Economic hurdles and role of China mean staying out of RCEP isn't the wrong move for India... for now

For now, there are a handful of major economic concerns that preclude India from considering the RCEP... and one rather formidable geopolitical one

FP Staff November 20, 2020 12:32:36 IST
Economic hurdles and role of China mean staying out of RCEP isn't the wrong move for India... for now

The RCEP Agreement was signed by 15 countries on Sunday. India was not one of them. AFP

It was a year ago that India walked out of the Regional Comprehensive Economic Partnership (RCEP), with Prime Minister Narendra Modi stating at the time that the agreement "[did] not address satisfactorily India's outstanding issues and concerns". On Sunday, the 10 Association of Southeast Asian Nations (ASEAN) members, along with China, Japan, South Korea, New Zealand, and Australia signed what is being dubbed the world's biggest free trade agreement.

The RCEP, at present, accounts for a reported 30 percent of global GDP, but this figure could've been higher had India decided to climb aboard. In a piece written in June this year, the argument had been made that while at that point the RCEP did not make sense for India, getting back to the negotiating table. However, five months on, and as a result of factors that are more geopolitical than economic in nature, it's worth revisiting that recommendation.

Reasons for staying out

At the Deccan Dialogue on Monday, Minister of External Affairs S Jaishankar delivered an address in which he stated, "In the name of openness, we have allowed subsidised products and unfair production advantages from abroad to prevail. And all the while, this was justified by the mantra of an open and globalised economy. It was quite extraordinary that an economy as attractive as India allowed the framework to be set by others. With the passage of time, our predicament became increasingly serious. The choice was to double down on an approach whose damaging consequences were already apparent; or to have the courage to think through the problem for ourselves. We chose the latter."

Cynics would make efforts to claim that the diplomat-turned-politician is merely toeing the party line with his remarks and that these are not reflective of his actual view. They would be wrong. In fact, this has been Jaishankar's view for the longest time. In June 2017, he had reportedly commented that India should "not conclude trade agreements which are not to our medium-term advantage", adding that although "larger free trade arrangements are important for getting preferential access to the markets, it is important to be cautious about the manner in which such arrangements work out in respect of our imports as well as our efforts to increase the share of the manufacturing sector in our economy".

Back in 2012 when the RCEP was little more than an idea, the then-Indian Ambassador to China had remarked, "Market access for Indian companies [in China] is a major concern... Nowhere else is our export so dominated by commodities and raw materials." While Jaishankar was talking about China at the time, as also when he warned that India's bilateral trade deficit was "difficult to sustain or defend", he could just as well have been talking about trade with the RCEP countries, where the situation is somewhat similar.

At the Deccan Dialogue, he went on to note, "As it is, the effect of past trade agreements has been to de-industrialise some sectors. The consequences of future ones would lock us into global commitments, many of them not to our advantage. Those who argue stressing openness and efficiency do not present the full picture. This is equally a world of non-tariff barriers of subsidies and State capitalism."

For now, there are a handful of major economic concerns that preclude India from considering the RCEP. These include the unviability of giving Most Favoured Nation status to all signatories to the agreement, the rejection of India's proposed Auto Trigger Safeguard Mechanism (to protect the country from any sudden or dramatic increase in imports) and the application of a 2014 base rate of customs duty (as opposed to a fairer 2019 one). India could consider returning to the negotiating table to address these deal-breakers if it were not for one other matter.

The China factor

In June, following the 10th RCEP inter-sessional ministerial meeting, the joint statement issued by the 15 participating nations noted, "We believe that India's participation in RCEP would contribute to the advancement and prosperity of the region. We therefore wish to emphasise that the RCEP remains open for India."

Also in June, the People's Liberation Army clashed with Indian Army soldiers in the Galwan Valley in Ladakh. This was the first time in many years that so many soldiers were killed on the India-China border. And while there had been three tense standoffs between the armies of India and China in this decade alone — Doka La in 2017, Chumar in 2014 and Depsang in 2013, they simply cannot be compared to Galwan Valley and the subsequent military confrontation in the Himalayas that persists to this day.

Numerous rounds of diplomatic talks have taken place in the intervening months, however, these seem to have had a very tiny effect in terms of de-escalation. Sure, the two parties have backed away from each other by a few kilometres, but the rhetoric from both sides has rarely been quite as caustic. Notably during this time, the spokespersons in China's Ministry of Foreign Affairs have scaled new heights of belligerence and found new ways to be more vitriolic than ever.

As a result, the bilateral relationship has taken a beating and has seen India make several attempts to limit its exposure to China, ranging from banning Chinese mobile apps and imports of power equipment from the country to staying out of the RCEP. After all, two of India's most glaring concerns with this free trade agreement relate to rules of origin and regulations around investment, and more pertinently, what China could do under the existing conditions.

If a country were to circumvent rules of origin due to a tariff differential, it could exploit its lower tariffs to dump its product in India. Meanwhile, India also seeks to carve sensitive sectors out of ratchet obligations. A ratchet mechanism, for the uninitiated, is one that ensures that if an agreement is signed between two or more countries that sees tariffs and quotas reduced or removed, they can neither be brought back and nor can other restrictive measures be imposed. What this means, as CNBC-TV18 points out, is that "India would have had to mandatorily offer investment-related benefits that it gives under other FTA partners to RCEP members."

Both of these conditions would have been deleterious to India's efforts to reduce exposure to China — an effort that will apparently endure until the Himalayan military standoff finally de-escalates.

'RCEP remains open for India'

That the Indian prime minister stated a year ago in Bangkok that the 'present form' of the RCEP Agreement did not "fully reflect the basic spirit and the agreed guiding principles of RCEP" indicates that India has not completely slammed the door shut on the deal. After all, there could be a 'future form' of the RCEP that is more amenable to India and better aligned with its interests. At the same time, RCEP member States have left the door open for New Delhi to return to the fold by waiving the normal 18-month period that new members would have to wait before being granted entry.

While noting that it would have been better for India to address its concerns "within the tent [rather] than outside" it, former foreign secretary Shyam Saran told The Hindu, "Keeping the door open for India from that point of view makes eminent sense, especially for countries like Japan and Singapore. It is a positive point that the door is not closed." He went on to add, "If India is part of RCEP and you are putting production units in India, you get access to a much larger market."

These remarks are instructive when read alongside this particular statement by Jaishankar at the Deccan Dialogue: "It is far from turning our back on the world; in fact, it is to enter the global arena with cards to play, not just to provide a market for others. This is really about seriously building comprehensive national power. Our success in doing so will determine future terms of engagement and our standing with the world."

That is essentially what returning to the RCEP or any other plurilateral/multilateral FTA will all boil down to: Whether or not India is able to develop the capacity and capabilities to compete with most of its potential FTA partners. At present, this isn't the case and it seems to have informed India's decision-making when opting out of the RCEP. However, India risks being left far behind its erstwhile RCEP partners if it doesn't act swiftly to put policy, infrastructure and implementation in place to build 'comprehensive national power'.

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