India markets closed

India’s RCEP dilemma: To be in, or not to be in

RCEP, FTA, RCEP members, US-China trade, FDI, trade policy reform, non tariff measures, foreign investment, RCEP economies

By Rajeev Kher & Harsha Vardhan Singh

India has decided not to join the Regional Comprehensive Economic Partnership (RCEP) till its key concerns are addressed. These include establishing a special safeguard mechanism to quickly address surge in imports from China (and dairy products from Australia and New Zealand), agreeing on rules of origin (minimal operations within a country) that prevent easy circumvention of the conditions agreed in RCEP, reducing tariffs from 2019 and not 2014 levels (since 2014, India has raised tariffs on several items), increasing India's access to certain services sectors in other markets, and establishing credible mechanism to address non-tariff measures.

India is, in effect, saying, that it would be part of the RCEP if its concerns are addressed. A decision to opt out of RCEP would mean that India does not wish to be an active part of the Asian regional value chains (the most dynamic global value chain system), is willing to reduce the value of India's existing FTAs-much less deeper than the RCEP-thus, reducing its export opportunities, not to focus on an important policy option for improving competitiveness (i.e., trade policy reform which must complement improving cost and timeliness of transactions and policy response), and not benefit from a framework of disciplines and collaborative solutions that would apply to China, among others. The strategic implications of these aspects add to the overall consideration of issues.

RCEP members give importance to India's membership, and they have created a number of India-specific provisions. However, they will assess the value of India being part of the agreement, and the conditions under which that participation takes place. Thus, if RCEP members substantively engage with addressing these concerns, it will happen within a negotiating context. This implies that the process will involve a give-and-take for reaching an agreed conclusion. In this regard, India's major concerns need to be understood and evaluated carefully.

A special safeguard for imports from China is particularly important. In 2018-19, India's trade deficit with China was $53.56 billion, or about 3.2 times India's merchandise exports to China. The ratio of India's merchandise imports from China to its exports to China was about 4.2, close to the corresponding ratio for the US-China trade (about 4.5). India's political and economic concern is, thus, obvious. Special safeguard mechanisms have been part of negotiations at both the multilateral and FTA level.

Regarding rules of origin, experience suggests that as trading conditions change with FTAs, investments and locations shift providing options for benefiting from opportunities through regular trade-related business decisions, or by circumventing the FTA disciplines by gaming the system. Global trade policy disciplines and negotiations have long expressed concern regarding circumvention of agreed rules and disciplines. This is incorporated in practical policy steps taken by some countries, like the US and EU.

The above two areas would appear to be strong "asks" of India, with little leeway for adjustment. Creative approaches to meet this demand would be required. All issues could involve a possibility of adjustments linked to India also agreeing to some demand from other RCEP members. Significantly, addressing non-tariff measures (NTMs) through agreed equivalence, protocols, and other similar mechanisms to improve meaningful market access should be a common concern. There should be a basis to develop collaborative mechanisms, for instance, along the lines of CPTPP, which includes seven members of the RCEP.

RCEP creates extensive goods liberalisation, with long transition for implementing tariff falls. It aims to enhance global value chain (GVC) complementarities. A focus on larger services trade liberalisation (an Indian concern) would create greater possibilities for more extensive GVC participation among RCEP countries. Likewise, addressing India's concerns on non-tariff measures would enable countries to develop more cost-effective GVCs.

India, too, needs to keep an overall perspective of its membership of RCEP in the negotiations on its specific concerns. Achieving a high growth rate requires creating additional growth opportunities through higher competitiveness and international trade, linking up with GVCs, reducing the time and costs of business transactions, improving technological capabilities, and creating a vibrant investment environment for domestic and foreign investment that consider overall opportunities combining domestic, and international markets. RCEP is an important framework for progressing on these objectives.

India is a large economy (7th largest in 2018) with a relatively low global rank as merchandise exporter (19th largest in 2018). In contrast, most leading trade economies have the opposite situation or a smaller gap between these two rankings. RCEP economies among the top-30 global merchandise exporters are China (top merchandise exporter in the world), Japan (4th largest), South Korea (6th), Singapore (15th), Australia (23rd), Thailand (24th), Malaysia (25th), Vietnam (26th), and Indonesia (30th). These countries will further improve their trade and investment opportunities through a deep trade agreement like RCEP.

These economies as well as India have several free trade agreements (FTAs), many of them with common partner countries. An important difference is that a number of their FTAs are deeper in terms of liberalisation of tariffs, trade facilitation, and co-operation than those of India. Further, they have FTAs with larger trade coverage, such as CPTPP, and agreements with the EU or the US. Thus, they create greater trade diversion towards the RCEP partner countries in comparison to India's FTAs. Membership of RCEP would significantly change this situation.

India's share in global merchandise exports has been about 1.7% since 2011-12, having increased from 0.7% in 2000-01. India's overall GVC participation ranking (out of 58 economies) improved from 56 in 2000 to 45 in 2009. The global rank is still very low, and major improvement depends on larger market opportunities abroad. Thus, while imports from China might be a specific concern, external opportunities will have to come through higher market opportunities, through FTAs such as RCEP.

For India, participation in RCEP, together with its own policy improvements to reduce costs and time taken for international trade transactions, would help improve linking up with GVCs; effective trade infrastructure and systems; technology upgradation; and enhanced FDI. Some of the issues raised by India would help make RCEP an even more effective and meaningful opportunity for creating additional RCEP-specific value chains than provided at present by this agreement with strong economic, regional and geo-political linkages.

Kher is former Commerce Secretary, India & Singh is former Deputy Director General, WTO. Views are personal