Introduction
At the ASEAN Summit in Cambodia in 2012, ASEAN countries and six additional partners including India, China, Japan, South Korea, Australia, and New Zealand launched negotiations for a multilateral free-trade agreement. The objective of this agreement, dubbed the Regional Comprehensive Economic Partnership (RCEP), was to increase economic integration by facilitating trade in goods and services, investments, technical cooperation, competitiveness, and intellectual property rights. The RCEP was to be a potent vehicle to support the spread of global production networks and reduce the inefficiencies of the multiple prior Asian trade agreements. Once effective, the RCEP would be the world’s largest economic bloc. As of 2018, the combined population of the member states is 3.5 billion and the total GDP (PPP) is $27.48 trillion.[1]
In early September 2019, several weeks prior to the RCEP’s planned conclusion in November 2019, the trade ministers of the participating countries met in Bangkok to finalize details. The core of the negotiating agenda covered trade in goods and services, investments, economic and technical cooperation, as well as dispute settlement. The countries released a joint statement declaring their collective desire to resolve outstanding and contentious issues, while affirming the importance of deepening the value chains between the RCEP countries.[2]
Despite the collective commitment of the member states, within India there were several protests and anxieties expressed by farming and industrial constituencies. After two months of deliberations by the Indian government, on November 4, 2019, India decided against joining the RCEP. Invoking Gandhi’s talisman[3], the interests of his Indian citizens, and his own conscience, Prime Minister (PM) Narendra Modi declined India’s membership in the RCEP.[4]
Major Reasons for India’s Refusal to Join the RCEP
India’s decision to stay away from the RCEP stemmed from efforts to incorporate the concerns of its domestic constituencies. Addressing these domestic push factors will be necessary for resolving the trade disruption and moving forward in beneficial multilateral discussions.
First, India has been cautious of its trade deficit, given that India’s trade deficits have always widened with nations after signing free-trade-agreements (FTAs) with them.[5] Further, India’s trade deficit with countries with which it has an FTA has almost doubled over the past six years–from $54 billion in 2013-14 to $105 billion in 2018-19. Increasing the trade deficit would deplete India’s foreign exchange reserves.[6] In 2018-19, 20% of India’s exports went to the RCEP countries and India received 35% of its imports from them.[7] India has trade deficits with Australia, China, Indonesia, Laos, Myanmar and the Philippines. The following figure shows India’s trade balance with the RCEP countries in 2018-19.
Second, the RCEP currently has a provision to call on the member countries to lower tariffs and import duties for each other. However, India believes that the RCEP would open the “floodgates for Chinese goods” to enter India, further raise India’s trade deficits, and weaken its anti-dumping duties that it has imposed on Chinese items from the chemicals, iron, and steel industries.[8],[9] China is the largest exporter to almost all countries of the group, including India. India already perceives China as enacting “market imperialistic” predatory behavior, which has deepened India’s apprehensions about the RCEP. Further, India suspects that China unfairly subsidizes its exports to India to capture the market.[10] The RCEP, if made effective in its current state, would lead to three-quarters of future Chinese goods entering India duty free, thereby raising India’s trade deficit with China beyond the current $63 billion.[11]
While there had been no discussions on the requisite tariff cuts from China, India has often sought greater market access in the Chinese market for its goods and services like pharmaceuticals, information technology, and agricultural products; but with limited successes.[12]
India’s dilemma is also exaggerated by fears over the competitiveness of its economy. Once the deal comes into effect, India would need to eliminate the tariffs on 25% of its traded goods and about 35% in a phased manner. Indian industry is wary of the possibility of these cuts, especially in the dairy, metals, electronics, chemicals, and textiles sectors.[13],[14] The prevailing slowdown in the economy has been cited as one of the reasons for India’s refusal to join the RCEP.[15] The International Monetary Fund’s latest World Economic Outlook cut its estimates for India’s growth for 2019 from 7% to 6.1%. Even the 2019 Economic Survey of India calculated economic growth to be 7.2% during 2018-19, which is slightly higher than previous fiscal year, 6.8%.[16], [17], [18] India needs to sustain a real GDP growth rate of 8% to achieve its objective of becoming a $5 trillion economy by 2024-25.[19]
