Topic – RCEP: India’s stand

Date – 17^th Nov 2020

Topics covered from the syllabus:

• GS-2:
• Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.
• Important International institutions, agencies and fora - their structure, mandate.

Note:

• Following is the summary of ‘The Big Picture’ discussion, which was aired on RSTV.
• Host: Frank Rausan Pereira.
• Panellists: Jayant Das Gupta, India’s former Ambassador at WTO; Harsh V. Pant, Observer Research Foundation; Jitendra Nath Misra, Former Ambassador

 

Context:

• Regional Comprehensive Economic Partnership (RCEP) was recently signed between 15 countries. The members hope that this partnership would be instrumental in bringing them out of the shock of COVID-related slowdown.
• India pulled out of the RCEP negotiations last year, citing its negative impact on the domestic producers.
  • India has said that the international groupings have many times led to de-industrialisation and an unfair competition imposed on domestic producers.
  • In a veiled reference to China, India has also said that many countries preach openness, but are not so transparent about their own policies.
• Other members have said that the doors of RCEP would be open for future participation of India.

 

(Map of 16 RCEP members with India greyed out recommended)

Regional Comprehensive Economic Partnership (RCEP):

• RCEP is a regional Free Trade Agreement between ASEAN and 6 other countries, viz. India, China, Japan, South Korea, Australia and New Zealand. It was finally signed in November 2020 after 8 years of negotiations.
• Last year, India walked out of the negotiations. Therefore, it is now an agreement between 15 countries. However, the members have said that the doors will be kept open for India to join the agreement at a future date of India’s liking.
• RCEP members constitute nearly a third of the global population and 29% of global GDP.

 

 

Association of South-East Asian Nations (ASEAN): It is a regional grouping of 10 south-east Asian countries. The member-nations include Thailand, Myanmar, Singapore, Indonesia, Vietnam, among others. India has an FTA and an annual summit with ASEAN.

 

 

Why India withdrew?

• Indian concerns:
• Import Surge protection: If due to tariff rationalisation, there is an import surge in the country, then that country should reserve the right to impose a safeguard duty to protect its domestic industry from injury.
• Transparency obligations: India contended that the use of subsidies and state capitalism by China to provide an additional advantage to the Chinese industry would be detrimental to the cause of free trade and should be addressed before finalising the agreement.
• Rules of origin: India wants strict rules of origin to prevent domestic markets from being flooded by indirectly-exported Chinese products. Here, indirect export refers to the export of Chinese product from a member nation having lower duty levels.
• Free trade in services: India is more interested in trade in services, as it has a strong service base. Therefore, any agreement without explicit provisions regarding services would have limited utility for India.
• Special status of a non-member country: India wants to protect its right to enter into a trade deal having special terms with a third country, without being forced to confer same terms on the RCEP members. For e.g. If India enjoys a close relationship with UAE and is entering into an investment agreement having a higher rate of return on investment, there should be no obligation for imposing the same rate of interest by the RCEP members.
• Redefined economic priorities: Apart from the obvious economic implications, there has been a wave of increased Protectionism around the world. This is shaping global economic and trade policies of the international community with respect to the relationship between foreign imports and protecting nascent domestic industry. The sub-prime crisis of 2008 has also led to dampening the spirit of free trade around the world.
• Dependency on China: India wants to be a part of global order, which is evolving into a trading environment away from dependence on one particular country (i.e. China). In this aspect, it is trying to achieve synergies with like-minded countries. For e.g., recently Japan has come up with the concept of Supply Chain Resilience Initiative (SCRI).

 

Supply Chain Resilience Initiative (SCRI): SCRI is a Japanese initiative. The origin of the initiative lies in the corona related outage in the global industry, which was dependent heavily upon Chinese manufacturing. Since Wuhan was the ground zero of COVID, the lockdown lead to crippling of the global industry which was over-reliant on Chinese supply of the raw materials. In response to this, Japan came up with SCRI, to ensure diversification of supply chains, to ensure uninterrupted supply of raw materials in the case of stoppage of supply of raw material or intermediate goods due to natural disaster or economic sanctions.

