After seven long years of negotiations, India has decided not to join the Regional Comprehensive Economic Partnership (RCEP). The final statement after the RCEP summit in Bangkok has left the matter somewhat open. It says that all RCEP countries will work towards resolving the significant outstanding issues that India has with the agreement. But Prime Minister Narendra Modi’s statement leaves no room for rethinking or further negotiation.
Two key reasons have been cited for India’s decision. One, the current international context has been seen as unhelpful. The China-US trade war and the challenges of the multilateral trading system brought added pressure for quickly concluding the RCEP negotiations. This shifted the focus somewhat from crafting an agreement that worked for all. Second, the RCEP final package was seen as lacking balance and fairness. India, it appears, was not able to get several of its key concerns addressed. These, reportedly, are related to possible surge in imports, particularly from China, addressing non-tariff barriers, protection to certain sectors in agriculture, dealing with possible circumvention of the rules of origin, and securing better access in the services sectors.
What has not been mentioned but may also have contributed to the decision was the economic slowdown and a sombre mood within the country that inter alia has seen exports stagnating. There has also been opposition to the RCEP in recent weeks from several quarters in the country. Politically, while the RCEP received no mention in the election manifestos of the 2019 elections, they have risen to a fever pitch in the last few weeks.
This writer had argued for India to join the RCEP but for negotiating hard to get a favourable outcome. An opportunity of this nature comes rarely. This writer had also proposed in a detailed RCEP study he led for the CII that India should try and get a more backloaded agreement for tariff commitments so that it gained space of a few years — by 2025. This would have enabled India to become competitive. After all no RCEP member runs as high a trade deficit with most members of the grouping.
Explained: Why India has said no to RCEP
The CII study had also outlined elements of a time-bound action plan till 2025 — and beyond. India should have had such an action plan in place to be RCEP ready. Such an action plan would have had a higher rate of success if there was external pressure — for example from the RCEP — to reform within a fixed timeframe.
Twenty years ago India gave up its quantitative restrictions on imports after we lost a case in WTO. There were fears that the country will be flooded with imports. At the commerce ministry, a “war room” was set up in the Commerce Ministry to monitor imports. Import surges were contained. Liberalisation helped in industry restructuring. A reform of our export incentive schemes is now underway after losing another WTO dispute. Mobilising public and political support for difficult reforms is never easy. Sooner or later we have to fall in line with international practices and not get isolated.
It does appear that India negotiated hard in the RCEP meet. Other countries were, in the end, unwilling to be accommodative of India’s concerns. A more flexible stand by them would have enabled India to grow rapidly and the country could have been a larger market for all members of the grouping to benefit from. We have, therefore, decided to disembark from the RCEP bus.
India was no doubt economically, from the beginning, an outlier of sorts in the RCEP since all other countries (barring Cambodia, Laos and Myanmar which, in any case, are least developed countries and would have got a soft treatment) are members of the APEC and are participants in its various initiatives. In particular, the trade and investment facilitation action plans of the APEC have seen transformational results. Peer pressure among others significantly helped these economies in reducing transaction costs and improving their position on indices such as logistics or in ease of doing business. Even their negotiators are far more familiar with each other’s policies and practices. The APEC annually holds over 300 technical meetings that have helped changing mindsets. For this very reason, a closer association such as through the RCEP could have been of help to India in playing catch up with countries which are members of the group. It could have also promoted formation of supply chains and facilitated participation in mutual recognition agreements.
One hopes that India’s decision to not join the RCEP will not detract the country from mounting a focussed effort in enhancing its competitiveness and expanding its export base. India’s burgeoning imports demand no less.
It will also be essential to regulate imports in conformity with domestic and international standards, an aspect that has received inadequate attention. Not being part of the RCEP does not mean we will not get targeted by exports from the group’s members which are now likely to attract more investments. Vigilant monitoring will be required to avoid circumvention.
The WTO has now become unreliable for securing and enhancing the country’s market access. We therefore need to explore other means for this purpose. Bringing the ongoing trade negotiations with the US, our largest export destination, to a successful conclusion should be a priority.
On free trade agreements (FTAs), we have focussed far more on the East. We do not have a single FTA with countries in the West. Based on the RCEP negotiation experience, a realistic yet meaningful FTA strategy needs to be formulated for the next five years. Further, getting more from the existing FTAs is critical; for this, the ongoing reviews need to be fully utilised. Mobilising stakeholder support for signing more FTAs will be difficult if we cannot get the existing FTAs to work for us better.
Joining the RCEP would have given more substance to our Act East policy. The economic pillar of this policy has remained weak compared to those pertaining to political ties, strategic and security aspects and people to people relations. Opting out of the RCEP implies there is need for greater exertion now on strengthening connectivity, trade and investment bilaterally. Concepts like Indo-Pacific will otherwise lose traction for us.
This article first appeared in the print edition on November 6, 2019 under the title ‘Getting off the RCEP bus’. The writer, a former Indian ambassador to Myanmar, is currently vice chairman, Research and Information System for Developing Countries