India’s RCEP exit: Countries can benefit even without free trade agreements

Prof Rupa Chanda, RBI Chair of Economics, IIM Bangalore, talks about possible regions where India can pursue greater trade integration post its exit from RCEP. At the same time, she asserts that FTAs are not the only factors that make countries big export powerhouses. Achieving that also requires domestic reform, competitiveness, ease of doing business and investment climate.

IBT: What is your view about the relevance of RCEP post COVID? And with the present scenario of global trade, what significance does this deal carry for the participating countries?

Prof Rupa Chanda: I do understand that the RCEP is a mega bloc with implications for regional value chains. But if you look in terms of concessions, or what they have really bound, it doesn’t go that much further than what already exists bilaterally among the countries. So, I think its main significance, at this point, is from a signaling perspective. It’s neither very deep in terms of commitments, nor very wide in terms of scope. Lots of important things are still really not on the agenda. And many things will happen over a phase of 20 years, as some of the countries haven’t ratified them.

So, if you take all that into consideration, I don’t see an immediate impact except, as I said, from the signaling perspective. I haven’t looked in detail into the rules of origin, but from what I understand, RCEP has simplified them to some extent. So the regional production network will get a boost; it will also have a positive implication for other countries in the sense that once you have access to one market in terms of investments, it will open up the entire region. So, it’s actually beneficial for even countries outside.

Now, India being left out of it or wanting to get out of it, is really a political stand. Of course, we were not getting what we wanted in RCEP – be it services access, safeguards, protection against import surges, trigger mechanism, etc. So, politically, it was not the right thing to do at that time. I don’t rule out the possibility of coming back into it in future, but not immediately. I don’t think the time is right.

But as I said, I don’t see a huge or immediate impact of this on ourselves in the near future, given what has been committed, or what it covers, as of now. But it could make life easier for multinationals looking at this region, as it would permit them to have more alternatives and even get their production out of China. I think the real beneficiaries here are Vietnam, Malaysia, Thailand, and Indonesia. They are alternatives in terms of low labour costs, especially Vietnam & Indonesia. Some of them overlap with CPTPP countries also. So to that extent, I think these are the main beneficiaries and some of the western multinationals could benefit.

Unless we raise our competitiveness significantly vis-à-vis RCEP countries, I don’t see where we’re going to make a lot of headway. We can become part of regional value chains, but ultimately, our ability to leverage will depend upon our competitiveness vis-à-vis these countries. And, we’ve seen in bilateral deals, we are not as competitive. In services, getting something is very difficult, as too many domestic regulatory issues have to be tackled, and our own constituencies are not ready. So, if we are not willing to give, what are we going to get? Even in services, we are not willing to concede much, then why should we expect? So, where’s the quid pro quo for us with these countries?

IBT: In the post-COVID WTO environment, with RCEP and possibly if the US joins the TPP, do you think that these two mega blocks could become overwhelmingly dominant on world trade? And does that concern us?

Prof Rupa Chanda: Firstly, I don’t think that the US is going to come back to TPP anytime very soon. This is not going to be an immediate issue that Biden will work on. It may happen towards the middle, or a little later in his tenure, because he has a lot of other domestic priorities – the US economic crisis, stimulus, handling Covid, etc. I think he’ll first have to address the vote bank in the country, as labour unions have endorsed him.

Getting into a trade deal, or renegotiating is not going to be one of the first things he does, so I’m not too concerned about that. But eventually, maybe two years post-pandemic, once things hopefully recover, RCEP and TPP coming together may emerge as fulcrums. Even without the US, CPTPP is a major block; but if the US comes in, clearly, it’s bigger.

Yes, I do see RCEP and TPP as alternatives, almost defining the world trading system and filling the vacuum created because of the WTO and its dysfunctional Dispute Settlement Body. Yes, a large part of future agreements will derive their templates from these two big blocs. But the risk here is that there are many countries left out of these two mega blocks.

So, for that exclusion, unless there’s some sort of open regionalism that’s allowed in these forums; that you know, more countries can eventually join in, or form other sub-groupings, there is a big risk of marginalisation of a large number of countries. That’s my fear. And many important issues of developing countries might get totally left out in the process, which is why WTO was set up in the first place. So, that is a concern, in fact, I think you’re asking the basic question – are the regional agreements a stepping or a stumbling block?

