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As Asia Opens to Trade, India Chickens - RCEP Jitters

December 31, 2019

 

After six years of continuous dissent and deliberation, the world’s largest trade deal is on the verge of becoming a reality next year. But did the long and laborious tale of persuasion reach its desired ends? The deal, like any other association of this scale, was fraught with fears from a number of quarters. Amongst the most decisive ones were China’s fear of production overcapacity and India’s fear of mountains of Chinese goods landing in its domestic markets. To analyze if the RCEP is doomed without India, or if the latter has erred in exiting the deal, it is important to trace its development and find the points of contention.

 

The 19th ASEAN Summit, held in the month of November 2011, was the occasion when the idea of RCEP was first put forward with the aim of fostering free trade among the ASEAN nations and their major trading partners. However, it was the 21st such summit, held in Phnom Penh, Cambodia, during which the framework and the first set of negotiations for the free-trade bloc were launched by the leaders of the region. The deal, which is essentially supposed to be an ASEAN led trading pact, in its original form had 10 ASEAN countries namely, Malaysia, Philippines, Singapore, Thailand, Indonesia, Brunei, Vietnam, Laos, Myanmar, Cambodia along with six of their major trade partners, namely, China, Japan, South Korea, Australia, New Zealand and India.

 

In 2017, the Donald Trump government decided to take America out of a massive free trade agreement - the Trans-Pacific Partnership (TPP). All eyes, then, turned to the ASEAN-centric grouping which had half of the world’s population (3.6 billion) and about 40 per cent of the global GDP ($25 trillion) within its ambit, with a majority of both being from India and China collectively. In an environment of growing protectionism in the western world, many view the RCEP as an alternative for rule-based transnational trade and global economic growth. However, like TPP or for that matter any other trade deal of this nature and magnitude, the RCEP too had its own unique set of issues which led to not just a delay in its conclusion, but also to the ultimate withdrawal of India, the third-largest economy of the region, during the last leg of negotiations.

 

The Indian government’s November 4 decision, of opting out of the humongous economic pact was in tune with the demands of the domestic stakeholders. With massive public support being the backbone of the present government, the decision of this nature was not a huge surprise. Critiques, however, believe that the decision to opt-out of the deal at this juncture would deprive India of its bargaining power during the critical rule-making stage, and would eventually give China the opportunity to establish its dominance in the grouping. A similar apprehension is shared by Japan which looked forward to balancing out the Chinese dominance in the region with the aid of India. In the subsequent paragraphs, we shall try and understand the major concerns that led to the departure of India and determine if it was a step in the right direction.

 

 

Nations, like living entities, react to situations and stimulus in accordance with past experiences. Good experiences, that bring productivity and tangible fortune, lead to a positive behavioural shift in a particular direction. However, bad experiences can often lead to the development of fears and paranoia. India, one may say, is a victim of one such paranoia when it comes to FTA(s) or Free Trade Agreements. In the past six years of RCEP courtship, India has been facing the issue of massive trade deficits with a majority of its trading partners who are also a part of the prospective grouping. To be precise, India has a trade deficit worth US$ 105 billion with 11 out of the 16 RCEP countries. Out of this big number, US$ 52 billion is with China alone. The former Prime Minister of Australia, Tony Abbot, has come out in support of India on this score and said, “I can understand India’s caution about the RCEP.” He was even found justifying India’s fear of Chinese dominance as he said, “My anxiety with RCEP is that just as the Trans-Pacific Partnership was the economic leg of the U.S. pivot to the Asia Pacific, RCEP is like the trade leg of the Belt and Road Initiative.”

 

In addition, nothing scares domestic manufacturers, who are not yet equipped to deal with the harsh winds of free-market competition, more than a flood of cheap Chinese goods in the domestic market. Manufacturing, though important, is not the only sector that fears market competition. Industries like dairy and agriculture share similar premonitions. However, the RCEP formulae demand the abolition of tariffs on about 70 per cent of goods from Australia, China and New Zealand in addition to 90 per cent of the same from its far eastern neighbours, South Korea, Japan and all the ASEAN nations. India, in order to protect its small businesses, had proposed the Automatic Trigger Safeguard Mechanism (ATM). As per the mechanism, levies on imports would increase automatically as soon as the pre-decided threshold is reached. The proposal had been found to be objectionable by a majority of parties.

