The world’s largest Free Trade agreement that includes nearly 30% of the world’s population and GDP was signed on 15 November 2020. The Regional Comprehensive Economic Partnership (RCEP) includes ten ASEAN Countries, Australia, China, and New Zealand. The new regulatory system will take effect in 2022, with tariffs returning to 2014 rates. This agreement was signed at the 37th Association of South East Asian Nations (ASEAN) Summit in Hanoi, Vietnam, by way of a digital ceremony. However, under the Modi regime, India opted to walk away from the negotiations in November 2019 after being an active party to the negotiations since its beginning in 2011. Despite India’s decision to sit out of talks after stepping out last year, the current trade bloc has made it clear that it will remain available for India to return to the table. By way of this article, the author aims to examine the implications of India’s decision on its economy while shedding light on the geopolitical and economic impact of the RCEP.

Geopolitical impact of the RCEP

RCEP discussions cover, among other things, trade in products, facilities, and capital expenditure; Intellectual Property Rights; and separate and preferential status for ASEAN countries that are less developed. This agreement aims to reduce future regulatory tensions for companies and countries in international supply chains by simplifying customs procedures and regulations of origin laws among member nations.

The framework ignores environmental and labour concerns, which are seen as critical elements of commerce and law-making in the post-pandemic economy.  Economists praised the RCEP as the world’s biggest trade bloc for successfully integrating the Asian economy in the wake of Trump’s announcement to exclude the United States from the Trans-Pacific Partnership. The RCEP, which is sometimes incorrectly referred to as “China-led,” is a victory of ASEAN’s middle-power policy. While the importance of a major East Asian trade deal has long been recognised, the project’s developers had to be politically respectable. The RCEP would also expedite the economic unification of Northeast Asia.

Economic impact of the RCEP

Even though RCEP and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will balance global costs from the US-China trade war, they will not do so for the countries, respectively.  Asia’s economy will be more profitable as a result of the new accords, which will integrate their assets in innovation, commerce, agribusiness, and natural resources.

RCEP’s impacts are remarkable, notwithstanding the agreement’s lack of severity compared to the CPTPP. It encourages supply networks across the area while also taking into account political concerns. The deal mentions nothing on labour, the ecosystem, or state-owned companies – all crucial sections in the CPTPP — and its IP regulations are minimal as compared to what many countries already practice.

By increasing transportation, energy, and communications ties, RCEP might boost connectivity of Chinese Belt and Road Initiative (BRI) financing, improving market access benefits. Foreign investment will also be attracted by the RCEP’s preferential origin criteria. By 2030, the RCEP may contribute $209 billion to global earnings and $500 billion to global trade.

Concerns raised by India

After nearly a decade of negotiations, India decided to pull out of the major trade pact due to a number of unaddressed concerns, including market accessibility for Chinese manufacturers, non-tariff obstacles for Indian producers, services industry, and rules of origin requirements, among other things. Other major concerns which were not fully resolved were e-commerce and trading remedies. To protect India’s local sector against cheaper imports from China, the Modi Government recommended various degrees of tariff concessions. India, however, received no genuine assurances on market accessibility or non-tariff obstacles.

India has a substantial trade deficit with the RCEP members and there was a need for explicit safeguards to shield its industries and farmers against an increase in imports, particularly from China. Other than economic considerations, India’s decision to withdraw from the RCEP included a geopolitical component, given China’s dominance and leadership position in the agreement.

One of the concerns is that imports from RCEP partner nations may wipe out small scale industries in India. Since Delhi’s pronouncement, the impasse with Beijing at the Line of Actual Control in Ladakh has solidified India’s choice to hold fast, leaving no room for any future economic talks with its northern foe. China is alarmed by India’s reservations. Immediately after  India pulled out of the agreement, China took a more accommodating position, saying it will tackle the lingering concerns highlighted by India under the concept of “mutual acceptance and tolerance.”

Impact on Indian economy

The incumbent government believes that past administrations participated in weak free-trade discussions, and hence, it intends to revisit its trade deals with South Korea and the ASEAN. Many factors have shifted during the time of RCEP discussions, including international trade and strategic realities, which India cannot ignore. India had been consciously, productively, and effectively involved in the RCEP discussions since the beginning, working toward the revered goal of finding an equilibrium, in the ethos of mutual trust.

The Confederation of Indian Industry (CII) stated that this decision would cause a setback to India’s investment and cash inflow. However, CII has said that it will strive to promote and collaborate with the Centre in its efforts to merge the Indian and the world economy through jointly profitable trade negotiations. While applauding the RCEP leaders’ joint statement admitting India’s valid concerns, it is anticipated that the issues would be resolved quickly to the shared benefit of all RCEP nations. The RCEP might have culminated in manufacturing possibilities associated with the Global Value Chain (GVC). GVC manufacturing enables multinational firms to employ several nations, allowing them to take advantage of lower labour costs.

With labour prices rising in China, these companies are trying to produce items in newer countries such as Cambodia, Vietnam, and India. India missed an exceptional chance to merge itself into international production networks in the scenario that trade constraints on its imports and exports had not existed. It would have been easier to attract Foreign Direct Investment and take control over the industries that China was abandoning.

Way forward

In the post-COVID scenario, protecting domestic assets is critical. As sectors flourish with government support over time, it is important to make Indian business aware that endless support will do more damage than benefit. Progressive tapering down of import tariffs, particularly with strategically allied countries, should be the practice. At this point, harmonizing international trade policy aims with domestic aims is crucial.

Exporters must solve challenges such as customs procedures, regulation, and ease of doing business in order for the industry to reach its full capacity. The Indian producers must now step up to the challenge and fully utilise the government’s concentrated efforts to scale up the production supply chain through programmes such as Production Linked InitiativeRemission of Duties or Tax on Export Products, and many others.

India needs to discard its defensive strategy when it comes to trade agreements and instead focus on developing internationally competitive industries. Connecting to the international economy via such agreements and improving local competitiveness are both intertwined. As a result, the administration must undertake internal reforms at the same time as efforts to extend India’s trade negotiations portfolio.

To be able to adapt to evolving conditions and new circumstances, the Modi administration must strengthen its declining competitiveness through internal reforms targeted at improving economic resilience in the longer run and loosening restrictive markets, while also speeding up discussions on additional trade deals. If India wishes to avoid a rise in Chinese exports, it needs to look for alternative countries with economic synergy, like the European Union, the United States, or Middle East, all of which have strategic objectives in tandem with India.

Conclusion

The incumbent Government assumed that by opting out of the RCEP and focusing on establishing a self-sufficient India, it will be in a stronger position to negotiate future Free Trade Agreements. As evidenced by China’s World Trade Organization membership, this is a farfetched outcome. Furthermore, India’s refusal to join the RCEP deprived it of the opportunity to help define standards in emerging sectors of trade, such as Artificial Intelligence and e-commerce.

In the end, Free Trade Agreements must be weighed in terms of their effects on the local market in the longer run, as well as the exposure they offer.  India’s sector is currently primarily focused on the internal market, but in a few years or so, it would want a diverse entry into the booming market beyond its territory.

The issue is that incumbent Government never viewed the Regional Comprehensive Economic Partnership as a chance to obtain further financial inclusion and participate into a growing industry value chain. The emphasis of Indian politics has been on defending its interests and safeguarding its industry against China. It is high time to look beyond this Indo-China argument. 

Developing a prosperous India necessitates altering the country’s policies and legislative framework, as well as evaluating and trying to renegotiate previous agreements. It is necessary to remember that while striving to be self-sufficient, blocking out trade partners can be a detriment to India’s futuristic foreign policy. 

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