So, they can be a building block, to the extent that many important issues are getting addressed, especially in the CPTPP and potential TPP, if the US comes back or whatever name it takes. RCEP hasn’t really done that, but there are many sticking points like e-commerce, services, investment, competition, transparency, etc, which the WTO was struggling with. There’s no consensus, but plurilateralism is a better way, if not multilateralism, because it still allows people to come on board; and here you’ve defined who is part of that grouping.

IBT: There’s been this discussion that we need to diversify from China, but there is still obviously this mega block with RCEP being signed. China calls itself the fulcrum of world trade now, so how realistic is it to move away from China?

Prof Rupa Chanda: It isn’t. I mean, how much willingness is really there amongst countries to reduce their dependence on China? You also have to look at the current environment, with almost every economy slowing down, that’s one country showing growth. I mean, who will you export to? So, their demand for raw materials is picking up.

Look at Australia. It may say a lot of things. A lot of that holds onto a geopolitical, defence, strategic decision. Japan and Australia are there but economically, they’re heavily dependent on China for their exports, sourcing of imports, cost competitiveness, etc.

It is going to be very hard to develop those alternative supply chains any time soon. Nobody is going to have that scale. I think even all this talk about reshoring and bringing production back to the western countries may not play out in the near term. It will affect competitiveness and the bottomlines of companies.

The complementarity, unfortunately, which India could have provided, it is not in a position to provide. Maybe we can provide it to a small extent, but we cannot step into the shoes of China. So, I think there is really no alternative for the time being and there are some countries that are better placed than us to take advantage.

IBT: India says that it wants to get into agreements with economies where there’s greater complementarity, but obviously, these kinds of agreements have also been delayed or are difficult. How do you see the scope for them?

Prof Rupa Chanda: This is difficult, because technically, India-EU should have gone ahead much more. There is clear complementarity in many areas. If you just take something like automotive, I know it’s a big stumbling block in the discussions, but actually I’ve done some detailed analysis with a student on automotive supply chain networks, and we stand to benefit with the EU. We don’t stand to benefit with East Asia. There’s much more complementarity with the European Union, but it’s just the OEM part that is actually holding us up.

So, we have to get over some of these domestic constituencies, which are blocking these deals. Again, whether it’s agriculture or services, I think it’s possible. In fact, with the EU, I think it’s still possible if we can somehow skirt the areas of labour and environment or come up with a compromise or a cooperation chapter, maybe through the climate change-related commitments. India has to think a bit more innovatively.

But with the US, of course, there are many more sticky issues like e-commerce, digital taxation, and visas. Hopefully with Biden, these will be less sticky issues. But IPRs and data protection are not easy. Even with EU, data protection is an issue. So, regarding these prospects, India has to reduce opposition voices to these deals. I don’t see that happening in the midst of rising unemployment and slow down, as there’s not going to be much appetite.

And if you look at the sentiment with the past FTA’s, we’ve done bad deals. Now, whether we did not sign good agreements, whether we didn’t choose the right partners, or our utilisation is low because of issues in terms of lack of competitiveness, non-tariff barriers, compliance costs, lack of information, etc, I don’t think anyone’s really investigated all the reasons well enough; it’s probably a combination of all.

But I think with the Western world, we should push ahead and try to compromise on some of the areas. We have to pursue it, not necessarily as an alternative since we got out of RCEP, but because possibly there will be more to gain than with RCEP.

IBT: What other regions, do you feel we can have a good potential for trade agreements? Do you see better potential anywhere?

Prof Rupa Chanda: We have a certain trade basket pattern with the Middle East. With them, there is a lot of scope, not just in certain products, but also in services; especially if you look at the UAE and some of the others. I’m not talking so much about Saudi Arabia and Kuwait, but I think it’s possible to have good bilateral deals, though that may be more geostrategic.

I think we should pursue Africa and Latin America more aggressively (including blocs like the East African Community, or the South African Customs Union), as China is already in there. In terms of political goodwill, past relations, etc, India probably has an edge over China. More than bilateral deals, we should try to sign some of these bigger blocks that will give us access to the wider African market.

Investment is what we need to pursue these blocks, in a more strategic way. It’s not just about exporting, it’s actually investing, creating value and jobs in these countries. And, we should not follow the China way. Their approach is towards a totally extractive sort of relationship where they will bring their labour, produce, extract and just take away. Again, some preliminary work I’ve done on India-Africa relations shows a much more mutually beneficial relationship. And here again, I think services like healthcare, drugs, education and tourism have a lot of scope.

