India's withdrawal from RCEP

- by Abhinav

India has announced that it is pulling out of the Regional Comprehensive Economic Partnership (RCEP) negotiations. One significant obstacle has been India’s firm resistance to the liberalization of trade in goods. RCEP negotiations without India may now be concluded next year, but a deal without India would have significant implications for the future regional order. RCEP negotiations were expected to work as a framework for a free and open economic system alongside the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which has already been agreed upon. To India, which has a $105 billion trade deficit with the other countries participating in RCEP negotiations, including a $54 billion trade deficit with China, it appeared that an RCEP that further promoted free trade with these countries would represent a blow to its economy. Moreover, an emerging economy like India rejecting RCEP could influence the position other countries take on the negotiations. More broadly, it could derail efforts to maintain a free and open economic system.

After India's pullout, the proposed free trade deal now aims to bring together the 10-member Association of Southeast Asian Nations (ASEAN), China, Japan, South Korea, Australia, and New Zealand. These countries said the deal would be signed early next year after they, without India, reached agreement on the text and market access issues, seven years after talks began. The proposed agreement was unacceptable to India in its current form as it did not accommodate New Delhi's concerns and "core interests." Access to this market on a ‘frictionless’ duty-free basis would have provided tremendous advantages to India’s exports. In the absence of trade barriers on its imports (imposed by itself) and its exports (imposed by partner countries), India would have had an excellent opportunity to integrate itself into regional and global value-chains, where India’s participation has been low. India would have been more easily able to attract foreign direct investment (FDI) and to also take over production in sectors that China is now vacating.

Finally, RCEP would have been an easier agreement for India to sign, as compared to any potential agreements with the US or the EU, because its focus was on trade liberalization. In contrast, agreements such as the Trans-Pacific Partnership (TPP) pose a greater challenge, since they require concessions over a range of contentious non-trade issues, such as environmental and labor regulations, intellectual property (IP) protection, and the operations of State-owned enterprises. India’s trade deficit with China is large. It accounts for about 40% of its overall deficit. Signing RCEP would have exposed India to the risk of surging imports from China and an even wider deficit. However, if these were India’s primary concerns it could have negotiated hard for the expansion of market access in the Chinese market in areas of its comparative strength, such as pharmaceuticals and IT services. On the import side, it could have sought exclusions of especially sensitive sectors and a more gradual liberalization schedule. This would have allowed India to simultaneously exploit greater market integration with Asia while giving itself time and economic space to adjust.

The argument that free trade is a ‘win-win’ is true, provided the countries operate on an equal footing. India’s economy needs to be competitive before it can take on the rest. A Make in India policy that promotes areas of excellence needs to be put in place, besides improving the business ecosystem. Logistics, contract enforcement, and harassment by the State machinery are huge concerns. As for dealing with RCEP and others, India should seek investment in greenfield projects, replicating the automobile's success story. Giving unlimited access to China will also result in a balance of payments crisis for India. This issue with China is faced not only by India but also in the United States. There is also the question of protecting jobs, at the end of the day. What will happen if China floods our markets with cheap goods? The point of employment also has to be considered.

India’s decision in the short term of not joining the RCEP is an understandable one if it doesn’t worsen India’s balance of trade with China. However, the decision won’t augur well for the long term. Trade integration is always a good thing in the long term.