Regional Comprehensive Economic Partnership

Context

• In a recently concluded Bangkok - ASEAN summit, all stakeholders, including India, were asked to conclude negotiations for the Regional Comprehensive Economic Partnership free trade agreement by the end of 2019.

About:

Regional Comprehensive Economic Partnership:

• The Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement that is often characterized as a China-led response to the Trans-Pacific Partnership (TPP) put forward by the USA.
• The pact is currently being negotiated among the 10 ASEAN member states as well as Australia, China, India, Japan, New Zealand and South Korea.

Will RCEP be able to counter Protectionism?

• Free trade has been facing many challenges since the 2008 global financial crisis, especially since the United States pulled out of the Trans-Pacific Partnership agreement last year.
• Since many countries now have to make much greater efforts to tackle their domestic economic problems, the mode and development of FTAs could change in the future.
• Moreover, the imbalanced global development could prompt countries to not agree to open their markets beyond a certain extent even for long-term development of multilateral cooperation.
• For instance, countries in different stages of development will agree to open their markets to different extents to insulate their economies against the negative impact of open and free trade.
• It is within this context that the intent and efficacy of RCEP be scrutinized.

Why is India apprehensive about RCEP trade deal?

• According to Indian Industrial associations, RCEP is nothing but a bilateral trade pact with China. India will lose, China will gain.
• Once the pact is enforced, India will have to give more market access to China and its trade deficit will increase further.
• In 2017-18, India exported goods worth $13.1 billion to China and imported goods worth $73.3 billion -creating a trade deficit of $63.1 billion.
• India has trade deficits with other RCEP nations, too, such as South Korea ($11.9 billion) and Australia ($10.2 billion).
• China has manipulated laws to give subsidies to its domestic manufacturers, despite being a member of the World Trade Organization for 18 years. This is making Indian companies anxious of RCEP.
• Indian negotiators and the domestic industry have been vocal about their discomfort with respect to opening up of the domestic market to Chinese exports. This is understandable, given the massive Chinese overcapacity in key manufacturing industries, and major support programmes in the form of financial, non-financial and trade measures for the domestic industry, which give an edge to Chinese producers over other trade partners.
• India’s trade deficit with the RCEP bloc of over $100 billion is almost 64% of its total trade deficit, of which China alone accounts for over 60% of the deficit.

India has been keen to join RCEP

However since 2012, its concerns remain: opening its markets for cheaper goods from countries like China and South Korea; and ensuring that RCEP countries open their markets for Indian manpower (services).

India and China: Trade Bridge

• India has a trade deficit with as many as 11 of the RCEP countries.
• India is not negotiating a bilateral or multilateral free trade agreement with China at the moment.
• Hence, it has demanded for differential tariffs for its trade with China vis-à-vis the others.
• India has also made tagging the “Country of Origin” on all products a base point in RCEP negotiations.

What is the government doing to facilitate the trade deal?

The Commerce Ministry has begun consultations with stakeholders from industries that are most worried about RCEP.

• It has engaged think tanks and management institutes to develop a consensus in favor of signing the regional agreement.
• If India gives up the chance to join RCEP, it would not just miss out on regional trade, but also lose the ability to frame the rules as well as investment standards for the grouping.
• It already happened during ASEAN formation. India cannot afford to lose out RCEP that too when the de-globalization trends and protectionist measures are a norm of the global economy.

To make RCEP work, what policy considerations are important?

• China’s manufacturing surplus and dumping of goods.
• China’s penetration in the Indian market has been massive. China dominates both in terms of value-added import items as well as labour-intensive industry imports.
• Almost 60% of India’s electric machinery imports, 36% of machinery and equipment imports, and 37% of organic chemical imports are from China.
• In order to iron out China factor from RCEP, India must have a plan to deal with this massive support that China offersits industries, leading to overcapacity and price undercutting post-RCEP.
  • Appropriate safeguard clauses need to be put in place within RCEP in case injury to domestic industry is found.
  • Within the FTA, provision should be made for safeguard measures to be invoked if a volume or price trigger for the concerned products is reached.
  • Given the current state of Indian industry, phased elimination of tariffs is necessary, especially with respect to some key manufacturing industries that have long gestation periods until they start running on full capacity.
  • Policymakers should be cognizant of the use of non- tariff barriers (NTBs) by China, Japan and South Korea.
  • China’s usage of NTBs like complex product certification process, labeling standards, custom clearance, pre-shipment inspection and import licensing has hindered India’s access to their markets.

Hard bargain within RCEP and fierce reform with domestic Industrial capacity:

• • Rigorous implementation of Make in India, persuading companies setting up plants and assembly units in India, bringing in valuable foreign capital and technical know-how.
  • Transforming ‘Make for India’ and Skill India where the needs of the external market, but more importantly the domestic market, are met through production in India.
  • Necessary incentives for MSMEs to be an active part of this process.

Summing up - Pros and Cons of aligning with RCEP:

Fallouts -  if India Joins RCEP:

• • China will dominate the trade, economy and investment factors.
  • Indian industry will have more to lose than gain if it agrees to a liberal tariff elimination schedule specially with respect to China.
  • RCEP trade arrangements that are not in India’s medium-term interest.

Fallouts - if India does not Join RCEP

• • Repeat of mistake which happened when India abandoned interest to join ASEAN.
  • Cumulative access to thriving East Asian market will be fragmented.
  • Buffer against US's and China's trade unilateralism will not be available - when standing alone.

Gain - if India Joins RCEP

• • Easier access to wide market across East Asia
  • Better approach in dealing with assertive China under a formal ASEAN led grouping
  • Higher immunity to global downturns - of EU and USA

Gain -  if India does not Join RCEP

• • Ability to maintain individual trade and investment policy matters
  • Will work harder to sustain WTO

Practice Question:

Indian industry will lose more than gain if it agrees to a liberal tariff elimination schedule especially with respect to China. At a time of growing protectionism, opening Indian market to China can be disastrous, given that proper standards and processes are not in place in India. Analyze intent behind RCEP and contrast it with rising protectionism trends. Discuss if the deal is effective for boosting Indian Industries' competitiveness.