India has always sought to capitalize on its labor force and wants freer movement of information technology and other skilled professionals among the RCEP members.[20] Whereas China, Vietnam, and Thailand having strong manufacturing sectors and Australia and New Zealand lead in dairy and agriculture that benefit from the reduction in tariffs, India feels that its ability, or lack thereof, to export its ‘skilled’ labor force has not been reciprocated in a similar fashion.[21], [22], [23] India is not comfortable with such a bias, as it wants its workforce to gain from improved access to employment opportunities abroad if it is losing competitiveness in other exports due to the RCEP.[24], [25]
Finally, there are fears that India’s agricultural sector, already in distress, would succumb to RCEP pressures.[26] India’s farmers would be faced with competitive dairy and agricultural produce, driving them out of profitable businesses. Its large informal economy and its small and marginal farmers constituting a population of around 300 million would be the major victims of market-competition[27]. For example, Rastriya Swamsevak Sangh’s affiliate Swadeshi Jagran Manch (SJM), India’s largest dairy producer, praised India’s decision to withdraw.[28]Yogendra Yadav, a proponent of farmers’ rights, welcomed the government’s step, saying it was a “much needed, and bold decision”. He thanked Prime Minister Modi for the decision taken in the “larger national interest” .[29]
Reactions of other RCEP member countries on India’s decision
After India’s decision to withdraw from the RCEP in November 2019, the joint statement of the other member countries mentioned that all participating countries would work to solve outstanding problems in a mutually satisfactory way.[30]
Perhaps anticipating India’s withdrawal decision, in September 2019, the Foreign Minister of Singapore Vivian Balakrishnan remarked that the RCEP was poised to be a game-changer, with the potential to secure the prosperity of the members against the anti-trade and anti-globalization winds in the world.[31] He highlighted the objective of this pact to expand the middle class and inculcate the next generations with a sense of optimism, and that the RCEP members had the responsibility to ensure this through this deal. As a major proponent of this trade deal and a major foreign investor in India and China, Singapore urged the two countries to resolve the issues in their trade relationship.
Initially, questions were raised whether the RCEP would move forward with or without India.[32] It now appears that the RCEP will indeed take shape without India. Nonetheless, a few countries have expressed their willingness to work with India to resolve its concerns so that it could join the RCEP when it is ready.[33] The Chinese foreign ministry officially mentioned that China is willing to continue to negotiate and resolve the problems facing the negotiations with India in the spirit of mutual understanding and accommodation, and that India was welcome to join the RCEP when ready.[34]
Japanese Trade Minister Hiroshi Kajiyama said that Tokyo would work toward a deal including India, and it might consider backing out of an RCEP minus India.[35], [36] Success would keep the world’s most populous democracy within the RCEP framework and be in line with Prime Minister Shinzo Abe’s policy of bolstering ties with India along with Australia and the United States, to balance Beijing’s growing naval and territorial expansionism. [37] Indonesian Foreign Minister Retno Marsudi said that RCEP members would work together to solve India’s problems in a mutually satisfying way.[38]
Had India joined the RCEP, then…
If India’s concerns and demands are acknowledged and incorporated by the RCEP members and its concerns regarding trade inequality are addressed, then India could join the trade deal.[39] In such a scenario, India would likely see a manifold increase in the size of its middle class (which at present constitutes its largest demographic) as access to economic opportunities expand in pursuit of becoming a $5 trillion economy.[40], [41]
Singaporean Foreign Minister Balakrishnan’s remarks on the RCEP’s potential to secure prosperity for its member-states would hold true for India as well.[42] It would therefore enable India’s move towards attaining the ‘no poverty’ goal under the first Sustainable Development Goal of the United Nations, to which it is a signatory. Through the RCEP, India could stand against the prevailing global trends of protectionism and unilateral policies.[43], [44]
India could utilize the RCEP as a platform to raise grievances over the economic malpractice of other countries with which it has trade relations. Steady discussions and negotiations could lead to changes in foreign economic policies that are not consistent with international trade laws.
