Ending the impasse over RCEP (Regional Comprehensive Economic
Partnership) at the 3rd RCEP summit, Thailand, Prime Minister Modi
pulled India out of the trade deal which includes 16 countries, accounts for 35%
of the global trade and half global population. He announced, “Our farmers,
traders, professionals and industries have stakes in such decisions. Equally
important are workers and consumers, who make India a huge market and the
biggest economy in terms of purchasing power parity. When I measure the RCEP
agreement with respect to the interests of all Indians, I do not get a positive
answer. Therefore, neither the talisman of Gandhiji nor my own conscience
permit me to join RCEP”.
Initiated in 2012, the multilateral trading bloc, RCEP
includes 10 ASEAN members- Indonesia, Malaysia, Singapore, Thailand, Myanmar,
Philippines, Brunei, Cambodia, Vietnam, Laos and its FTA (Free Trade Agreement)
partners- China, Japan, South Korea, Australia, New Zealand and India. India
which was part of the trade negotiations since its inception decided to pull
out after 29th round of talks. The group comprising of Asian Tiger
economies with a proven record as robust market economies fervently batted for
a trading block that could augur their trade interests. After India’s slow
growth in the last quarter and lower growth projections by financial agencies,
analysts argued, RCEP can open up new avenues for investments and trade
providing much needed impetus for the Indian economy. By opting out of RCEP,
they contended India missed becoming part of sophisticated global export chain
and investment opportunities.
Interestingly, unlike other RCEP countries, India has
fledging manufacturing ecosystem with service sector fuelling India’s growth. Of
the 15 RCEP countries, India has trade deficit with 11 countries which account
for $105 billion of which China alone accounts for $53 billion. China a
manufacturing bulwark evolved into an economic superpower is currently steering
the RCEP negotiations. Apparently aware of India’s hesitation to join the RCEP
which can hardly cater to India’s interests, President Xi at Mahabalipuram
informal summit pledged to address India’s concerns. But nothing changed on
board.
China’s mercantilist policies and its denial to allow
reciprocal access to its markets despite spiralling trade deficits over the
years turned India into a dumping yard for cheap products. After a decade of
requests, at the height of the trade tariff war with China, Beijing relented to
provide market access to India’s non-Basmati rice last year. Access protocols
for tobacco leaves and chillies concluded just recently. India which lacks competitive
manufacturing ecosystem has abysmal record of trade exports with various FTA
partners. Indeed, industries and manufacturing sector which accounts for 31% of
its GDP is a distant second with service sector contributing as much as 54% of
GDP. Services form the huge chunk of India’s trade and is the key driver of
India’s economy. They account for 38.4% of India’s total exports. Services is
the only sector where India has trade surplus. Even IMF recently suggested that
services trade could fuel India’s trade engine. Interests of skilled workers
employed by service sector will be undermined if access to services trade is
hampered.
Ever since India signed goods FTA in 2009 with ASEAN
countries there has been a significant rise in ASEAN imports to India while
Indian exports hardly registered any increase. Upon India’s persistence, ASEAN
agreed to sign services and investment FTA in September 2014 but Indonesia and
Cambodia didn’t ratify the agreement on the pretext of Indian professionals
flooding their markets. Similarly, even China continues to fiercely resist
market access to India’s services sector, engineering and pharmaceuticals. Currently,
India’s trade deficit in goods and services has increased to $103.63 billion
from $84.45 billion despite India’s positive surge in exports.
Among the major reasons for India’s withdrawal from RCEP has
been lack of assurances on market access, non-tariff barriers and threat of
China flooding Indian markets. Auto-trigger mechanisms to protect countries
from surge in imports are not clearly defined. Secondly, RCEP set 2014 as the
base year import duties as against 2019 when India increased import duties on
several goods to protect its domestic manufacturing. The losses accrued from
such a scenario would inflict severe losses to Indian trade and
counterintuitively impact India’s “Make in India” initiative. Further stringent
rules to track the origin of the goods isn’t worked out. So effectively China
can re-route its products from other RCEP countries and continue to inundate
Indian markets. Above all, RCEP failed to offer a better deal for India’s
mainstay- services sector through better mobility of professionals.
Another area of major concern has been agriculture and dairy.
With RCEP in place dairy products from New Zealand will penetrate Indian
markets throwing the livelihoods of millions of Indian marginal farmers out of
gear. This will potentially exacerbate the rural distress. With the threat of
cheap imported products inundating Indian markets looming large, domestic
manufacturers and farmers opposed RCEP. Unlike in the past when Indian
leadership caved into pressure from global powers, India reiterated that RCEP
in the present form failed to “reflect the basic spirit and the agreed
guiding principles” and pulled out. Previous lopsided FTAs have entailed
burgeoning trade deficits. But a defiant India now refused to succumb to
Beijing’s indifference.
Had China addressed India’s trade concerns and market access India
must have felt confident. But China’s blatant disregard to India’s core
concerns stoked India’s worst fears about benefits of RCEP. Facing an economic
slowdown and uphill US trade war, China is eyeing Indian market to mitigate its
losses. Now, irked by India’s withdrawal China’s state media started floating
theories of India making last minute demands. ASEAN countries who earlier had a
balanced trade with China are currently reeling under huge trade deficits. But
because of its intricate supply chain links and other geopolitical compulsions with
China, ASEAN is enthusiastically pushing for RCEP anticipating better trade and
investment opportunities.
After its decision on RCEP, India affirmed that it is open
for business and sought to have bilateral trade agreement with trading
partners. Close on heels, India is on the brink of signing FTA with Mauritius
to gain access to Africa where China has massive foothold. India is intent on
expediting stalled trade agreements with Australia and the EU. While parallels
are drawn between India and the US for pulling out of trade deals, RCEP and TPP
respectively. Analysts, allude that both will stand to lose their significances
after severing ties with multilateral trade agreements. Being second largest
economy in Asia on PPP basis, RCEP countries desire India to be on board.
Despite the RCEP, ASEAN will continue to look towards India as a counter
balance to hegemonic China in the region,
While economic rationale guided India’s decision experts
believe that this will have major geopolitical consequences. RCEP’s success
will position China as a winner. By consequence Beijing is expected to have
significant sway in the region. As of now, other 15 RCEP countries decided to
go ahead without India. However, doors aren’t permanently closed for India.
India being a large market will always be a lucrative trade and investment
destination. RCEP’s bottom lines will push India towards making its markets
more competitive.
By staying away from RCEP, India refused to compromise with
its core business interests. India’s audacious move exemplifies its reluctance
to be a “junior player in economy and trade”. Earlier India rejected China’s
BRI (Belt and Road Initiative) over the concerns of territorial sovereignty.
Now India rebuffed trade deal that ignored India’s vital trade interests.
India’s bold decision must certainly ring bells in China.
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