This article exists as part of the online archive for HuffPost India, which closed in 2020. Some features are no longer enabled. If you have questions or concerns about this article, please contact indiasupport@huffpost.com.

Why India Pulled Out Of RCEP And How The Deal Will Benefit China: An Expert Explains

Arpita Mukherjee, professor at ICRIER, says China now has an advantage vis-à-vis India in the 14 markets of RCEP and more bilateral agreements in the region than India.
This image made from a teleconference provided by the Vietnam News Agency (VNA) shows the leaders and trade ministers of 15 Regional Comprehensive Economic Partnership (RCEP) countries on November 15, 2020.
ASSOCIATED PRESS
This image made from a teleconference provided by the Vietnam News Agency (VNA) shows the leaders and trade ministers of 15 Regional Comprehensive Economic Partnership (RCEP) countries on November 15, 2020.

On Sunday, 15 countries signed the Regional Comprehensive Economic Partnership (RCEP) agreement, raising several questions about India’s decision to walk out of the world’s largest trading bloc last year.

External affairs minister S. Jaishankar defended the government’s decision this week, saying that joining the pact would have resulted in “fairly immediate negative consequences” for the country’s economy. He also said that India withdrew from RCEP as a number of key concerns flagged by it were not addressed.

The RCEP deal comprises 10 member countries of the Association of Southeast Asian Nations (ASEAN) along with China, Japan, South Korea, Australia and New Zealand.

India still has the option of joining the agreement. Any country can join RCEP 18 months after it comes into force but India, being one of the initial negotiating countries, can join at any time.

Arpita Mukherjee, professor at Indian Council for Research on International Economic Relations (ICRIER), told HuffPost India in an email interview that in her opinion, India walked out of the agreement because of its trade imbalance with China and a fear that it will only increase if tariffs are reduced under RCEP. The geo-political tensions with China could be another reason, she said.

India’s trade deficit with China was $48.66 billion in 2019-20, according to government data.

Relations between India and China have soured since the Ladakh standoff and the violent face-off in Galwan Valley on 15 June, in which at least 20 Indian soldiers died.

Several reports noted that RCEP can also be seen as a way for China to draft the trade rules in the region and increase its influence (see here and here).

Mukherjee said that China was an important player in regional trade even before RCEP, but it now has an advantage vis-à-vis India in the 14 markets that are part of the agreement. “It also has more bilateral agreements in the region than India. So definitely, Chinese companies will be at an advantage vis-a-vis Indian companies in the markets of RCEP member countries, and there will be more value chain integration.”

1. What do you think of India’s decision to walk out of RCEP last year? Given the uncertainty around Covid-19 and the need to boost the economy, should India reconsider the decision?

In my opinion, India walked out of the RCEP due to its trade imbalance with China and the fear that the negative trade balance will increase, if tariffs are reduced under the trade agreement. Also, India has been increasing tariffs in the recent years which makes it difficult to enter into trade agreements. The geo-political tensions with China can be another reason. However, the most important reason is that there is a lack of research on market potential and barriers, which can be made available in the public domain and used for industry and stakeholders’ consultations. All stakeholders have to prepare themselves for a mega-regional agreement and, in this case, there has been a lack of preparedness and coordination.

With Covid-19, global supply chains are disrupted and protectionism has increased. A trade agreement can help to counter protectionism but in a pandemic situation, countries can take harsh decisions for a temporary period.

Under the current economic scenario, India’s priority is to boost economic growth, ensure employment, implement reforms and address policy gaps. It is also important to examine what measures RCEP member countries, especially developing countries, are taking to meet their commitments. India needs to prepare itself before going forward.

2. Will India’s refusal to join the agreement affect its bilateral trade agreements with some RCEP members?

India already has comprehensive trade agreements with Japan and Korea. The India-ASEAN agreement is under review and both sides have pointed out multiple issues. The refusal to join the RCEP does not prohibit India from joining new agreements or strengthening its existing bilateral agreements. These agreements will depend on the extent of commitments from both sides. If we give less, we will get less than our competitors in those markets. Individual agreements are always costly for businesses vis-a-vis autonomous/unilateral tariffs reduction or multilateral or mega-regional agreement. With the slow progress in the Doha Round, Indian businesses are at a disadvantage vis-a-vis businesses from competing developing countries like Vietnam, which has signed several comprehensive agreements including all key trading partners.

3. India’s trade deficit with at least 11 of the 15 RCEP countries is reported as one of the reasons for walking out of the deal. India is now considering reviews of its bilateral FTAs. Are there any concerns with this approach? Will RCEP members be willing to do a review?

India’s trade deficit was indeed an issue for the RCEP negotiations, but somehow our concerns have always been directed towards China. There are concerns on both sides with respect to the review of the bilateral agreements. India’s commitments in some of its bilateral agreements are even lower than the autonomous or unilateral regime. India needs to address this issue.

Second, there is a need for research in India to find out market access, discriminatory, non-tariff and other regulatory barriers in the countries with whom we have existing trade agreements and how these barriers can be addressed under the revised trade agreements.

Third, India’s own ask list is narrow in areas like services, where it has export potential. Fourth, there is a need for more detailed study on how to attract core investment. Fifth, in India there is hardly any research on new areas in trade like ‘technology and trade’. There is need for more in-depth work on this. In this, the government has to engage deeply with industry bodies like NASSCOM.

If we are well-prepared there is no cause for concern. Our interactions with India’s trading partners show that they are willing to do a review but they do not like India’s approach of limited commitments under trade agreement. They prefer deeper commitments.

4. One of the arguments against India’s decision is that it will allow China to become an important player in regional trade. Also, there are expectations that RCEP will pave the way for deeper cooperation among members. Will this isolate India and make it a less attractive trade partner?

Even before RCEP, China was an important player in regional trade and regional supply chains, and RCEP made its position stronger. Interestingly, even with the Covid-19 pandemic, other countries went ahead and signed the RCEP agreement without India.

China now has an advantage vis-a-vis India in the 14 markets of RCEP. It also has more bilateral agreements in the region than India. So definitely, Chinese companies will be at an advantage vis-a-vis Indian companies in the markets of RCEP member countries, and there will be more value chain integration. While we can restrict imports by higher tariffs, our exports may suffer. This is a cause for concern for Indian companies. Regional trade agreement provides a predictable trade regime which companies look forward to in the absence of any multilateral trade agreements.

5. Are there any advantages to staying out of RCEP for India?

There may be some political advantages of walking out of RCEP. It may have also helped to promote self-reliance. Some Indian industries, which lack global competitiveness due to a number of reasons, including high power or logistics costs, are happy as they will not face tough competition.

6. India is one of the biggest markets in the world. Will its withdrawal affect the deal or RCEP member states?

As of now, India’s withdrawal has not affected the decision of RCEP members as the agreement has been signed. RCEP members have acknowledged the strategic importance of India and stated that if India becomes a member of RCEP it will lead to even deeper value chain integration. The agreement is open to accession by India and the member states can commence negotiations with India if India wants to negotiate.

Close
This article exists as part of the online archive for HuffPost India, which closed in 2020. Some features are no longer enabled. If you have questions or concerns about this article, please contact indiasupport@huffpost.com.