Out of the RCEP: Implications for India
The importance of the RCEP cannot be overstated. Due to the withdrawal of the US from the Trans-Pacific Partnership agreement, a move that greatly reduced its scope and efficacy, and the counterbalancing nature of the RCEP as the first trade bloc that groups large economies of the developing world in the Asia-Pacific, the RCEP is the primary support of the entire trade bloc.
India’s image for supporting multilateralism could be greatly affected by its withdrawal from the RCEP. In addition to giving the appearance that the decision was principally motivated by concerns over China, the decision to withdraw could allocate significance to a multilateral platform consisting of other important countries like Japan, South Korea, Australia, and the ASEAN member-states. India has healthy bilateral relations with each of these countries. Although the joint statement of the RCEP reads that the member countries would work towards resolving India’s concerns, the questions of “when” and “how” remains a mirage. The ambiguity in the process and timeline that member countries have in working towards resolving India’s concerns could eventually lead to an understanding-deficit between India and the other RCEP members. This was lucidly stated by the Indonesian Minister of Trade Enggartiasto Lukita, saying that the RCEP negotiations have reached the “point of no return” and tensions among countries could lead to a loss in the momentum capable of driving positive changes in the world economy.[45]
In a globalized world, competitive economies will find it increasing difficult to keep themselves closed and restrict economic forces. Rather than keeping itself out of the RCEP, India needs to focus on its strengths and areas where it has leverage. Major arguments against joining the RCEP have been that it would destroy local industries, particularly agriculture, dairy, and fisheries, and would worsen the trade deficit. In reality, these industries would still operate and will instead have access to larger markets and cheaper inputs. Consumers would benefit through freer trade, cheaper goods, reliable prices, and newfound influence on domestic producers to produce quality goods at competitive rates. The concerns of India’s industries being flooded with cheap goods with RCEP membership seems unwarranted because it would also gain access to a new market with a population of around 2.5 billion.[46] Such concerns are direct reflections of the shortcomings of Indian policy in improving domestic infrastructure for primary goods, and imparting skills and competencies to the manufacturing sector.[47], [48],[49]
While contending that the RCEP would have enormous strategic and foreign policy implications, India underscores the fact that its merits cannot be separated from its economic imperatives. On the brighter side, India would gain from the RCEP membership as it could open the doors for labor-intensive manufacturing in the country. Movement of inputs without tariffs and frictions across borders of 16 countries would make any multinational company established in India doubly competitive.
Conclusion
If operationalized, the RCEP could be the “deal of the Indo-Pacific”. As a multilateral and a pan-regional model with its center of gravity in the Indo-Pacific, it will create enormous opportunities for the member states and promote trade and economic integration under fair trade rules.
Instead of worrying about the pitfalls of joining the RCEP, New Delhi should use this regional trading bloc to further domestic reforms and remove structural bottlenecks hurting its exports so that it can leave a bigger footprint on the world market. India should not risk getting isolated in the region and must deliberate on getting its concerns addressed to balance its economic and strategic calculations, all while preparing itself to one day spearhead a rules-based “Indo-Pacific century”.[50],[51]
[1] The World Bank, Population Total, https://data.worldbank.org/indicator/sp.pop.totl, Accessed on November 10, 2019
[2] Association for South East Asian Nations, Joint Statement of the 7th Regional Comprehensive Economic Partnership (RCEP) Ministerial Meeting, https://asean.org/joint-statement-7th-regional-comprehensive-economic-partnership-rcep-ministerial-meeting/, Accessed on November 12, 2019
[3] Gandhi’s talisman: Whenever you are in doubt, or when the self becomes too much with you, apply the following test. Recall the face of the poorest and the weakest man [woman] whom you may have seen, and ask yourself, if the step you contemplate is going to be of any use to him [her].
