For six long years, India participated in negotiations to join the Regional Comprehensive Economic Pact (RCEP), seeking the reap the benefits of joining the world’s largest regional trade agreement. But in November 2019, New Delhi announced its decision to withdraw from the China-backed deal that at the time comprised of 16 countries, including the ten ASEAN members and Australia, China, Korea, Japan, New Zealand, and India. Unable to resolve its “fundamental issues” with the nature of the deal, India sought to prevent its markets from being inundated with cheap Chinese goods to safeguard the interests of its domestic industries, like agriculture and dairy, and to empower the country’s services sector. Although India’s concerns are valid, the RCEP covers a broad spectrum of issues, such as the trade of goods and services, investment, competition, intellectual property rights, and other areas of economic and technical cooperation. Moreover, it collectively accounts for two billion of the world population, a third of the global gross domestic product, 27.4% of the world’s goods, and 23% of services trade. After the deal was finally signed at the end of November by 15 countries, it must be asked whether India lost out by isolating itself from the region and the RCEP?
India’s fears about free trade agreements (FTAs) are not unfounded, as the country’s past experiences with them have been discouraging. A report by NITI Aayog called “India’s FTAs and Its Costs” shows that India holds trade deficits even with countries whom it has FTAs. These FTAs remain underutilised due to low margins of preference, delays and administrative costs associated with rules of origin, and numerous non-tariff measures, among other reasons. For example, despite having FTAs with the ASEAN, Japan, and South Korea, India’s export share in these countries has declined from 51% to 46% over the last decade; in fact, its current trade deficit with the ASEAN and five other countries in the RCEP stands at over $100 billion.
Further, domestic resistance to the RCEP remains high, given that the deal proposes that 92% of India’s goods should be tariff-free over the next 15 years. However, while this reduction in tariffs on Indian exports is beneficial, several domestic producers view reducing tariffs on imports coming into India as harmful to their interests. In fact, most signatories to the RCEP wanted India to reduce tariffs on up to 90% of traded goods. However, even without entering RCEP, India’s trade deficit with China stands at $53 billion, which accounts for half of India’s total trade deficit. This has left manufacturers worried that without sufficient trade protections, the market could be flooded with cheaper Chinese goods.
Resistance from India’s dairy sector has been especially high, because, even though India is currently self-sufficient in this industry, New Zealand’s entry in the market may “prove to be suicidal”. According to the Indian Express, New Zealand in 2018 exported 93.4% of its milk powder, 94.5% of its butter, and 83.6% of its cheese production. Not only does India fear competition from these exports, but it also fears losing up to 50 million jobs in rural India if its dairy farmers are forced to compete with their Kiwi counterparts. Similar concerns have been raised by the agriculture, steel, automobiles and textiles industries.
However, it is clear that despite the Indian government’s outwardly protectionist stance, policymakers remain wary of the potential benefits the country is forgoing by not signing on to the deal. For example, Commerce Minister Piyush Goyal has previously defended the RCEP, saying that “national interest cannot be hijacked by one or two sectors” and must be “seen in the overall context”, because if all sectors had to be considered then “no negotiation can ever be complete”. He further added that India must “keep in mind the opportunity to increase business activities of new technology, new foreign investment and opening up of the services sector, new market access to Indian exporters. Otherwise, Indian exporters will be at a disadvantage.”
Similarly, economists and policy analysts have argued that India would in fact benefit by joining the RCEP and that India’s previously scarring experiences with FTAs have more to do with India’s lack of manufacturing competitiveness than the nature of the deals themselves. In fact, despite suggestions otherwise, according to the Economic Survey 2019-20, India has by and large benefitted from its FTAs from the perspective of the balance of trade. The report states, “The overall impact on India’s exports to the partners, with which the agreements have been signed, is 13.4% for manufactured products and 10.9% for total merchandise. The overall impact on imports is found to be lower at 12.7% for manufactured products and 8.6% for total merchandise.” The only countries with whom the imports exceeded exports were Japan, South Korea, and Sri Lanka. Therefore, using anecdotal examples to argue that FTAs are harmful to India’s economy ignores that such deals have the potential to boost production and exports.
Yet, the manufacturing sector’s share of the economy has stagnated at around 16-17%. While India’s fears of Chinese goods are valid, bowing out of lucrative trade deals does not negate China’s pre-eminence in global trade and supply chains; China’s primacy exists independent of FTAs as it is the largest trading partner for many countries, including India, and thus cannot be dislodged or undercut simply by withdrawing from deals like the RCEP.
