This article has been written by Himani Singh.
RCEP is an agreement which was brought in light and discussed among the ASEAN countries back in 2012 and now, in 2019, it is making headlines in the newspaper all around the world. RCEP is an agreement between the 10 members ASEAN countries plus India, China, Japan, South Korea, Australia, the agenda of this agreement is to form the largest group of countries which has the alliance for the free trade without any limitation, the markets of the member countries will be absolutely open to everyone in the pact of RCEP. This agreement was a lot in debate in Indian states in past as well as it is currently going on in the present too. The main question raised and debate going on all around is whether the decision made by Narendra Modi in the Bangkok meeting to walk out of RCEP was right getting applause or should be condemned? In the quest of the answer? Here in this article we will discuss from our collected points whether RCEP is a boon or ban to India in its current situation.
What is RCEP?
Let’s start with discussing what RCEP is and how and why the agreement came into existence, so as to get the core understanding of the whole agreement we need to know the beginning of this agreement with its main objective in mind.
RCEP stand for Regional Comprehensive Economic Partnership. As the spelling of word’s acronym RCEP suggestes that same is the objective of the agreement. It talks about the association of countries which would help to build each other’s economy by opening up trade between the region’s biggest and fastest-growing economies.
Inception of the Agreement- RCEP
RCEP was launched in November 2012 in Phnom Penh, Cambodia as an initiative by ASEAN to encourage trade among its member states and six other countries.
All the six other member countries Australia, China, India, Japan, New Zealand and South Korea already have standalone free trade agreements with ASEAN. Coming together under RCEP would boost commerce across the group by lowering tariffs, standardizing customs rules and procedures, and widening market access especially among countries that don’t have existing trade deals. All 16 countries started negotiating RCEP in 2013, when talks for another major trade pact -the Trans-Pacific Partnership or TPP were underway. Given China’s absence in the then U.S. led TPP, which was slated to be the world’s largest trade deal, many observers considered RCEP a way for Beijing to counter American influence in the region.
In 2017, however, U.S. President Donald Trump pulled his country out of the TPP and slapped punitive tariffs on several U.S. trading partners for what he said were unfair trade practices.
In particular, the U.S.-China trade war has hurt many Asian exporters by reducing demand for their goods and slowing down growth. The urgency to conclude RCEP increased after all that.
Main Agenda of RCEP
The objectives which has been derived by the experts of trade, for the commencement of the RCEP was to make the trading flexible among the 16 countries who are supposed to be a member of RCEP but the main reason for which RCEP has been brought in force is to rejuvenate the China’s economy. After trade war and the slowdown of China’s economy, it was its strategy to expand its market for export and recover from the loss of the trade war with U.S. ( who joined TPP to expand its export but later opt out of it and levy the heavy tariffs on the countries who was partner with it)
Analysing the bilateral trade of goods, services and FDI flow
Eight RCEP countries have been considered for the study of trade imbalances with India and the competitive advantage of Indian exports in these destination countries. The decision on the selection of these countries is based on their historical trade ties and volumes of trade with India
- India-non asean trade relationships and RCEPs effect
It was the 4th largest export market for India (3.4% of Indian exports) and the largest import market for India accounting for 17% of the Indian imports in 2016. The overall bilateral trade stood at $69.4 billion with India having a trade balance of -$51.6 billion. The same is being worried to get worse once India enters RCEP.
China, again, is heavily dependent on imports from Asia which stood at $673 billion (out of total $1.2 trillion) in 2015. South Korea and Japan, collectively, account for 37% of these trades, heavily dominated in the machinery and metals. India, here, accounts for a minuscule 1.8%.
It was the 79th largest export market
for Indian goods with exports of $308.7 million. With the country, India maintained a negative trade balance of $200.1 m. The reason for the small amount of trade can be attributed to the competition which Indian goods face with their Chinese competitors. The Chinese goods have an advantage as China has already entered into a free trade agreement with New Zealand since 2008.
To make Indian goods more competitive in New Zealand market, an FTA with the country can be New Zealand is heavily dependent on imports from its Asian neighbours and Australia, which stood at $23.2 billion (out of total $35.7 billion) in 2015. China and Australia account for 30% and 19% of these trades respectively. China sends its machinery while Australia supplies food products and chemicals as a part of this trade regime. India is yet to make a presence here and accounts for only a minuscule 1.8%.
India- Asean members relationship and RCEP effect.