Similarly, I would say with India-Mercosur, we need to push in a bigger way, in the case of raw materials, light manufactures and services. In fact, Latin America gives you access into North America because there are so many deals, we can pursue strategically. Central Asia is another area we should look at, because again, historically, there are good relations with some of the countries, apart from the energy perspective.

IBT: And, what about our own immediate neighbourhood?

Prof Rupa Chanda: As far as SAARC is concerned, I am not as hopeful. Instead, I think sub-regionally, smaller groupings of countries do better, as we are seeing between India and Nepal, Bhutan, Bangladesh, etc. So, I think we need to keep pursuing that. The problem is that there’s always the China factor, and these countries play you against China constantly until you have the economic muscle to invest.

We have talked about trade far too much. But we have to look at the relationship between trade and investment, because with investments, you will get markets and access for movement of people. You will be able to address a lot of the IP and other sorts of problems. Investment will always have much less resistance, because you’re seen as having local presence. So this is what we need to pursue and along with it will come many other forms of trade.

IBT: The concern is that India could be left out of the next wave of technology and evolution, if it stays out of RCEP? So, what options does it have to ensure that it doesn’t lose competitiveness?

Prof Rupa Chanda: I think India really needs to focus on its domestic reforms first, whether it’s in or out of any regional/multilateral arrangement. Countries benefit even without FTAs; it’s not like China necessarily had FTAs to get access to markets. You can talk about unfair trade, undervalued exchange, state aid, etc, but still, underlying it is a strong manufacturing sector. That is something we have to do. And protecting your market, or erecting more tariffs or saying ‘Atmanirbhar’ is not going to make you a manufacturing powerhouse, as you can’t develop an electronics industry overnight for instance.

And, you can’t say that I’m closing myself to intermediate imports, because they bring in technology, lower your costs and give you quality and variety. There are many benefits of intermediate imports. We need to get out of the mentality of seeing imports as bad and exports as good. But you must do it in a strategic way with proper R&D, skilling incentives and so on; not the overt incentives, which are WTO countervailing. So, one has to be very careful.

Now, what do we need to do? I personally think some of the existing FTAs need to be reviewed and we will have to see to what extent have we been able to utilise them. And if not, why haven’t we been able to utilise them?

What I have found with MSMEs in particular, they often don’t have knowledge about FTAs or how to navigate FTAs and rules of origin. So, first and foremost, capacitating SMEs to take advantage of FTAs is as important. The second is that we have to bring in investments, especially at this time, when there are multinationals looking at alternative destinations. We have to link our SMEs to the supply chains of these MNCs. These are the two most important things we have to do.

Maybe signing FTAs with new partners is one way, but I am not so much hung up on the fact that FTAs are what makes countries big export powerhouses. I think it is your own domestic reform, competitiveness, ease of doing business and investment climate that make you. At present, even domestic investments are going down. For that, there are other fundamental factors, not just NPAs. There are macroeconomic issues, but it is also about regulatory clearances, land acquisition, labour, etc.

Also, the SME part is crucial. We know financial access and credits for SMEs is important, however that doesn’t mean a lot of moratoria and so on. That’s not the only way. We need skill sets for SMEs because employment has a huge turnover, and we need technology readiness for SMEs. A lot of that will come if you can actually get investments and sourcing for MSMEs from abroad.

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Rupa Chanda has been a faculty member in the Economics and Social Sciences Area at IIM Bangalore since 1997. She teaches Macroeconomics` and International Trade. She is currently the RBI Chair Professor in Economics and Head of the Economics and Social Sciences Area. In 2018, she briefly served as the Head, UNESCAP Sub-regional Office for South and South-West Asia, New Delhi.

She received her PhD in Economics from Columbia University and her B.A. from Harvard University. She is a recipient of several teaching awards and distinctions. Before joining IIMB, she worked as an Economist at the IMF in Washington, DC.

Her research interests concern the WTO, international trade in services, regional integration and migration. She has received research grants and has undertaken assignments for organizations such as the ILO, WHO, UNDP, UNCTAD, OECD, World Bank, ADB, and South Centre. She has served as a member of several industry and government expert committees in India and was a member of the WHO’s Expert Committee on International Health Regulations in 2015-16 and the WHO’s Expert Advisory Group, International Recruitment of Health Personnel in 2019-20. Prof. Chanda has published extensively, including books, journal articles, book chapters, and reports.