The RCEP would help push India’s “Act East Policy” through better access to vast regional markets and greater economic integration with countries across the Indo-Pacific region. Additionally, being a signatory party would give India the chance to amend the agreement in the future, especially in new areas of trade like e-commerce, which is becoming increasingly important to Indian interests. Furthermore, the Joe Biden administration has indicated that it may re-join the revive the Trans-Pacific Partnership (TPP), which would leave India even further isolated in a scenario where regional agreements dominate global trade.
The RCEP reduces or eliminates tariffs over time on a range of multiple goods and services, establishes rules on investment and competition, and ensures intellectual property protection. This uniformity of rules increases the ease of doing business and will ultimately invite greater foreign investment and provide Indian firms with the opportunity to participate in global value chains and generate greater employment, which are all key features of PM Narendra Modi’s ‘Invest in India’ initiative.
Joining the RCEP would complement India’s existing free trade agreements with ASEAN, Japan, and South Korea, while also addressing implementation complications resulting from overlapping agreements. A 2014 study found that overlapping memberships in Regional Trae Agreements (RTAs) involving developing countries have had a negative effect on intra-RTA trade levels. Amidst seemingly perpetually stalled FTA negotiations with the United States (US) and the European Union (EU) that were supposed to provide a counter-balance to RCEP, India must reconsider its decision to bolster engagements with its ready and willing Indo-Pacific neighbours.
To begin with, India requires a well-thought-out industrial policy to address key concerns of the manufacturing sector that deter industrial competitiveness. While schemes like the Production Linked Incentive (PLI), which promote incentive-based manufacturing, are steps in the right direction and come at a strategic time when multinational companies are looking to establish manufacturing bases outside of China, India still lags behind in offering lucrative tax and rent benefits, painting an unfavourable image of the country’s business and bureaucratic environment.
Further, efforts should be made to raise domestic competitiveness by addressing issues related to logistics, power, labour market productivity, and R&D. One way that the Indian government has been trying to build its domestic industry’s capacity is through the phased manufacturing program. Under this initiative, it aims to move electronics manufacturing from semi-knocked down (SKD) to completely knocked down (CKD) kits by importing more components rather than semi-assembled parts, which in turn increases jobs. However, Although schemes like the PLI and phased manufacturing are helpful for India’s immediate needs but cannot be a long-term alternative to second-generational structural reforms.
To do this, India must leverage and exploit its unique strengths, such as its 2,234 ports, which handled nearly 1.3 billion metric tons of cargo in 2019. Despite these monumental figures, dredging issues have left India’s invaluable ports severely underutilized. At the same time, it must also seek to reduce the logistical costs of doing business in the country, such as dispute resolution times, which are much longer than in competing countries.
Efforts to boost domestic production and competitiveness and increase the foreign investment will ultimately lead to an invaluable link between the government’s ‘Make in India’, ‘Invest in India’, and ‘Aatmanirbhar Bharat’ initiatives and yield untold economic benefits. Commerce Minister Piyush Goyal, for his part, believes that it is possible to “balance” industries that “could be at an unfair advantage to Chinese companies” and ensure that any agreement made “will be good for India in the balance of convenience”. According to the Financial Express, private sector dairies would undoubtedly benefit from the RCEP, particularly in “differentiated products” like cheese because private entities have built their processing capabilities much faster than cooperatives. However, the point still stands that protecting smaller dairies will continue to remain a balance that perhaps cannot be struck if India joins the RCEP, forcing New Delhi to consider whether it is willing to somewhat sacrifice the livelihoods or at least minimise the earnings of those farmers to strike a trade deal and how it will compensate them for that loss.
Luckily for India, RCEP has kept its doors open, giving India time to address structural and logistical deficiencies that have prevented it from maximising its productive capacity, reduced the ease of doing business, and impeded the competitive strength of its domestic industries. Once these internal constraints are remedied, India should strongly consider removing protectionist barriers and joining the RCEP in order to maximise its economic growth potential.
Did India Make a Mistake By Not Signing the RCEP?
Even officials within the government have expressed misgivings about India’s decision to not enter the RCEP trade deal, drawing concerns about the true cost of protecting domestic industries.
February 8, 2021
SOURCE: HIROKO OSHIMA