Will India board the RCEP train or not?

How India handles RCEP (Regional Comprehensive Economic Partnership) is something that is being pondered and deliberated in the high corridors of power. Since RCEP is an extended Free Trade Agreement (FTA) with 10 ASEAN countries viz. Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam and the six Asia–Pacific States viz. India, China, Japan, South Korea, Australia and New Zealand, India’s joining or not joining the RCEP will have serious impact not only on the goods and the services sector but might go on to threaten the very viability of such an agreement.

Significantly, the 10 ASEAN countries and their six FTA partners accounts for more than one third of global GDP, 30 per cent of global trade, 26 per cent of foreign direct investment (FDI) flows and 45 per cent of the total world population. If it comes into effect, it will be by far the largest economic integration agreement ever made. But with most countries, including India, considering their own benefits and losses, and several experts and key persons, particularly in India, vociferously airing their views that it would not be in India’s interest to join RCEP, it is not going to be a easy ride for such an agreement to come into effect without hectic behind-the-scene negotiations and deliberations.

Taking a clue from emerging developments, even Singapore Prime Minister Lee Hsien Loong has said he was not sure if an agreement will be finalized in 2018 itself. Speaking at a World Economic Forum meeting in Hanoi, Lee said: “(We) hope to achieve a substantial conclusion to the RCEP by the end of this year, but that is not yet assured.” This is despite the fact that in the recently concluded sixth RCEP meeting  of trade ministers from 16 countries, the ministers had confirmed their commitment to achieve a “comprehensive, high-quality and mutually beneficial economic partnership agreement.”

It is the mutual benefits that are hard to agree upon because of conflicting interests of the various countries, particularly the stronger countries like China, Japan, India and Australia, who all are seeking their individual interests.

Those supporting the RCEP agree that while coming out of these conflicting self-interests is going to be a big bargain but if somehow this is achieved, it will be a significant step towards the economic integration of the region. They argue that the RCEP is a critical element in keeping the centrality of the focus on the ASEAN countries as it seeks to coordinate the ASEAN and its dialogue partners into a common economic platform that will address issues of tariff reductions and will move towards a wide-ranging regional FTA. Moreover, the inclusion of South Korea, Australia and New Zealand increases the economic stakes in the Indo-Pacific further, giving RCEP a firm footing to create economic integration in the entire region.

As far as India is concerned, it is being argued such a trade pack will increase the already high trade imbalance of India with some RCEP nations, particularly China, and hence it would hurt our producers. The need of the hour is for India to negotiate the much-needed space to its real sectors to gain competitive edge. If this had been done while negotiating the three FTAs – with ASEAN, Japan and Korea – India would not have faced an ever-increasing trade deficit. In 2009-10 when these FTA negotiations had just ended or were in their final stages, India’s trade deficit vis-à-vis its three FTA partners was $16 billion, which in 2017-18 has risen to $81 billion.

The fact that the Indian producers have not been able to compete with their counterparts in some other countries can be gauged from the trade deficit figures for the RCEP Participating Countries (RPCs) with India, which has grown to $104 billion, up from $48 billion at the end of the previous decade. Clearly, no logical reasoning can be given for India to overlook these huge trade deficit figures and to continue supporting the trade liberalization ambitions of some RPCs, whose chief aim is to increase their presence in the large Indian market.

Apart from the increasing trade deficit, which is likely to increase further if India boards the RCEP train, the very presence of China in RCEP may tilt the balance towards China both economically and strategically, which might hamper India’s enhanced focus in the Indo-Pacific region.

Experts in Niti Aayog have in recent times realized that India needs a tariff regime that must be flexible enough to allow tariffs to be calibrated. Such flexibilities are provided by WTO’s tariff regime, which has allowed the increase in actual applied tariffs on particular products as long as they remain within their WTO bound rates – that is, the maximum tariffs that India is allowed to impose by the WTO. And since the bound tariffs are considerably higher than the applied tariffs for most products, India has faced no problems in effecting the recent tariff hikes. Such flexibilities, however, are not allowed in any of the FTAs like the RCEP.

NITI Aayog’s recent warning that joining the RCEP could be disastrous to the country as it will give a huge market access to China – the key player in the grouping – thereby increasing the trade deficiency and jeopardizing the domestic manufacturing programs in the country. China is already India’s second biggest trade partner, after the Unities, but with a difference that whereas India has a good trade surplus with the US, it has the biggest trade deficit with China – over $52 billion out of the two-way trade of $84.44 billion in 2017. India has been pressing China for many years to open its IT and pharmaceutical sectors for Indian firms to reduce the massive trade deficit by China has not obliged. If RCEP comes into effect in its current form, this trade deficit is most likely to increase considerably.

As NITI Aayog member VK Saraswat who authored a note along with two  others said: “At a time of growing protectionism and the US’ stands towards China, opening our market to China can prove to be disastrous.”

This is not the first time when experts are advising India to be extra cautious and take into account geo-strategic issues while moving ahead with the RCEP.  Former Chief Economic Adviser Arvind Subramanian and former foreign secretary S. Jaishankar too have voiced their concerns on different occasions saying in clear tone that Indian domestic situation is not ripe enough to open up to RCEP.

But question remains what would happen of our ‘Act East’ policy if we shy away from this crucial agreement involving 15 other countries who come in the ‘Act East’ domain. If India skips the train, it could be at the cost of isolating itself, which too would not be of interest to our country.