What does India’s exit from RCEP imply?
Recently, the Regional Comprehensive Economic Partnership (RCEP) of Asia and the Pacific signed the mega trade deal among the 10 Southeast Asian countries and five FTA partners (Australia, China, Japan, New Zealand and South Korea).
India opted out of RCEP because
- Unsatisfactory address of India’s outstanding issues and concerns: India was unable to ensure countermeasures like an auto-trigger mechanism to raise tariffs on products when their imports crossed a certain threshold.
- It also 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 strategic allies or for geopolitical reasons.
- India felt the agreement would force it to extend benefits given to other countries for sensitive sectors like defence to all RCEP members.
- Increase in trade deficit with RCEP members: The India’s trade deficit increased with ASEAN, Japan and South Korea, after it signed FTAs with these countries.
- India has trade deficits with 11 of the 15 RCEP countries and India has been unable to leverage its existing bilateral free trade agreements with several RCEP members to increase exports.
- The government has started reviewing and examining this situation and a meaningful trade relationship after the review could offset some losses that may have occurred by not joining the RCEP.
- Presence of aggressive China: The escalating tensions with China are a major reason for India’s decision.
- The participation of China in the deal had already been proving difficult for India due to various economic threats and the clash at Galwan Valley has soured relationsbetween the two countries.
- The various measures India has taken to reduce its exposure to China would have sat uncomfortably with its commitments under RCEP.
- Since China is the key source of imports and is also the main export destination for most member nations, the deal is likely to it in a better position to shape the region's trade rules.
- Lack of provisions for market access issues: RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
Implications of opting out of RCEP for India
- World’s largest trade bloc: Without India, the RCEP trade bloc still stands as the world’s largest free-trade bloc with a combined GDP of over 26 trillion and nearly one-third of the world’s population.
- Impact on bilateral ties with RCEP members: 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.
- India unable to explore large markets: The move could potentially leave India with less scope to tap the large market that RCEP presents because the size of the deal is humongous as the countries involved account for over 2 billion of the world’s population.
- Australia-India-Japan network: India’s decision could impact the Australia-India-Japan network in the Indo-Pacific as it could potentially put a spanner in the works on informal talks to promote a Supply Chain Resilience Initiative among the three.
Why India needs to review its decision on opting out of RCEP?
- Opportunity for greater market access to India: The post-RCEP scenario might offer India an opportunity for greater market access.
- The imports from partner countries would increase at a much higher rate than export in a reduced tariff situation.
- RCEP has potential for India’s service sector: An agreement like RCEP, with liberalisation (both in manufacturing and services) carried out in phases, has considerable potential for India’s services sector, especially for software and ICT.
- The micro, small and medium enterprises (MSMEs) could become the part of global value chains by accessing intermediate products at globally competitive prices from RCEP countries.
- Not being part of RCEP will harm India's exports and investment flow: According to CII, not being part of the RCEP would hinder India's efforts to increase its integration into regional and global chains.
- India should now get its trade negotiation act together: By leaving the RCEP, India has lost some of the goodwill it requires to mobilize forces effectively at the WTO, especially among its regional Asian allies.
Opportunities for India beyond RCEP
- Focus on stronger bilateral trade with Asian region countries: If India chooses not to join RCEP then it needs to examine and explore the possibilities of stronger bilateral trade deals with key countries in the Asian region.
- It aims to offset any trade diversion (from India) that may occur from RCEP members post-implementation.
- India’s comprehensive economic cooperation agreement needs to be strengthened by proactively resolving all issues related to tariffs, sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT).
- Increased focus on groupings away from RCEP: India should make positive progress towards trade agreements with the US and Europe and expedite talks with the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and the India-Southern African Customs Union Preferential Trade Agreement.
- US and India to keep a check on China: Since the US has opted out of the Trans Pacific Partnership (TPP) and India from RCEP, a strategic move could create an opportunity for both countries for a meaningful engagement through a possible FTA to check China in the region.
Road ahead
- India has implemented several macroeconomic reforms, strengthened its position in the ease of doing business index, global competitiveness index and increased its reforms for a self-reliant India. If these reforms effectively strengthen India’s base and competitiveness in the future, India’s joining the RCEP could add to its growth story.
- India, as an original negotiating participant of RCEP, has the option of joining the agreement without having to wait 18 months as stipulated for new members in the terms of the pact.
- India has to set its economy in order, and opt for regional cooperation, whenever the opportunity arises and if India has to emerge as a global superpower, a $5 trillion economy, it has to take the leadership position to ink such partnerships in the near future.
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