 

Another major nuisance for Indian is the ‘Rules of Origin’. What India wanted is stricter rules of origin in order to check the flow of goods partly or wholly made in China. Since India is already dealing with the problem of cheap Chinese clothes and textiles making their way into its market via countries that enjoy concessions under the South Asia Free Trade Pact Duty-Free-Quota-Free routes in Bangladesh, if the original rules are further liberalised the possibility of Chinese dominance would not be far from becoming a reality. The participating nations find this to be unfair as not all countries of the grouping are fully equipped to produce every bit of a finished product within their borders.

 

The government of India, since 2014, had been on a crusade to increase tariffs and duties on a host of products. Since then, the tariffs imposed by India on a variety of foreign goods, ranging from textiles to parts of an automobile, have increased from about 13 per cent in 2014-15 to 17 per cent at present. This is the reason why the country was fishing for 2019 as the base year for further negotiations, as the trade deal would need members to reduce tariffs in accordance with the base year. It feared that if 2013, the year in which the negotiations began, was chosen as the base year the tariff advancements made in all these years would go back to square one.

 

 

Although some of the concerns are reasonable and genuine, no one knows what would be the repercussions of the bold move on the future of the economic growth and employment in India. As per conventional wisdom when it comes to tying transnational trade knots it is always advisable to stay on the negotiation table than to leave a vacuum. In an atmosphere where a vacuum has already started to develop due to protectionist tendencies of America, the withdrawal of India from possibly the world’s biggest trade deal might not be the step in the best direction. As per the database published by a trade monitoring initiative named Global Trade Alerts (GTA), India, among all other G-20 countries, stands second, next only to Donald Trump led American government, in terms of imposition of maximum number of trade barriers in the past three years, and is thereby reversing the advancements by the 1991 policy of liberalisation. Ironically, India has also been a strong critique of the recent growth of protectionism in the western world. With the withdrawal of India, many see the idea of “Indo-Pacific” also losing its potential ground.

 

The decision of leaving the opportunity to frame rules and guidelines which will be concretised beyond reversal in 2020, when 15 remaining countries will go ahead with the deal without India. This will not only decide India’s future relations with the members of RCEP but also prepare a model to be followed for future negotiations of this sort. India is currently in talks with the US and European Union for the purpose of securing an FTA with each of them. The two entities have requests similar to that of India’s northern and eastern partners. If it was not ready to bite the bullet for the biggest trade deal in history, it might find it equally arduous when faced by similar demands from the far western economies. In the midst of an escalating trade war between the US and China, such decisions would also put light on India’s broader foreign policy choices. To observe how the events roll out, would be an interesting task indeed.

 

While it is generous, if one may say so, of the government to think of small domestic businesses before other things, many subject experts also believe that the agreement had the potential of becoming the next 1991. Ultimately, the deal could have provided the government with some genuine reason to make massive tangible strides in the direction of better infrastructure, access to affordable credit, consistent supply of electricity, improved logistics, an impetus to MSME sector etc., and could have led to an overall improvement in the market competitiveness of Indian businesses.

 

 

The country is so unsure of the ability of its domestic traders to face outsiders that it had even requested for exemptions from ‘Ratchet obligations’ which basically means that the Indian side might just roll back all the steps taken towards liberalisation of duties, taxes, quotas under the deal as per its needs and future requirements. This is an unfair advantage to a certain extent that none of the partners would be willing to readily provide.

 

One thing that stands out in the entire situation is that the step has been endorsed as a strong and determinant step by the Modi government. In the words of Union Minister of Commerce and Industry, Piyush Goyal, it was a “bold and courageous decision”. However, probably the world knows that the decision to get down from the train, just before the last and final station, was motivated by fear and paranoia.

 

It is true that these problems are real and the step to opt-out of the negotiation was probably a well-intentioned one, but the one thing that fails to grab the official, as well as public attention, is that even after the pompous withdrawal, problems that make India fearful, are still unaddressed. Indian markets are still uncompetitive and people are facing a dearth of jobs even in the absence of external competition. As a country willing to grow, it will, at some point in time, have to open its gates to the outside world. Now with the entry door to a global coalition left ajar until early next year, India is left with possibly one last opportunity to recalibrate as the world waits not so patiently. 

 

Views expressed are solely those of the author.

 

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About the Author

Alika Raina is a policy researcher and writer based at New Delhi. She has previously worked with Mr. Rajeev Gowda, Member of Parliament of India. Alika holds a Plant Science graduate from Hans Raj College, University of Delhi. In the past she has worked as a freelance writer on topical issues with organisations like UdChalo. Apart from her affinity with science she also enjoys analysing diplomatic issues and public policy. She is an ardent follower of minimalism and a sustainable way of living, and summarizes her beliefs in the following words: “We all can do very well without bubble wraps.”

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