[4] Association for South East Asian Nations, Joint Statement of the 7th Regional Comprehensive Economic Partnership (RCEP) Ministerial Meeting, https://asean.org/joint-statement-7th-regional-comprehensive-economic-partnership-rcep-ministerial-meeting/, Accessed on November 12, 2019
[5] A Note on Free Trade Agreements and their Costs[5] by NITI Aayog analyzes multiple FTAs that India has signed over the past decade. See: Saraswat, V.K., P. Priya and A. Ghosh, A Note on Free Trade Agreements and Their Costs, NITI Aayog, https://niti.gov.in/writereaddata/files/document_publication/FTA-NITI-FINAL.pdf, Accessed on November 12, 2019
[6] Lokeshwarri, S.K., Worrying signs on the forex reserves front, The Hindu BusinessLine, August 19, 2018,https://www.thehindubusinessline.com/opinion/columns/lokeshwarri-sk/worrying-signs-on-the-forex-reserves-front/article24731553.ece, Accessed on December 17, 2019
[7] Department of Commerce, Ministry of Commerce and Industry, Government of India, 2019
[8] Shah, Amit, View: By saying no to RCEP, PM Narendra Modi has kept India first, The Economic Times, November 13, 2019, https://economictimes.indiatimes.com/news/economy/foreign-trade/view-by-saying-no-to-rcep-pm-modi-has-kept-india-first/articleshow/72028437.cms?from=mdr, Accessed on December 17, 2019
[9] Ministry of Commerce & Industry, Impact of Cheap Imports on Industrial Production, Press Information Bureau, February 11, 2019, https://pib.gov.in/PressReleasePage.aspx?PRID=1563769, Accessed on December 17, 2019
[10] ibid
[11] Ghosh, Nilanjan, Pal, P., Chakrabarty, J. and R. Ray, China-India Relations in Economic Forums: Examining the Regional Comprehensive Economic Partnership, ORF Occasional Paper, https://www.orfonline.org/wp-content/uploads/2018/08/ORF_OccasionalPaper_162_RCEP.pdf, Accessed on November 13, 2019
[12] Sen, A. China should give India greater market access to improve trade ties: Sitharaman, The Hindu Businessline, January 16, 2018, https://www.thehindubusinessline.com/economy/china-should-give-india-greater-market-access-to-improve-trade-ties-sitharaman/article9214597.ece, Accessed on December 29, 2019
[13] Rajya Sabha TV, India’s World: RCEP – Challenges & Way Forward, https://www.youtube.com/watch?v=bGvN2uqNGoo, Accessed on October 22, 2019
[14] Nataraj, G., RCEP an opportunity before Asian giants to show a united front, Live Mint, October 23, 2019, https://www.livemint.com/opinion/online-views/opinion-rcep-an-opportunity-before-asian-giants-to-show-a-united-front-11571771846921.html, Accessed on December 17, 2019
[15] Dutta, P.K., 5 reasons why PM Modi pulled out of RCEP in Bangkok, India Today, November 5, 2019, https://www.indiatoday.in/news-analysis/story/5-reasons-why-pm-modi-pulled-out-rcep-in-bangkok-1615825-2019-11-05, Accessed on November 21, 2019
[16] Ministry of Finance, Government of India, Economic Survey of India 2019-20, Department of Economic Affairs, Economic Division, New Delhi.
[17] International Monetary Fund, World Economic Outlook, Global Manufacturing Downturn, Rising Trade Barriers, Washington D.C. p. 10.
