After months of uncertainty, India has chosen to hold back from joining the Regional Comprehensive Economic Partnership (RCEP) trade agreement, turning its back on one of the most dynamic regions in the world. Certain segments which lobbied against the deal might be relieved at the outcome, but the loss to the economy far exceeds the short-term perceived benefits of staying out of the pact. While the political rhetoric continues to centre around free trade, the government’s action signals a distinct shift towards a protectionist stance.
Much of the domestic opposition to joining the RCEP is rooted in the fear that the influx of cheap Chinese products, non-tariff barriers which tend to restrict market access, and cheaper dairy products from New Zealand would worsen the already ballooning trade deficit and dent the domestic industry. To be fair, these are legitimate concerns. There are reasonable arguments to be made that certain sectors, agriculture in particular, would need safeguards. Though the details of these negotiations are not yet known, the Indian side should have made greater effort to convince other countries for carve-outs for certain sectors, and for allowing a gradual phasing out of tariffs to ease domestic fears. New Delhi should have used this as an opportunity to push through contentious but necessary reforms that would boost competitiveness. But, by deciding not to join, it has succumbed to the protectionist impulses that have guided much of its recent trade moves. While it is possible that the deeper than expected slowdown in the economy may have tilted the balance in favour of not joining, a certain policy incoherence marks this government’s approach. On the one hand, it wants India to become a manufacturing hub. Yet, staying out of the RCEP reduces opportunities for trading with these countries, which together account for roughly a third of global trade. Manufacturing today requires greater integration with global supply chains. Signing the agreement would have signalled an embrace of freer trade, which could have aided in the shift of companies out of China to India. But the move has complicated India’s course to integrate into global value chains. With this, India has also ceded space to China to have greater say in the region.
Ultimately, it was a political call. In the presence of stiff opposition, Prime Minister Narendra Modi should have marshalled his formidable political capital amassed by winning two consecutive elections, and with enhanced majority, to seal the deal. As a persuasive communicator, Modi, with the backing of 303 MPs in the Lok Sabha, could have made a convincing argument to people on the long-term benefits flowing from this deal. The failure to do so, bowing to the pressure of various interest groups, shows that parliamentary strength alone is not sufficient to push through contentious but necessary reform.