RCEP, the Regional Comprehensive Economic Partnership, is the world’s biggest trade deal that has been signed by 15 Asia-Pacific countries and mainly backed by China. These 15 countries form a combined Gross Domestic Product (GDP) of more than $26 trillion and comprise nearly one-third of the world’s total population as well. These countries have signed the RCEP trade deal at the 37th Association of Southeast Asian Nations (ASEAN) Summit on 15th November 2020 that was hosted by Vietnam virtually.
According to 10-nation comprising ASEAN, the RCEP aims to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement among the member countries and its Free Trade Agreement (FTA) partner countries as well.
However, India, one of the biggest economies in the Asian continent after China, is not a part of the RCEP.
Back in November 2019, when the negotiations for the long-overdue trade deal entered the final stages, Indian Prime Minister Narendra Modi choose to opt out from the trade deal surprising the fellow members. India being one of the largest economies in the world and out of the RCEP is certainly a significant move and a setback for the trade deal as well. However, several economists also believe that not being a part of the RCEP will cost Indian economy dearly.
Let us discuss the different aspects of the newly signed trade deal and why India is not a part of it.
What is RCEP?
The seeds of RCEP were sowed back in November 2012 by the leaders of 10 ASEAN member countries and six ASEAN FTA partner states during the 21st ASEAN summit in Phnom Penh in Cambodia. These 10 ASEAN member countries are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. The ASEAN FTA partner countries were Australia, China, India, Japan, Korea and New Zealand.
The RCEP allows a common set of rules of origin to qualify for tariff reduction with other RCEP members. This trade deal is claimed to result in less procedures and easier movement of goods. According to the stakeholders of the deal, RCEP will encourage multinational companies to invest more in the region resulting in stronger economies. This will also lead to supply chain and distribution hubs’ development in the region.
China is the source of the majority of imports and also the main export destination for most of the member nations. The RCEP is likely to benefit China majorly with this new trade deal, under which the new tariff regime will kick in from 2022 and will see the duties going back to the 2014 levels.
With this trade deal, many participating countries that are becoming too economically dependent on China would be the victim of expanding Chinese influence across the region, claim many experts.
Why did India pull out of RCEP?
India pulled out of the China-backed RCEP as negotiations failed to address the trade deal’s core concerns. These concerns include threat of circumvention of rules of origin due to the tariff differential, inclusion of fair agreement to address the issues of trade deficits and opening of services.
The RCEP would have brought down the import duties on 80% to 90% of the goods, along with easier service and investment rules. Several Indian industries believe that the reduced customs duty would lead to a flood of imports, especially from China, with which India has a huge trade deficit. Meanwhile, India’s trade deficit with other RCEP member countries is also rising.
Interestingly, post India’s withdrawal from the RCEP, the country’s relation with China has hit a new low, after both the countries were involved in an armed conflict in Galwan Valley. Both India and China have been loggerheads since then.
Apart from the concerns regarding Chinese influence, Indian government also raised the issue of unavailability of Most Favoured Nation (MFN) obligations. India would be forced to give similar benefits to RCEP countries that it gave to others. India raised a red flag over the move to use 2014 as the base year for tariff reduction.
Prime Minister Narendra Modi said that India’s decision to withdraw from the RCEP was guided by the impact it would have on the lives and livelihoods of all Indians, especially the vulnerable sections of the society. However, as Indian officials said, despite the withdrawal, India could rejoin the discussion if it chooses to do so at a later stage.
Impact of India’s withdrawal from RCEP
According to many experts and analysts, India could lose investments due to its withdrawal from the RCEP. Also, the Indian consumers may end up paying more cost during global trade than they should. Investment and supply chains too will face challenges that have been already suffering due to the Covid-19 pandemic.
On the other hand, the RCEP member countries will lose out the opportunity to access the Indian market, which is hard to get into, especially in the wake of the Covid-19 pandemic.
On the other hand, many analysts believe not joining the RCEP will provide India an opportunity to strengthen its domestic industries. This comes in the line of the Atmanirbhar Bharat or Self-reliant India campaign launched by the Indian government.
Several domestic industries including automobile, aluminium, agriculture, chemicals, steel, plastics, copper, machine tools, dairy and paper among others have expressed their displeasure on RCEP, citing the reason that dominance of cheap imported foreign goods would dampen local businesses.
Meanwhile, Chinese state media has said that India has committed a strategic blunder and missed the bus to long-term growth, while commenting on New Delhi’s decision not to join the China-led 15-country trade bloc, which is the biggest in the world.
As the Chinese official news agency Xinhua reported, “The RCEP agreement covers a market of 2.2 billion people, or almost 30% of the world’s population, with a combined GDP of $26.2 trillion or about 30% of global GDP.” Also, it hailed the trade deal as a monumental achievement in East Asian regional cooperation and also as a victory of multilateralism and free trade, despite the two major global economies, the US and India not being a part of the deal.
Impact India-ASEAN relations on RCEP
India-ASEAN relations has been a key pillar of the Indian foreign policy. Also, it has driven the government’s Act East Policy. With the significant changes in the global policies and economic scenario in the early 1990s and India’s step to economic liberalisation has resulted in the country’s focus on a strengthened and multi-faceted relationship with ASEAN.
Back in 2012, India and ASEAN commemorated 20 years of dialogue partnership and 10 years of Summit level partnership with a Commemorative Summit held in New Delhi. It took place under the theme ‘ASEAN-India Partnership for Peace and Shared Prosperity’.
In the last two decades, India-ASEAN trade and investment relations have been growing steadily. ASEAN has been India’s fourth largest trading partner. At present, India-ASEAN trade volume stands at $81.33 billion, approximately 10.6% of India’s overall trade volume. India’s exports to ASEAN region is 11.28% of the country’s total exports.
ASEAN accounts for 18.28% of total investment flows into India since 2000. The region has contributed $68.91 billion of FDI inflows into India between April 2000 to March 2018. On the other hand, FDI outflows from India to ASEAN countries between April 2007 to March 2015 was $38.672 billion, as per data by Department of Economic Affairs (DEA).
Clearly, the investment flows both ways are pretty substantial.
The UPA government opened 74% of Indian market to ASEAN countries. On the other hand, Indonesia opened only 50% of its market for India. It also agreed to explore an India-China FTA in 2007 and join RCEP negotiations with China in 2011-12. However, the impact of these decisions resulted in increased trade deficit with the RCEP countries, from $7 billion in 2004 to $78 billion in 2014.