As on 2016, Thailand was the 25th largest export market for India with exports of $3.0 bn. Despite signing the free trade agreement with the ASEAN in 2009, the trade imbalance with the country has widened in the subsequent years. As on 2016, India had a trade imbalance of $2.4 bn.
imports from Asia stood at $64.5 billion (out of total $83.6 billion) in 2015. China and Japan account for 27% and 13% of these trades respectively; heavily dominating in the electric machinery. India falls behind here as well and accounts for a minuscule 2.1%
Results of the analysis suggests-
The analysis for the above countries suggests that India does not have significant import partnerships within RCEP despite having bilateral FTAs and hence, getting into RCEP might help it to broaden the same. However, the categories for expansion are limited given heavy competition from Chinese products. On the contrary, imports into India might increase many folds resulting in worsening of trade deficits. There is no denying the fact that India stands to lose on merchandise trade; it can only restrict it by carefully expanding exports and protecting domestic production from imports. Some of the key commodities in this list should include agricultural products, metals and minerals, and pearls and gemstones.
Reason why India walked out of RCEP
The decision of India to walk out of the RCEP was absolutely apt for situation where India is standing today. Above we have analysed certain boon and bans associated with this agreement and based on the above analysed facts one could argue that RCEP is a agreement by China in answer of TPP to USA ( which USA is not part of now) and beyond that in current economic situation it was not beneficial for India to sign a free trade agreements with huge economy like China. Not only the reason was that India was going to be in pact with big economies of the world but India was not in any way getting benefited out of this agreement. Every country becoming a part of RCEP had their eyes stake on India because India is a big market for all the countries to increase their exports and get a chance to boon their economic growth but was the situation same for India as well? So answer to this is big no.
Factors affecting the decision to walk out are-
- The PM concluded by stating that he cannot put Indian farmers’ and workers interests at stake by signing the trade deal to gain larger market access
- Non-favourable Trade Balance
Though trade has grown after Free Trade Agreement with South Korea, ASEAN countries and Japan, imports have grown faster than exports from India. According to a published paper by NITI Aayog, India has a bilateral trade deficit with majorly all of the member countries of RCEP.
- Dumping of Chinese Goods
India has already a member of FTAs with all the members of RCEP except China. This is the most important concern for India, as post becoming member of RCEP, cheaper products from China would have flooded the Indian market.
- Non-acceptance of Auto-trigger Mechanism
In order to deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism.
Auto-trigger Mechanism would have allowed India to raise tariffs on products in instances where imports cross a certain threshold. However, other countries in the RCEP were against this proposal.
- Protection of Domestic Industry
India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products like dairy, steel etc.
For instance, the dairy industry was expected to face stiff competition from Australia and New Zealand.
Currently, India’s average bound tariff for dairy products is on average 35%. The RCEP binds countries to reduce that current level of tariffs to zero within the next 15 years.
- Non-Consensus on Rules of Origin
India was concerned about a “possible circumvention” of rules of origin. Rules of origin are the criteria used to determine the national source of a product. Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs.
Implications of India’s withdrawal from RCEP
India’s decision to not sign RCEP will benefit the Indian small businesses, farmers,MSMEs, pharmaceutical, data security, chemical industries & steel industries.
India had major concerns about getting overtly flooded by imports mentioned under the agreement, which will leave the small Indian businesses and farmers at risk. As per the Commerce and industry minister Piyush Goyal, the decision of not signing the RCEP agreement will give a boost to the ‘Make in India’ initiative.
RCEP and Prophecies
India stepping out of the RCEP was no brainer and was expected. The major aim of the RCEP was meant to be China’s answer (political and economical) to the Trans-Pacific Partnership (TPP), which the USA is now no more part of. However, India does not share Chinese political estrangement with US, which is reflected in the ongoing US-China trade war. It is believed and argued that once the trade war between two gaint economies will come to an end (which may be sooner than expected), China could lose interest in RCEP. At the same time, India has had political differences with China in the sub-continent and also on issues in the South China seas. Hence, there is no strategic objective for India being part of the RCEP at this point. For the RCEP countries minus India, the standard trade pattern has been exports of intermediates/inputs to China, which are then assembled for export of final product to the markets of the EU and USA. This trade is large and will continue, so that RCEP minus India merely restates the current trade pattern in these countries.
After the dept analysis of the whole agreement, considering the advantages and disadvantages in the picture I have come to the conclusion that looking at the current scenario of India, at this moment where India is having a huge trade deficit with country like China,which could lead to adverse effects on the Indian economy by jeopardizing its domestic industry, interest of farmers and MSMEs. It was the better decision of India not to join the agreement now and wait for a while to focus on the growth of Indian Industries and the policy of Make In India to expand the growth of Indian products in the market.
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