RCEP members
Since 2012, Regional Comprehensive Economic Partnership (RCEP) countries have participated in 31 full negotiating rounds, a number of Ministerial meetings and three Leaders Summits, cumulating in the full conclusion of RCEP negotiations and signature of the agreement on 15 November 2020. India was the founding member of RCEP. The, RCEP accounts for 25% of global GDP and 30% of global trade, represents a significant shift in global economic dynamics. In 2019, India decided to abstain from joining this 15-member free trade agreement has sparked extensive debate on its long-term economic and strategic implications.
Historically, India’s experience with Free Trade Agreements (FTAs) has been fraught with challenges. FTAs with South Korea, Malaysia, and Japan, for example, have led to a surge in imports without a commensurate rise in exports, exacerbating India’s trade deficit. For instance, in 2018-19, India ran a merchandise trade deficit with 11 out of 15 RCEP members, highlighting the challenge of balancing trade flows. Given that India already runs a trade deficit with most RCEP countries, there is a well-founded concern that joining RCEP would further widen this gap, potentially damaging domestic industries unable to compete with an influx of competitively priced goods, especially from China. However, India’s services trade surplus and its push for a robust agreement on the services trade, including easier movement of skilled manpower, could offset some merchandise trade concerns.
Indian industry has voiced significant apprehensions about RCEP, particularly regarding the potential flooding of the market with cheaper Chinese products. This concern is not unfounded, considering that India’s manufacturing sector could struggle to compete with the low-cost, high-volume output of Chinese industries. The elimination of tariffs on a broad array of trade goods could meet strong resistance from domestic industries, particularly in an economy already experiencing a slowdown. Furthermore, the competitive disadvantage for Indian products, which are subject to regular indirect taxes, compared to lower or zero-tariff imports from FTA countries, has already been a point of contention and would likely worsen under RCEP. The strategic implications of India’s decision are profound. The RCEP, upon its finalization, will cover half of the world’s population, 40% of global commerce, and 35% of global GDP, making it the largest free trade area globally. India’s absence from this bloc raises questions about its long-term strategy in the Indo-Pacific region, particularly as China’s dominance grows both geopolitically and geo-economically. While Japan has emphasized the importance of India’s inclusion, the ongoing negotiations without India could lead to a regional economic architecture heavily influenced by China, potentially sidelining Indian interests.
Arguments for Joining RCEP
Proponents of India’s inclusion in RCEP highlight the transformative potential of globalization, which has historically benefited the Indian economy by introducing new technologies and enhancing competitiveness. Joining RCEP could provide Indian industry access to a vast market, incentivizing necessary reforms and reductions in bureaucratic constraints that stifle growth. Notably, the liberalization of markets has previously led to significant consumer benefits, such as the automobile and telecom booms, and the recent surge in solar power generation driven by cheap imported solar films. Furthermore, RCEP could offer India a strategic advantage in accessing Chinese markets, especially amidst China’s trade tensions with the United States and its demographic challenges. India’s participation could attract multinational companies looking to relocate production facilities from China, thereby boosting foreign direct investment (FDI) and positioning India within sophisticated regional production networks. This shift could also facilitate greater engagement in global value chains, enhancing both inward and outward FDI.
However, concerns about national security and food security necessitate some level of protection for sensitive industries and agricultural sectors. India’s vast arable land and substantial pool of scientists, engineers, and technicians provide a solid foundation for competitive growth. Thus, joining RCEP could be a strategic move to check China’s influence, ensuring that India has a say in shaping the region’s economic architecture rather than conceding this role to China.
The arguments against India missing out on RCEP are equally compelling. Since liberalizing its economy post-1991, India has seen significant improvements in product quality and competitiveness, benefiting consumers and increasing exports. Despite no trade agreement with China, India’s imports from China have surged, indicating that trade agreements themselves are not the sole factor influencing trade balances. Rather, enhancing competitiveness and addressing non-tariff barriers are crucial for improving India’s trade balance.
India faces a critical choice: it can either raise tariffs and shield domestic firms from competition or leverage trade agreements to drive competitiveness and expand markets. The RCEP provides a long adjustment period, allowing Indian firms time to enhance their competitiveness. Furthermore, being part of RCEP could position India as a hub for services exports to the ASEAN region, foster deeper integration into regional production networks, and offer significant FDI gains.
Nevertheless, issues of inadequate protection against import surges, the lack of credible assurances on market access, and concerns over non-tariff barriers remain significant hurdles. India’s past insistence on exemptions from Ratchet obligations—to retain the ability to impose restrictive measures to protect exports—reflects its cautious stance on committing to irreversible tariff relaxations.
Ultimately, India’s decision on RCEP is a balancing act between protecting short-term industrial interests and pursuing long-term economic integration and competitiveness. Missing out on RCEP could render Indian exports uncompetitive, as other RCEP members would enjoy preferential access. The ensuing export losses could lead to foreign exchange shortages and depreciation of the rupee, further impacting the economy. India’s strategic and economic calculus must weigh the immediate risks against the potential long-term benefits of joining RCEP. As the global economic landscape evolves, RCEP is the goose that will lay golden eggs. India’s engagement with RCEP could define its role in the regional and global economy, shaping its trajectory towards becoming a competitive, integrated economic powerhouse.
Post Script:
The member states of RCEP includes Brunei-Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam. Other five regional countries with which ASEAN has free trade agreements includes Australia, China, Japan, South Korea and New Zealand.
