RCEP: Would Deeper Economic Regionalism Have Benefitted India?

THE SEVENTH REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP (RCEP) ministerial meeting was held on September 8, 2019, in Bangkok. At this meeting, there was heightened fervour to conclude and sign the agreement. Hoping to launch a new kind of regional economic architecture between the ASEAN+6 countries (10 ASEAN members plus Australia, China, India, Japan, New Zealand and South Korea) in 2012, negotiations for the RCEP, however, have still not concluded and members are continuing to negotiate their comparative advantages and raise concerns.

ASEAN is the 52-year-old regional Association of South-East Asian Nations. Over the years, the free trade agreements that it has signed has made ASEAN one of the most coherent trading partners in the world. For ASEAN to increase its presence in the global economy, certain challenges were highlighted during several of its ministerial meetings. Hurdles, ranging from rules of origin to tariff concessions to customs related issues, were seen as roadblocks to an integrated economic regionalism. Thus, came the idea to establish RCEP with guiding principles.

For ASEAN, the RCEP opens doors to many more opportunities than what exists now. The RCEP has the potential to push liberal economic policies and strengthen ASEAN trade connectivity and facilitation schemes. The Rules of Origin which are at present not liberal, will allow ease of business rules. Most importantly, the signing of RCEP will allow ASEAN to be much more effective as a bargainer than what is feasible under a bilateral trade arrangement. This is what makes RCEP the most lucrative goal for ASEAN to achieve.

India, as Curator of the Act East Policy, is a part of this grand scheme because it places India at the forefront of the Indo-Pacific region and opens doors to various regional trading networks. Eminent domain specialist Jayshree Sengupta has argued that the “RCEP countries are a hub of low-cost manufacturing and trade in the global economy and also include major resource-rich countries, like Australia and Singapore, which is a services trade and financial centre.”

On the one hand, the ASEAN countries are getting impatient while India is showing some reluctance, despite the growth in production networks, efficient machinery and information technology and other logistics, facilitating a steady expansion of trade with the ASEAN nations. In spite of RCEP not being as ambitious and intrinsic in its approach as the US-led Trans-Pacific Partnership (TPP) is, there are a few concerns that are making it difficult for India to garner domestic support for this mega-trade agreement to bolster growth in Asia.

Both India and China are not part of the TPP which is much more extensive and focussed on good regulatory practices, high labour standards, environmental rules, regulation of intellectual property, digital economy, etc. In comparison, RCEP is mainly centred on removing the inconsistencies created by different free trade agreements, harmonize tariff and rules of origin, and improve market access in services and investments. In addition, RCEP makes a special arrangement for developing countries, by allowing slow but steady tariff reductions and assistance on technical matters.

India stands to benefit once RCEP begins to operate because it is a chance for Indian goods to be part of the Asian demand-supply chain. The government aims to increase the “share of manufacturing in the economy to 25% from about 16% by 2022.” So, to argue that India will leave RCEP is absurd. Yet, the truth is that India, like all the other partners of RCEP, is calculating the costs involved.

One of the major concerns is the clause which mandates that India place over 90% of its trade under a zero tariff. Firstly, it is very difficult for India to bypass this process. And secondly, this translates into the sudden, huge surge of Chinese goods into Indian markets and washing out of domestic producers.

Economist Nilanjan Ghosh opines that a regional FTA will expose “vulnerable sectors to market forces and the vagaries of competition emerging from global trade”. He particularly points out that, despite the glorified vision that RCEP is creating for the Indian industries, the fact is that the standard of India industries are not to the level of its international counterparts and, therefore, they are not ready for competition in the international market. Partly to be blamed is the “host of unimplemented reforms in the product and the factor of markets. While the introduction of GST was thought of to be a major step in this regard by rationalising supply-chains and removing the fragmented nature of the markets, multiple rates of GST often cause problems of compliance across the value chain of a commodity.”

Economists Surujan Gupta and Surendar Singh argue that “product groups such as electrical machinery and equipment and parts thereof, and machinery, mechanical appliances, nuclear reactors are major contributors to India’s trade deficit in engineering goods with China. The liberalisation of tariffs under RCEP, particularly with China, may have an adverse impact on India’s domestic engineering industry”.

As a result, there is speculation floating around that, perhaps, India will quit the negotiations and leave RCEP or vice versa. RCEP has many more supporters than detractors. But to say that a situation may arise when the agreement will marginalize India and move ahead without India is somewhat difficult.

India is the third-largest economy in Asia and, while the recent meeting demanded urgency in the signing of the agreement, there is room for flexibility and further negotiations till all members are fully satisfied with the terms and conditions. India hails multilateralism and economic liberalization.

It makes more sense to ally with RCEP than move away from it, especially in contemporary times, when countries are extensively engaged economically with each other. The solution lies in India supporting and finding a niche in addressing issues of liberalization and seeking options to protect as well as expose its domestic industries to the uncertainties of international markets.

(The writer is Research Assistant in Nepal Institute for International Cooperation and Engagement, Kathmandu)

(This article has been reproduced here in arrangement with the South Asia Monitor. It can be accessed at https://southasiamonitor.org)

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