[18] Ministry of Finance, Government of India, State of the Economy in 2018-19 – A Macro View, Press Information Bureau, https://pib.gov.in/newsite/PrintRelease.aspx?relid=191212, Accessed on December 17, 2019
[19] The Economic Times, Budget 2019: FM Nirmala Sitharaman lays down 10-point vision for $5 trillion economy, July 5, 2019, https://economictimes.indiatimes.com/news/economy/policy/budget-2019-fm-nirmala-sitharaman-lays-down-10-point-vision-for-5-trillion-economy/videoshow/70086488.cms, Accessed on December 17, 2019
[20] The Hindu Business Line, India convinces RCEP members to commit on easing worker movement, September 4, 2018, https://www.thehindubusinessline.com/economy/india-convinces-rcep-members-to-commit-on-easing-worker-movement/article24865778.ece, Accessed on December 17, 2019
[21] Felipe, Jesus, Utsav Kumar and Arnelyn Abdon, 2018, Exports, Capabilities, and Industrial Policy in India, Working Paper No. 638, Levy Economics Institute, http://www.levyinstitute.org/pubs/wp_638.pdf, Accessed on December 29, 2019
[22] Lomas, M., Which Asian Country Will Replace China as the ‘World’s Factory’?, The Diplomat, February 18, 2017, https://thediplomat.com/2017/02/which-asian-country-will-replace-china-as-the-worlds-factory/, Accessed on December 29, 2019
[23] Xu J, Wu Y., 2018, A Comparative Study of the Role of Australia and New Zealand in Sustainable Dairy Competition in the Chinese Market after the Dairy Safety Scandals. International Journal of Environmental Research and Public Health. 15(12):2880
[24] The Hindu Business Line, India convinces RCEP members to commit on easing worker movement, September 4, 2018, https://www.thehindubusinessline.com/economy/india-convinces-rcep-members-to-commit-on-easing-worker-movement/article24865778.ece, Accessed on December 17, 2019
[25] Mitra, D. Why India needs to rethink its decision to opt out of RCEP, The Economic Times, November 15, 2019, https://economictimes.indiatimes.com/news/economy/policy/why-india-needs-to-rethink-its-decision-to-opt-out-of-rcep/articleshow/72061734.cms, Accessed on December 16, 2019
[26] Biju, K.V., Don’t drive Indian farmers to suicide through RCEP, Down To Earth, November 3, 2019, https://www.downtoearth.org.in/blog/economy/don-t-drive-indian-farmers-to-suicide-through-rcep-67565, Accessed on December 17, 2019
[27] Department of Agriculture and Cooperation, Government of India, Agriculture Census 2015-16, National Informatics Center, https://agcensus.nic.in/document.html, Accessed on January 24, 2020
[28] The Hindu Business Line, https://www.thehindubusinessline.com/economy/agri-business/fervent-appeals-pay-dairy-players-rejoice-centres-rcep-decision/article29886142.ece, Accessed on November 2, 2019
[29] The Hindu Business Line, https://www.thehindubusinessline.com/economy/agri-business/fervent-appeals-pay-dairy-players-rejoice-centres-rcep-decision/article29886142.ece, Accessed on November 2, 2019
[30] Association for South East Asian Nations, Joint Leaders’ Statement on the Regional Comprehensive Economic Partnership (RCEP), 4 November 2019, Bangkok, Thailand, https://asean.org/storage/2019/11/FINAL-RCEP-Joint-Leaders-Statement-for-3rd-RCEP-Summit.pdf, Accessed on November 5, 2019
[31] Garekar, B., RCEP will be game changer, says Vivian Balakrishnan, urging India to join the mega trade deal, The Strait Times, September 9, 2019, https://www.straitstimes.com/singapore/rcep-will-be-a-gamechanger-says-vivian-balakrishnan-urging-india-to-join-the-mega-trade, Accessed on October 29, 2019
[32] Mahadevan, R. and A. Nugroho, RCEP must move forward, with or without India,
East Asia Forum, September 19, 2019, https://www.eastasiaforum.org/2019/09/19/rcep-must-move-forward-with-or-without-india/, Accessed on December 16, 2019
[33] The Japan Times, India’s exit from RCEP leaves Japan and China unsure about future direction of free trade pact, November 5, 2019, https://www.japantimes.co.jp/news/2019/11/05/asia-pacific/asian-rcep-nations-effectively-give-year-end-goal-free-trade-deal/#.Xfi-QtYzY1g, Accessed on December 16, 2019
[34] The Hindu, https://www.thehindu.com/news/national/will-resolve-outstanding-issues-raised-by-india-for-not-joining-rcep-china/article29889318.ece, Accessed on November 5, 2019
[35] India’s exit from RCEP leaves Japan and China unsure about future direction of free trade pact, The Japan Times, November 5, 2019, https://www.japantimes.co.jp/news/2019/11/05/asia-pacific/asian-rcep-nations-effectively-give-year-end-goal-free-trade-deal/#.XcZsZ0UzY1g, Accessed on November 6, 2019
[36] Reynolds, I. Japan not in the mood to join RCEP if India doesn’t come on board, Business Standard, November 28, 2019, https://www.business-standard.com/article/economy-policy/japan-not-in-the-mood-to-join-rcep-if-india-doesn-t-come-on-board-119112900271_1.html, Accessed on December 16, 2019
[37] Abe, S. 2012, Asia’s Democratic Security Diamond, Project Syndicate, December 27, 2012, https://www.project-syndicate.org/onpoint/a-strategic-alliance-for-japan-and-india-by-shinzo-abe?barrier=accesspaylog, Accessed on December 16, 2019
[38] New Strait Times, India’s Exit from RCEP Leaves China and Japan at Odds, November 6, 2019, https://www.pressreader.com/malaysia/new-straits-times/20191106/281797105802954, Accessed on November 10, 2019
[39] The Hindu, Could join RCEP if demands are met, says Piyush Goyal, November 5, 2019, https://www.thehindu.com/news/national/could-join-rcep-if-demands-are-met-says-piyush-goyal/article29891273.ece, Accessed on November 7, 2019.