 

 

Challenges associated with joining RCEP:

• Challenges associated with trade blocs:

• Centrality of one country: Global experience points out to dominance of one country in international groupings. For e.g. the US in North American Free Trade Agreement (NAFTA) or India in South Asian Association for Regional Cooperation (SAARC). In the case of RCEP, this centrality is mostly attributed to China, which is not appreciated by India.
• Limited success of trade blocs: As already stated above, the on-going wave of protectionism has put a question mark over the sustainability of even the most successful trade blocks. For e.g. Brexit has questioned the viability of the European Union.
• Existing FTAs: India is having FTAs with most of the member countries of RCEP. Therefore, it might be futile to get into RCEP, unless it provides some additional benefits for India. Rather, it makes sense to invest diplomatic energy into strengthening the relationship with ASEAN countries and other members of RCEP.
• Border issues with China: At a time when Indian army is engaged in a standoff with People’s Liberation Army (PLA or the Chinese army) along with Chinese expansionist tendencies in Bhutan and other neighbouring countries, it does not send a right message to the domestic as well as international audience, to engage with China economically.
• Atmanirbhar Bharat: Prime minister’s clarion call for self-reliance would mean that India provides better opportunities for the development of its domestic industry. This might also mean that India has to be wary of groupings which might be deterrent to growth of the domestic industry.

 

Benefits of joining RCEP for India:

• Economic benefits:
• Enhanced market access and trade facilitation: RCEP is expected to create better opportunities for the suppliers of member countries into each other’s territory and enhance ease of doing business by creating better import infrastructure at the entry point.
• Technological advancement: Countries like Japan and South Korea can be helpful in fulfilling technical gaps which are felt by India in case of high-end technologies. They can also help in taking care of strategic advancement, especially in building defence capabilities.
• Investment from China: Despite its security implications, China has been a source of investment for Indian firms. Therefore, it is imperative that no door, which can be helpful for economic growth, is closed for eternity.
• Global value chains: RCEP can make India an integral part of global supply chains. This can be better understood in the context of Supply Chain Resilience Initiative (SCRI), a recent initiative of Japan. (see inset)
• Strategic Considerations: Like India, Japan is also inclined to steer away RCEP from Chinese dominance. Therefore, it is pushing for Indian presence in RCEP, even as an observer. Apart from that, India’s pullout from the RCEP despite the presence of Japan and Australia, two important members of Quad (Quadrilateral Strategic Dialogue), might show lack of coordination between the members of Quad.
• Safeguarding India’s overseas markets: Countries like Vietnam are well-positioned to replace Indian textile exports, by the virtue of decreased tariffs in the territory of RCEP member nations. India might be staring at more of such loss scenarios if it chooses to stay out of RCEP.
• India’s huge domestic market: India can leverage its huge domestic market as it is clear to the other RCEP members that it is not just India, which will benefit from membership of RCEP. Even other countries will benefit if India joins the grouping. The exponential growth of service sector in India and rising incomes have led to increasing disposable incomes, which make it a lucrative market for any exporting country.

 

 

Quadrilateral Security Dialogue (Quad): It is an informal security forum, formed to discuss security implication in the indo-pacific region and to impart synergy between member-nations. Its members are US, India, Japan and Australia. China has complained of quad being directed against itself. However, the member nations have clarified that quad is not directed against any particular country.

 

 

Way Forward:

• Observer Status: If the disagreements persist over Indian concerns, India can opt for the observer status. This will keep India aware of the future developments and allow for the effective monitoring of RCEP’s implementation by India.
• Wait and watch: It will be two years when RCEP actually comes into force. Therefore, India can meanwhile observe the behaviour of China towards the ASEAN countries and other member nations to better understand the dynamics coming into play in RCEP. On the basis of this observation, an informed decision can be taken regarding India’s membership of RCEP.
• Building domestic economic strength: It is important to concentrate on the manufacturing strength of India, so that in the future even if India has to join the RCEP, the domestic industry is not impacted by the surge in imports. Rather, the effort should be to build the competitiveness of Indian exports to make India a global economic player.
• Not a zero-sum game: Although strategic concerns dominate media reports and talk shows, it has to be kept in mind that RCEP is an economic grouping and should be treated as such. The historical baggage might only lead to India being left out of a global partnership, which has the potential to redefine global trade.

 

Conclusion:

Chinese premier Le Keqiang called RCEP as a ‘victory of multilateralism and free trade’. However, India has rightly pointed out that by not being transparent about the future tariffs and not heeding to Indian concerns, RCEP has not left India with any choice but to walk out. Members of RCEP are more than willing to welcome India into the deal, but it is important that India’s concerns are met before any positive step in the direction is expected from India. Meanwhile, India needs to keep building its domestic capacity and strengthen existing FTAs so that it is more confident while negotiating on the global tables.