Topic: General Studies 2, 3:
- Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
India and RCEP
Context: 15 countries came together and signed the Regional Comprehensive Economic Partnership (RCEP) on the sidelines of an online ASEAN summit hosted by Vietnam on 15th Nov 2020.
Even as India opted to stay out after walking out of discussions last year, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.
What is RCEP?
- RCEP was originally being negotiated between 16 countries — ASEAN members and countries with which they have free trade agreements (FTAs), namely Australia, China, Korea, Japan, New Zealand and India.
- Objective: The purpose of the deal is to create an “integrated market” spanning all 16 countries. It would make it easier for products and services of each of these countries to be available across this region.
- Mega Trade deal: It was described as the “largest” regional trading agreement as the countries involved account for almost half of the world’s population, contribute over a quarter of world exports, and make up around 30% of the global GDP.
- Negotiations to chart out this deal had been on since 2013, and India was expected to be a signatory until its decision in November 2019 to stay out of the deal.
Why did India walk out?
- Unfavourable Balance of Trade: India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing bilateral free trade agreements with several RCEP members to increase exports.
- Fear of Dumping of Chinese Goods: India has already signed FTAs with all the countries of RCEP except China. This is the major concern for India, as after signing RCEP cheaper products from China would have flooded the Indian market.
- Non-acceptance of Auto-trigger Mechanism: In order to deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism that would have allowed India to raise tariffs on products in instances where imports cross a certain threshold. However, other countries in RCEP were against this proposal.
- Lack of Consensus on Rules of Origin: Rules of origin are the criteria used to determine the national source of a product. India was concerned about a “possible circumvention” of rules of origin. The deal did not have sufficient safeguards to prevent routing of the products.
- Protecting domestic industries: Throughout the negotiations, the dairy industry demanded protection as the industry was expected to face stiff competition from Australia and New Zealand when the deal was signed. Similarly, steel and textiles sectors have also demanded protection.
- MFN Status: India wanted RCEP to exclude most-favoured 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 benefits it was giving to its strategic allies
- Issue of Market Access: RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
- Lack of Commitment to resolve above issues: India had been “consistently” raising “fundamental issues” and concerns throughout the negotiations and was prompted to take this stand as they had not been resolved by the deadline to commit to signing the deal.
- No deal better than bad agreement: India’s stance was based on a “clear-eyed calculation” of the gains and costs of entering a new arrangement, and that no pact was better than a “bad agreement”.
How far is China’s presence a factor for India’s decision?
- Apart from economic reasons (fear of dumping), escalating tensions with China are a major reason for India’s hardened position on the deal.
- China’s participation in the deal had already been proving difficult for India due to various economic threats, the clash at Galwan Valley has soured relations between the two countries.
- The various measures India has taken to reduce its exposure to China would have sat uncomfortably with its commitments under RCEP
Why is RCEP important for China?
- China is trying to overcome Covid-19 disruptions and resurrect the supply chain mechanism and possibly put pressure on US President-elect Joe Biden.
- The Indo-Pacific so far ran on twin tracks of economy and security with economy on a weak wicket.
- China is trying to strengthen the economic base while the US is focussed on the security aspects.
- For India, RCEP hardly makes a difference as it has FTAs with ASEAN, and CEPAs (Comprehensive Economic Partnership Agreements) with Japan and South Korea already.
What can the decision cost India?
- Indirectly benefits China: RCEP is a China-backed trade deal, signing it without India will further strengthen China’s economic power. It will affect India’s neighbourhood as China already tries to influence the region through its deep pockets.
- Impact on India’s Act East Policy: There are concerns that India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc.
- Losing out on Large Market: The move could potentially leave India with less scope to tap the large market that RCEP presents —the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.
- Impact on other initiatives: There are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific. It could potentially put a spanner in the works on informal talks to promote a Supply Chain Resilience Initiative among the three.
What are India’s options now?
- Can Join in future: Japan worked hard to keep the RCEP agreement “open for accession by India” and also said that India may participate in RCEP meetings as an “observer”.
- Observer in RCEP meetings: RCEP signatory states said they plan to commence negotiations with India once it submits a request of its intention to join the pact “in writing”, and it may participate in meetings as an observer prior to its accession.
- RCEP not connected to its vision on Indo-Pacific: Indian government has made it clear that India was not about to step back from its Act East policy, nor was the decision on RCEP connected to its approach to the Indo-Pacific
- Exploring other alternatives: There is also a growing view that it would serve India’s interest to invest strongly in negotiating bilateral agreements with the US and the EU, both currently a work in progress.
- When India chose to stay out of the Belt and Road Initiative in 2017, there was much commentary that India might be isolating itself. Three years later, India’s position has been recognised by like-minded democracies, and many have said that India’s decision was prescient.
- Likewise, India’s decision on RCEP which was based on principles will be recognised by other like-minded countries.
- Instead of sitting out and building tariff walls across sectors, it must prod and incentivise the industry to be competitive, and get inside the RCEP tent at the earliest opportune moment.
Connecting the dots: