiations for this deal, which is signed on Sunday, were on since 2013 in which India was expected to be a signatory up till last November.
So, What exactly happened? Why did India opt-out?
On the 4th of November, 2019 India decided to withdraw from the free trade agreement negotiations that began seven years ago. Prime Minister Narendra Modi said, “Neither the Talisman of Gandhiji nor my conscience permits me to join RCEP”.
As per our PM the pact doesn’t address the concerns and issues raised by India on which the RCEP complained that India added its demand at the last minute. However, India raised the concerns at the negotiation stage itself as industries and farmers had expressed their concern over RCEP.
This decision is made to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector.
As China is also a signatory to this pact, at the given time the relations between India and China are stressed. Is China’s presence a reason?
Escalating tensions with China played a major role in India’s decision. While China’s participation within the agreement had already been proving difficult for India, as seen from the various economic threats, the clash at Galwan Valley has scared the relations even deeper between the two countries.
With the various measures, India took to scale back its exposure with China, in such a scenario it will be difficult for India to keep its commitments under RCEP. During RCEP negotiations major issues remained unresolved which are related to the exposure that India would have to give to China. This included India’s fears of “inadequate” protection against rising imports.
Another reason was the possible circumvention of rules of origin (a mechanism to rule out the nation from which the product came). In absence of which some countries could dump their products by routing them through other countries that enjoyed lower tariffs.
Due to less insurance of countermeasure by India, like an auto-trigger mechanism to boost tariffs on products, when a particular threshold will cross their imports and also exclusion of most-favored-nation (MFN) obligations from the investment chapter, as it did not want to hand out, especially to countries with which it has border disputes, the advantages it had given to strategic allies, or for geopolitical reasons. India felt that the agreement would force to increase benefits given to other member nations which will include sensitive sectors like defense. There also was a lack of clear assurance over market access issues in countries like China and non-tariff barriers on Indian companies.
Is this decision of opting out going to cost India?
The concerns with respect to the decision of opting out are that it might impact India’s bilateral trade ties with RCEP member nations as they may be more inclined to focus on strengthening economic ties within the bloc. This move could potentially impact India with less scope to tap the massive market that RCEP present. The size of the deal is gigantic because the countries involved account for over 2 billion of the world’s population.
Attempts were made by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific. And it could potentially put a spanner in the works on informal talks to promote a Supply Chain Resilience Initiative among the three.
However, The stance of India on the deal also comes as a result of learnings from unfavorable trade balances that it has with several RCEP members, with some of which it even has FTAs. An internal assessment by the government has revealed that there has been growth in both imports and exports with those FTA partners. For both India and its partners, the utilization rate of FTA has been moderate across sectors, which covers pacts with Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, Republic of Korea, and Malaysia.