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Rethink Or Rewind

The Regional Comprehensive Economic Partnership, a massive free trade deal covering half the world’s population and 40% of the global economy, sounds too good to miss. It is arguably one of the most significant economic pacts of our times. However, even after spending around 7-8 years trying to polish a deal that could possibly change global trade patterns, Prime Minister Modi announced India’s decision to opt-out, at least for the time being. It was also unusual in the context of Indian polity that all opposition leaders and the government were on the same page. The act of stepping away was hailed by everyone. As India is once again invited to be a part of this influential trading bloc which comprises 29% of the world’s GDP, perhaps it’s time to analyse India’s game plan.

Here, it becomes important to distinguish between a rethink and a rewind. Both of these would involve some change in the status quo, however, the means and extent vary. A rethink would implicitly imply that India’s current decision was flawed and that it should have accepted the deal on the table. Contrary to this, a rewind would acknowledge the fact that the offer had strong problems which India just couldn’t have accepted lying down. The only thing that we would want to change, going back into the past, is to negotiate differently and not end up where we are right now.

However, knowing that we couldn’t have had a rendezvous, we arrived at a crossroad. India chose to play on the offensive instead. The principle behind RCEP is surely beneficial to us, precisely why we’ve had a critical role in talks. But, we need to get a deal on terms that are fair to us and not with a skewed cost-benefit analysis. Even the joint statement issued at the end of the summit recognised that this wasn’t the end of the road for India’s tryst with RCEP and that there would be further attempts to dot the i’s and cross the t’s, subject to the resolution of our concerns.

RCEP is representative of the larger scheme of things going on in India’s international affairs. September 2014, October 2018, June 2019 for G20, December 2019 (cancelled due to protests) mark some direct meetings and summits held between the heads of states of India and Japan. All of this homework in building direct and strong friendships and relations did pay off. When India backed out of RCEP on 4th November 2019, by the month-end, top Japanese negotiators were saying that Japan wasn’t keen to join RCEP without India. This support strengthens the force behind India’s demands. Even Australia and New Zealand have backed India up in this regard.

Having considered these backdoor efforts, we feel that it is a power move by India. By opting out, India seeks to assert two things. Firstly, it highlights the weight of what India brings to the RCEP table. With 1.3 billion people, the market that it offers to others deserves recognition in terms of bargaining power. Secondly, it is important for India to show that it would not remain a passive bystander to negotiations but one that aspires to sit at the head of the table.

Even former NITI Aayog Vice-Chairman Arvind Panagariya said, “I have always maintained that India should bargain hard in RCEP negotiations though with the intention to eventually join it. India’s current stance is consistent with this prescription.” The rationale of scope for further negotiations resulting in a more appropriate deal is reflected in his logic, as he further said, “There is room on the Indian side to give up on some of its current demands, but there is also room for India to win concessions on other demands. Statements by other 15 RCEP countries on India’s position have been conciliatory and neither side has closed the door on further negotiations.”

Analyzing the major points of contention, we find certain main issues. Firstly, India was looking for specific rules of origin to ensure the trade pact wasn’t abused by non-partner countries. This is very significant because of the scenario of globalization that we live in. For instance, India signs the RCEP offering free trade with Vietnam. However, Vietnam can have a free trade agreement with Ukraine. This creates a loophole of exploitation by Ukraine which can establish firms in Vietnam, retain controlling stake and push Ukrainian products into Vietnam, even if they perform some manufacturing processes locally. If the goods were finished and packed in a warehouse in Hanoi, that’s all that matters. Vietnam here has no reason to prevent this, it gets a boost to local production, employment and exports.

There was also a demand for an auto-trigger mechanism to protect a country from a surge in imports. Given that India has over $100 billion in total trade deficit with 11 RCEP members and it faces fiscal deficit as well, this is a need rather than a want for India. This should have been worked out as either side can play around with the definition of ‘surge’. The quantitative limit here forms the bargaining chip in talks. Seeing possible resolution, this is another reason for India to have taken an offensive stance.

Other areas which couldn’t be satisfactorily resolved were e-commerce and the services sector. In the past few decades, there has been a structural shift in the relative role played by the three sectors in the economy. The tertiary or service sector has rapidly expanded in its importance for India. We also have a large number of people who are self-employed and running small shops or industries. A lot of these also tend to offer services rather than the production of goods. Alienating their interests would’ve justifiably spelt doom on the domestic front.

India had also proposed a non-uniform system of tariff concessions. There would be a different level of concession given to China to allow India to protect its small and medium industries against the stiff competition of cheaper imports made using China’s advanced mass production techniques. Although this may sound unjust, it is important to note that pre-RCEP conditions of international relations are nowhere uniform. In light of that, it is tough to have a ‘one size fits all’ approach. Even if we were to consider going soft in this demand, other alternatives for fighting this fear would invariably have to be provided.

Another issue is the competitiveness of Indian products. If our products were competitive in price and quality, then there would have been no issues. People often point out that this is a protectionist stance and an acceptance of weakness in a sense. However, we need to operate in reality; if we aren’t that competitive, we can’t take decisions assuming otherwise. We need to work upon this but we can’t ignore this.

The China factor is very strong in the role it played in India’s decision making. Its power has been continuously growing at a global level. Although this is fine as a balance to counter US’s hegemonic supremacy, it also hinders the power India has in Asia and Oceania. We find Chinese goods being dumped here despite high tariffs on them. In that case, it is unwise to assume that that would change with RCEP. Although every Free Trade Agreement generally does and should have a safety valve in place, this does not nullify the logic of starting with a better agreement in the first place.

Having analyzed why India’s reasons for opting out were justified, we’ll consider the proposed cons of doing so. The natural argument is about losing out on access to much freer trade. However, India has bilateral trade agreements in place already with Malaysia, Singapore, South Korea, Japan and Thailand. It also has a Free Trade Agreement with ASEAN as a whole. This limits the losses India would face by not being a member of RCEP.

Beyond trade, another concern is losing out on markets. Statistically, India’s cross-country trade growth rate has been unrelated to the existence of trade deals. India has non-preferential trade with all NAFTA members; however, it does have agreements in place with members of NEA and ASEAN. Yet, this has little correlation to the bilateral volumes.

Here, we recall a lesson from the theory of comparative advantage. Trade can make everyone better off, but here ‘everyone’ refers to countries, not individuals. There would usually be some parts losing out and some gaining, just that the gains tend to outweigh the losses. The interest of local traders, micro and small industries, shopkeepers, etc have to be kept in mind. Otherwise, coupled with their fight against large e-commerce players, it would have been a double whammy to the Indian entrepreneurial spirit.

All in all, India should not rethink its decision but rather take it ahead to its rightful conclusion. If we can ensure that this strategy of hardball reaps dividends, India as a whole wins. We all win.

By Parth Chowdhary and Pratham Kalra
2nd Year Undergraduate Students
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