After 8 long years of negotiations, 15th November 2020 finally saw the creation of one of the biggest trade blocs in the world.  This was soon followed by a debate over whether India’s decision to stay out of this Regional Comprehensive Economic Partnership was a prudent one. This article will try to break down the significance of RCEP and the future implications of India’s stand.

RCEP Asia Pacific Forms
Image: World’s Largest Trade Bloc (Source: Statista)

What is RCEP?

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement, the signatories to which are ASEAN Members namely, Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam and their six FTA partner countries; Australia, China, Japan, New Zealand, and South Korea.

The RCEP seeks to put in place, provisions that will help facilitate trade and investment within the Asia-Pacific region by streamlining the separate trade requirements of each member country, while simultaneously working to increase transparency and accountability in international trade relations among the participating countries. India was originally a part of the negotiations over RCEP, but owing to certain significant issues that remained unaddressed, despite multiple sessions, India chose to withdraw from RCEP in 2019.

India opted to stay out of the RCEP
Image: India opted to stay out of the RCEP (Source: Bloomberg)

Origin of RCEP

Negotiations over the RCEP began in the year 2012 with a joint declaration amongst 10 ASEAN countries and their 6 Free Trade Agreement (FTA) partners at Phnom Penh, Cambodia.  The primary concerns that the RCEP sought to address were, trade-in Goods, Customs procedures and trade facilitation standards, technical regulations and conformity assessment procedures, movement of natural persons, Intellectual Property, e-commerce, investment, competition, Small and Medium Enterprises (SME’S) and dispute resolution mechanisms.

RCEP recognizes the significance that ASEAN holds in the emerging regions as well as the global economic framework and seeks to hold the mutual interest of all participating countries at its core. The RCEP shall also be consistent with the provisions laid out by WTO, including GATT Article XXIV and GATS Article V.  Any partner country that eventually wishes to become a party to the RCEP shall be allowed to do so, provided certain criteria’s laid down by the signatories are met with. Currently, an 18 month period has been laid down, subject to which a country may be allowed to join the RCEP.

Significance

Peterson Institute for International Economics has researched the expected Country wise Impact of RCEP
Image: Peterson Institute for International Economics has researched the expected Country-wise Impact of RCEP (Source: The Economist)

As per a study by Peterson Institute for International Economics, over $209 billion and $500 billion could be added to World income and World trade, respectively, through RCEP, by the year 2030.  A part of RCEP’s significance also comes from the fact that it is the very first FTA between China, Japan, and South Korea; countries that also happen to be, 3 of the greatest economies within Asia and stand to benefit the most from this agreement. The sheer magnitude of this trade blocs relevance can be observed from the fact that a population of around 210 would be covered within the ambit of RCEP and the combined GDP of all of its members is over USD 26.2 trillion summings up to 29% of world GDP.

Impact on Trade in Goods and Services

The RCEP aims to progressively eliminate both tariff and non-tariff barriers to trade in goods and services, in order to establish free trade areas within the signatory parties. Routine tariff negotiations are proposed to be conducted with the aim to achieve high trade liberalization, through tariff elimination. This should also help in bringing about regional economic integration within the region. There is also a significant emphasis being laid upon lowering barriers relating to intellectual property, that could significantly alter India’s current stance on Intellectual property Rights, in the event that India chooses to become a signatory to the RCEP.

Economic Cooperation

Rules and obligations on trade in services under the RCEP will be consistent with the General Agreement on Trade in Services (GATS). They will aim to achieve a liberal and competitive environment for increasing investments within the Asia-Pacific region.

Measures have been introduced for Economic and technical cooperation within the RCEP that intend to narrow down developmental gaps among the signatories and maximize mutual benefits that can be derived by all of the nations involved.

India’s Stand

 While India happens to be the 4th largest trading partner in ASEAN with over $86 billion worth in trade volume, India is in a trade deficit with most of these countries. With respect to the ASEAN + countries, India has a massive trade deficit of over 90 billion dollars of which China holds the biggest share.

India
Image: India backs out of RCEP

 In light of these facts, one of the most commonly brought up concerns regarding India’s participation within the RCEP is that of its impact on the domestic industry. India fears that its domestic industry would suffer greatly in the event that India is to become a signatory to the agreement. China’s steel exporting capacity far exceeds India’s and the same is the case with Dairy and poultry imports from Australia and New Zealand. This trade imbalance coupled with a free trade agreement could result in, a disproportionate influx of imports, further deepening India’s trade deficit. These economic downsides, along with the currently heated state of geopolitical relations between India and China have made India reluctant to participate in the RCEP.

Auto-trigger Mechanism and Country of origin Rules

There are two main protectionist measures that India brought up time and again during the ASEAN negotiations, to assuage its concerns over RCEP, namely, Auto trigger mechanism and stricter Country of Origin rules.

To protect the domestic industry against a massive inflow of imports once the tariff barriers are significantly lowered, India, during the Jakarta rounds proposed an auto-trigger method that would require that a cut-off volume of import shipments be laid down, exceeding which, the lowered tariffs would go up again.  While this method is fairly effective, it is not entirely flawless. Nation dumping in its exports can always circumvent this mechanism by pushing its import through other signatories once it has reached the quota level of required shipments.

Countries have opposed India’s bid for stricter Country of origin rules
Image: Countries have opposed India’s bid for stricter Country of origin rules

In order to cover this loophole, India further proposed stricter Country of origin rules.  Rules of origin propound that the tariff concessions and duties to be levied shall be based on the country of origin of the product and not the country through which such shipments are being received by the importing nation. While most countries, including China, were in agreement with the first provision. An amicable agreement could not be arrived at on the latter, owing to which India withdrew from the RCEP.

Missed opportunities

While there might be some disadvantages to the RCEP, there are also some major segments in which India stands to benefit from the agreement.

The RCEP trade bloc far exceeds the European Union or any other regional economic trade bloc in terms of the overall trade volume it seeks to regulate. In the future, it stands to act as a decisive global platform to determine crucial economic policies. India is losing out on an opportunity to have a say in these economic decisions by keeping its distance from the RCEP.

The RCEP will not just complement India’s existing bilateral trade agreements; it will also help consolidate all the overlapping agreements into one comprehensive body of work that would make it a lot easier to navigate the provisions of these existing FTA’s smoothly.

There are two extremely crucial regional economic blocs that India is not a party to; the first one being Asia-Pacific Economic Cooperation and the second one, Trans-Pacific Partnership. Japan, China, South Korea, and Australia are an important part of not just the RCEP, but these regional trade blocs as well. Becoming a part of the RCEP would help India forge stronger ties with these countries thus saving India from the potential economic repercussions it might face, as a result of the economic policies of these blocks.

While most ASEAN countries and even the FTA partners have expressed their interest in having India on-board with the RCEP, for now, India appears to stand firm on its protectionist stance.