RCEP: Should India have signed the agreement?

On Sunday, 10 ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) along with China, Japan, South Korea, Australia and New Zealand signed the Regional Comprehensive Economic Partnership (RCEP) agreement. India, which was a part of the negotiations for several years, had pulled out of this agreement in November 2019 citing unfavourable terms. Was India right in pulling out of RCEP?

RCEP is unfavourable to India:

Apart from having provisions on intellectual property, telecommunications, financial services, e-commerce, and professional services, RCEP is expected to eliminate a wide array of tariffs on imports within a period of 20 years. This has raised alarms in India, with fears of the domestic market being flooded with cheaper imports. This has led to protests by farmers, small businesses, manufacturers, and opposition political parties.

Announcing that India was dropping out of the RCEP negotiations during the RCEP summit in Bangkok in November 2019, Prime Minister Narendra Modi said, “The present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP. It also does not address satisfactorily India’s outstanding issues and concerns. In such a situation, it is not possible for India to join RCEP Agreement.”

Indian negotiators had raised several concerns during the final days of the negotiations, which were not addressed satisfactorily during the RCEP discussions. Some of the Indian demands included an automatic trigger mechanism of import duties if a spike is detected in imports from RCEP nations, the right to localize data, stringent origin rules, among others.

India was also wary of the negative impact past free-trade agreements (FTAs) had on the country’s trade. Comparing the effects of FTAs that India had signed with Korea, Japan and ASEAN, a government report noted that “As imports from Korea, Japan and ASEAN have shot up after the respective agreements came into force, India’s trade deficit with these countries has increased since then.” The report goes on to state that “With China, India’s trade seem to be very skewed and China’s capacity overhang in most sectors may lead to a surge of imports into India with very limited access for Indian exports into the Chinese market.”

Even if some of these concerns are addressed in the coming days, the Chinese aggression in the border areas has put a dent into any positive development on the trade front involving China.

RCEP is good for India:

An article on Bloomberg noted that India needs to trade more and not less. It asked the country to take a leaf out of the trade playbook of East Asian countries. “As country after country in East Asia has demonstrated, integrating into global value chains is a proven route to prosperity. The process raises productivity, boosts output, creates jobs and ultimately stimulates demand. The World Bank notes that joining such production networks increases per-capita incomes 50 times as much as standard trade does. There are few other plausible ways for India, which despite its size accounts for less than 2% of global merchandise exports, to employ its burgeoning population and make the transition from an agriculture-based economy,” the article notes.

Studies have shown that imports through FTAs have increased mostly for intermediate goods, which are used for value-addition and eventual export of the value-added goods. For instance, after FTA was signed with Japan, imports of industrial supplies, capital goods and transport equipment increased. These imports are predominantly used as intermediate goods, which resulted in increased employment opportunities and productive capacity. Between 1999-00 to 2012-13, Indian domestic value-added content of exports has increased substantially from $46 billion to $295 billion. As this article notes, “during this period, the total number of direct and indirect jobs supported by aggregate Indian exports rose from about 34 million to 62.6 million, with the share of export-tied jobs in total employment having risen from a little more than 9% to 14.5%. Backward linkages, from manufacturing to agriculture and services, have become a key source of export-related value addition and job creation in India.”

Supply chains straddling multiple countries will be smoothened through RCEP. As this article notes, “Apple’s much-vaunted production base in India depends on value-chain inputs from other parts of Asia. The same goes for the two-way flow of auto components. India can be the world’s leading exporter of bulk drugs, but not without backward linkages of active pharmaceutical ingredients, which are sourced from RCEP countries.”

P.S. Read the legal text of RCEP agreement here.

Despite the RCEP deal being signed without India, the group recognizes the importance of India and hopes that it will become a signatory soon. They singled out their willingness to re-engage with India by signing a separate Ministers’ Declaration. Read it here.