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Breaking Down India’s Exit from RCEP

“In the current situation, it is not possible for India to join the RCEP Agreement.” This line said by Narendra Modi, the Prime Minister of India, brought a halt to the RCEP negotiations which had been in place since November 2012. But what exactly is the RCEP and what forced India to withdraw from the agreement after such a long period of negotiations?

What is RCEP?
The Regional Comprehensive Economic Partnership or RCEP deal was proposed at the ASEAN Summit in November 2012 with an aim to establish a trade bloc between the 10 ASEAN countries, China, Japan, South Korea, Australia, New Zealand and India. This would reduce trade barriers on goods, services, investment, intellectual property, and e-commerce. However, with Narendra Modi’s statement, the agreement now faces an unexpected hurdle. India’s exit from the deal is seen as a major blow to the agreement, given that with India on board, the deal would have had half the world’s population and a third of the global GDP under its ambit. But now that India has decided to leave, the trade bloc has lost a huge chunk of its market and lies under a looming threat of influence from China, which was earlier under check because of India’s presence.

The RCEP deal has been a topic of interest for the entire world. When you have an agreement which would result in the creation of the largest trading bloc in the world – and that too without the participation of the US, the largest economy in the world – you are bound to attract attention. However, the size and enormity of the deal is not the only factor that makes it is so crucial. The deal is also crucial to the ASEAN members, as it would play a key role in encouraging trade and boosting commerce by lowering tariffs and widening the market access.

The deal is momentous, especially for China. The benefits and riches of this deal stretch far beyond the ASEAN countries. In fact, China is expected to benefit the most if the deal does go through. It would not only help the ‘Dragon’ gain more strength in Asia but would also aid it in countering the tariffs imposed by the USA, which is one of the prime reasons why this agreement has so much support from Beijing. Although the deal was introduced by the ASEAN countries, it won’t be wrong to say that China has spearheaded the deal to what it is today. What China wanted through the RCEP was a safeguard against the Trans-Pacific Partnership, another trade agreement proposed by the US which excluded China and was going to be the largest trade bloc of its kind, until the US decided to abandon it. In recent years, RCEP has become all the more important to China as it has begun to feel the pinch of the US-China trade war. Unrestricted access to the 1.3 billion consumers, which India has to offer, would help China make up for the lost exports by dumping cheap goods in the Indian markets.

India’s concerns
Now, the question is, what went so wrong that India completely abandoned the deal? One of the serious fears which India has is that if it becomes a member of the RCEP, China would start dumping its cheap goods in the Indian market. This would make it extremely difficult for Indian businesses to compete with their Chinese counterparts. Moreover, Indian businesses are already reeling under the economic slowdown in the country. However, the problem does not end here. With RCEP in place, other countries would follow suit and would start dumping their goods into the Indian market. Australia and New Zealand, with a highly developed dairy sector, are waiting to grab the opportunity to increase their dairy exports to India. Vietnam and Indonesia have very cheap rubber to export and Sri Lanka is already creating trouble for the Indian spice market. Also, the Indian economy is dominated by the service sector, but the RCEP does not have much to offer in this regard, which in a way makes this deal unfair for India.

Another reason for India’s exit is that it feels that the local businesses would be hit hard if proper checks and safeguards are not in place to protect them. Furthermore, India has a trade deficit (i.e. excess of imports over exports) with 11 of the 15 remaining members of the RCEP deal. Its trade deficit with these countries has gone up from $54 billion in 2013-14 to $108 billion in 2018-19. If we follow the current pattern of trade, the deficit would have only increased further if India would have joined the RCEP.

We also need to consider that historically, free trade agreements haven’t worked well for India. India has had free trade agreements with Sri Lanka, Malaysia, Singapore and South Korea in the past decade. However, the utilisation of these agreements has been only 5-25% according to a report by the Niti Aayog. Pertinent examples include the India-Korea Comprehensive Economic Partnership Agreement (CEPA) and the India-Japan CEPA. Both these agreements have been largely unsuccessful from India’s point of view. The India-Korea CEPA resulted in an 8% CAGR increase in imports compared to a meagre 4% CAGR increase in exports. Similarly, the India-Japan CEPA has led to an increase in India’s trade deficit vis-a-vis Japan. Some of the issues responsible for this include faulty commitments by the participants, stricter rules of origin and the lack of awareness among Indian businesses about the FTAs. This raises questions about the benefits of free trade agreements and whether India should actually enter into another such agreement.

It’s not that the RCEP has only negative implications for India. Had India been a part of the deal, Indian consumers would have had a wider array of goods available to them at cheaper prices, improving their standard of living. Not only this, but the Indian businesses could also get access to international markets. But given the current terms of the agreement, the negatives far outweigh the positives. India would certainly not want to enter into an agreement in such a scenario.

The stance of other Stakeholders
Not all of the 15 proposed members have a similar stance when it comes to India exiting the deal. Where on one hand Malaysia wants to expedite the process, other key Asian countries like Japan feel that India’s participation is necessary to balance the deal against China’s dominance. Experts feel that an RCEP without India will have a minuscule positive impact on China. A study by Queensland researcher Renuka Mahadevan and the Indonesia finance ministry’s Anda Nugruho estimate that China would see a meagre 0.08% rise in GDP as a result of being in an India-less RCEP by 2030. To summarize, India’s exclusion translates to the loss of most of the benefits which countries like China, Malaysia, Vietnam, South Korea were planning to reap through this deal, making India’s participation pivotal for its success.

What lies ahead?
What India wants with RCEP is a mutually beneficial agreement, in which all the participant countries have something to gain. But the current agreement, as it stands, leans more towards making India a dumping ground for imports from other countries, rather than making it an export powerhouse. Yet, the Commerce and Industry Minister Piyush Goyal says that India is open to the deal if their key demands, including increased protection against Chinese imports and an auto-trigger mechanism which would increase tariffs as soon as the imports of a particular commodity exceed a set threshold, are met. Moreover, he feels that trade concessions should be extended to services as well, which are India’s stronghold, for the deal to be actually fair. Whether the other countries would give in to India’s demands, so that it participates in the deal, remains to be seen.

By Himanshu Chhabra and Ishaan Mittal, 1st year undergraduate students, SRCC.
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