[40] Krishnan, S. and Hatekar, 2017. Rise of the New Middle Class in India and Its Changing Structure, Economic and Political Weekly, 52(22): 40-48
[41] Federation of Indian Chambers of Commerce and Industry (FICCI), 2019. India’s vision of $5 trillion economy is doable, possible and shall be done – Piyush Goyal, http://www.ficci.in/pressrelease-page.asp?nid=3574, Accessed on January 20, 2020
[42] Garekar, B., RCEP will be game changer, says Vivian Balakrishnan, urging India to join the mega trade deal, The Strait Times, September 9, 2019, https://www.straitstimes.com/singapore/rcep-will-be-a-gamechanger-says-vivian-balakrishnan-urging-india-to-join-the-mega-trade, Accessed on October 29, 2019
[43] United Nations Development Program, Sustainable Development Goal 1, 2019. Available at: https://templatelab.com/sustainable-development-goals/, Accessed on October 29, 2019
[44] The Economic Times, RCEP: Jaishankar says India concerned over “enormous” trade deficit with China, September 9, 2019, https://economictimes.indiatimes.com/news/economy/foreign-trade/rcep-jaishankar-says-india-concerned-over-enormous-trade-deficit-with-china/articleshow/71051623.cms?from=mdr, Accessed on December 16 2019
[45] Hejimans, P. and R. Rahadiana, Stalled Asia Trade Pact at ‘Point of No Return,’ Indonesia Says, Bloomberg, September 9, 2019, https://www.bloomberg.com/news/articles/2019-09-10/stalled-asia-trade-pact-at-point-of-no-return-indonesia-says, Accessed on November 1, 2019
[46] The Telegraph, Dumping fears grip firms, November 4, 2019, https://www.telegraphindia.com/business/dumping-fears-grip-firms/cid/1716865, Accessed on January 20, 2020
[47] Lal, S. and A. Patwardhan, Can experimental research techniques cure the problem of infrastructure contract failure in India?, World Bank Blogs, December 23, 2019, https://blogs.worldbank.org/governance/can-experimental-research-techniques-cure-problem-infrastructure-contract-failure-india, Accessed on January 20, 2020
[48] Chenoy, D., S. Mishra Ghosh and S.K. Shukla, 2019. Skill development for accelerating the manufacturing sector: the role of ‘new-age’ skills for ‘Make in India’, International Journal of Training Research, 17(sup1), 112-130, https://www.tandfonline.com/doi/pdf/10.1080/14480220.2019.1639294?needAccess=true, Accessed on January 20, 2020
[49] Majumdar, S., 2008. Asian Development Bank Institute, Workforce Development in India-Policies and Practices, Asian Development Bank Institute (ADBI), Japan, https://www.adb.org/sites/default/files/publication/159351/adbi-workforce-dev-india.pdf, Accessed on January 20, 2020
[50] Scott, D. India and the Allure of the ‘Indo-Pacific’, International Studies, 49(3&4): 1–24
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