On the agenda when Prime Minister Narendra Modi flew to Bangkok on Sunday was a crucial trade deal that could hugely impact the Indian economy: The Regional Comprehensive Economic Partnership or RCEP. Eventually, on Monday, it emerged that the Indian government was not going to sign the pact, So first understand what is this RCEP.
RCEP (Regional Comprehensive Economic Partnership)
The Regional Comprehensive Economic Partnership is a free trade agreement originally devised to consist of 16 countries across the Asia-Pacific region. The pact looks to drop tariffs and duties between the members so that goods and services can flow freely between them. At the RCEP’s administrative core is ASEAN: an intergovernmental grouping of 10 Southeast Asian countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. It was proposed that the ASEAN bloc will be joined with six dialogue partners: China, Japan, India, South Korea, Australia, and New Zealand.
Free trade agreements aren’t new. But the sheer scale of the RCEP sought to change the game. With its original 16-country composition, it would have been the world’s largest trading bloc with half the world’s population and around a third of global GDP.
While the RCEP is administratively built around ASEAN, the main mover is actually China. It was pushed by Beijing starting 2012 in order to counter another free trade agreement that was in the works at the time: the Trans-Pacific Partnership. The US-led Trans-Pacific Partnership excluded China and hence the RCEP was Beijing’s balancing act. However, in 2016, when Donald Trump took control of the US federal government, the US itself withdrew from the Trans-Pacific Partnership. Even now, however, the RCEP is a major tool for Beijing in order to counter the United States efforts to stymie trade with China. Under a protectionist President Donald Trump, the US has since 2018 began setting tariffs and trade barriers to Chinese goods, and economic conflict that has been called the China-US trade war.
WHY DID INDIA WALK OUT?
India opted out of the deal in January in the ASEAN Summit in Bangkok after years of negotiations. Announcing the decision, PM Modi had 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 the RCEP agreement.”
According to a government official, India had been “consistently” raising “fundamental issues” and concerns throughout the negotiations and was prompted to take this stand as they had not been resolved by the deadline to commit to signing the deal. Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector. According to officials, the current structure of RCEP still does not address these issues and concerns.
POLITICAL ROLE
Sensing an opportunity to voice popular discontent, the largely moribund political opposition stirred to life on this issue. On Saturday, the Congress president Sonia Gandhi attacked the government for considering the RCEP. Gandhi argued that the free trade agreement would deal a “body blow” to the Indian economy and will result in “untold hardship for farmers, shopkeepers, and small and medium enterprises”. Earlier, the Congress had characterised the RCEP as the “third jolt” to the economy after demonetisation and the introduction of the Goods and Services Tax.
The Left had also opposed the RCEP. The Communist Party of India (Marxist)’s farmer wing, the Kisan Sabha announced a nationwide protest on against the bloc on Monday. Even the Rashtriya Swayamsevak Sangh, the parent body of the ruling Bharatiya Janata Party, had raised red flags about the RCEP as part of its long-standing economically protectionist agenda. This opposition made the Modi government quite wary of rushing into a deal. As a result, India made a number of last-minute demands, eventually rejecting the RCEP itself.
HOW MUCH THIS DECISION COST INDIA?
There are concerns that 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. The move could potentially leave India with less scope to tap the large market that RCEP presents —the size of the deal is mammoth, as the countries involved account for over 2 billion of the world’s population.
Given attempts by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific. It could potentially put a spanner in the works on informal talks to promote a Supply Chain Resilience Initiative among the three.
However, India’s stance on the deal also comes as a result of learnings from unfavourable trade balances that it has with several RCEP members, with some of which it even has FTAs. An internal assessment by the government has revealed that the growth in trade (CAGR) with partners over the last five financial years was a modest 7.1%. While “there has been growth rate in both imports from and exports to these FTA partners”, the “utilisation rate” of FTAs both for India and its partners has been “moderate” across sectors, according to this study, which covers pacts with Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, Republic of Korea and Malaysia. India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing bilateral free trade agreements with several RCEP members to increase exports.
“You don’t get into FTAs merely to provide your market to your partner countries. While you accommodate your partner countries, your objective is also to increase the presence of your products in the markets of your partners, and India hasn’t been able to achieve the latter objective,” said trade expert Biswajit Dhar, professor at JNU’s Centre for Economic Studies and Planning. “Our share in the imports of RCEP partner countries have either stagnated or fallen,” he said.
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