India has withdrawn from the Regional Comprehensive Economic Partnership (RCEP) agreement signed on November 15, 2020 which has generated a huge debate in the world. Started in 2012, India was engaged in a long negotiation with other partner countries and expressed her consents and concerns regarding the tenets of the deal in different times. There were some points of disagreements between India and other partners ranging from the concerns of trade deficits, rules of origins as well as other outstanding issues. Abruptly, on November 2019, India pulled herself out from the negotiation. Notably, Prime Minister Narendra Modi expressed his clear discontent at a summit in Bangkok, claiming that ‘the negotiations did not reflect the RCEP guiding principles’. At the East Asia Summit meeting in November 2019 in Bangkok, India ultimately decided to opt out, saying ‘its key concerns were not addressed’. Furthermore, making a forceful argument in his address at the summit, Indian Prime Minister Modi said: “The present form of the RCEP agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP.” Elaborating, he said: “It also does not address satisfactorily India’s outstanding issues and concerns. In such a situation, it is not possible for India to join [the] RCEP Agreement”.
Against this backdrop, it has now been a burning question why India has stayed out of RCEP when other partners, including China and Japan, welcomed India to reconsider her decision offering the settlements of outstanding issues like rules of origins and automatic trigger safeguard mechanism (ATSM) as India claimed. There are some specific factors which may have motivated India to opt out from RCEP.
Trade imbalance fears
A big concern for India, which prompted it to pull out of the deal, was that it would be flooded by goods from China and other RCEP members. India’s trade deficit with RCEP nations is US$105 billion, with China alone accounting for US$53.5 billion. It’s the biggest deficit India has with any country. Some sectors of the Indian economy, like the pharma and IT industries, have found it tough to enter and expand in the Chinese market. Therefore, not joining RCEP would boost Modi’s “Make in India” initiative and protect the country’s economic interests and national priorities. Moreover, India was looking for specific protections for its industry and farmers from a surge in imports, especially from China.
Securing vulnerable sectors
India was also concerned about the RCEP’s potential impact on sectors like agriculture, which would affect the country’s vast rural population. Indian agriculture is largely subsistence-based and beset by alarmingly low levels of modern technology, packaging, processing and storage facilities. Opening it up to competition from much more advanced agriculture producers in places like Australia, New Zealand and Japan would have led to an economic and social crisis. Even bigger industrial sectors, like steel, iron and rubber manufacturing, were not in favor of the trade pact. The Indian government’s decision protects vulnerable sections of the economy, as well as medium and big industries, from foreign competition for the time being. Farmers and dairy farmers staged fierce protests across India during the RCEP Summit in Bangkok. Criticism against RCEP grew among the general public, and the Indian National Congress, the largest opposition party, condemned the talks.
Circumvention of rules of origin and base rate of customs duty
The mounting concerns came also from the issues like Circumvention of Rules of Origin and base rate of customs duty. Countries can take advantage of tariff differential given to another country in tariff lines not offered to it. For example, once India becomes an RCEP member, China may use lower tariffs than India’s offers to Vietnam or Malaysia for dumping its products in India, according to India.
Auto Trigger Safeguard Mechanism (ATSM) and Most Favored Nation (MFN) obligations
India’s past experience with FTAs has not been very positive as it had led to huge import surges leading to injury to the domestic industry. To ensure that no domestic industry in any of the RCEP countries suffers due to malpractices, India had proposed an auto trigger mechanism which has not been accepted. Besides, MFN status is often given for strategic interests. India did not want to give away the rights to give concessions to its strategic allies or for geopolitical reasons and hand out the same preferential treatment to all RCEP countries, especially China with which India has border disputes.
Internal political blame game over RECP
Staying away from the deal has resulted in a political blame game between the ruling party and the opposition party, Congress. The United Progressive Alliance (UPA) agreed to explore an India-China FTA in 2007 and join RCEP negotiations with 2011-12 and now is blaming BJP for staying out from RECP trade deal. The Modi government now also blames the UPA for negotiating a lop-sided deal during Congress tenure. The impact of these decisions resulted in India’s trade deficit with RCEP nations increasing from US$7 billion in 2004 to US$78 billion in 2014, leaving domestic industry reeling under the impact of those decisions, according to BJP government.
How far is the ‘China factor’ a matter for India in RCEP?
It may be argued that escalating tension with China is a major reason behind India’s decision. While China’s participation in the deal had already been proving difficult for India due to various economic risks, the clash at Galwan Valley has soured relations between the two countries. The various measures India has taken to reduce its exposure to China would have set India uncomfortable due to the commitments under RCEP. It is also a case of India’s way of showing “strategic clarity” on China. Major issues that were unresolved during RCEP negotiations were related to the exposure that India would have to deal with China. This included India’s fears that there were “inadequate” protections against surges in imports. It felt there could also be a possible circumvention of rules of origin— the criteria used to determine the national source of a product-in the absence of which some countries could dump their products by routing them through other countries that enjoyed lower tariffs. Apart from that, India also wanted RCEP to exclude most-favored nation (MFN) obligations from the investment chapter, as it did not want to hand out, especially to countries with which it has border disputes, the benefits it was giving to strategic allies or for geopolitical reasons. India felt the agreement would force it to extend benefits given to other countries for sensitive sectors like defense to all RCEP members including China.
Cost of opting out from RCEP
India’s decision has its costs. There are concerns that India’s decision would impact its bilateral trade ties with RCEP member nations, as they may be more inclined to focus on bolstering economic ties within the bloc. Given attempts by countries like Japan to get India back into the deal, there are also worries that India’s decision could impact the Australia-India-Japan network in the Indo-Pacific. On the other hand, some have argued that RCEP could have resulted in opportunities in the manufacturing sector related to the global value chain (GVC). GVC manufacturing allows large corporations to use multiple countries, thus reaping the benefits of cheaper labor. Staying out means the losing out these opportunities, though there are concerns for dumping of Chinese products in Indian market.
Whether we like it or not, new supply chains are being explored; new connections are being made; trading infrastructure that will last for decades is being built. If India misses out on attracting some of that infrastructure by opting out from RECP, it could be locked out of several years of growth. Arvind Panagariya makes a strong argument for India to reconsider its exit, because staying out would not be in India’s economic interest. He also rebutted arguments of staying out and claimed that a return from RCEP means the inglorious days of “self-sufficiency” and insisted that the withdrawal reflected the weakness of the government against the efforts of protectionist lobbies. He argues that India would have had an excellent opportunity to integrate itself into regional and global value-chains, where India’s participation has been low. India would have been more easily able to attract foreign direct investment (FDI) and to also take over production in sectors that China is now vacating. To many analysts, “isolationism is not an option”.
From Indian perspective, assessing the underlying causes and related concerns regarding RCEP rules and regulations it can be concluded that deep concerns arising from rules of origin, timeframe of customs duty as well as issues governing the trade deficit due to the possibility of dumping in trade prompted the country to opt out the RCEP negotiation. However, one may argue that it is not just an economic decision, but mixed with strategic consideration. It is undeniable that the current developments in the border and decade-long tensions with China concerning geopolitical as well as economic issues have influenced Indian policy makers to stay out from the deal. Despite the repeated call from the other parties to the negotiation, even from China, to India to return in the negotiation assuring the settlements of outstanding issues, India remained strict to her decision of remaining outside the deal. As the third largest economy in the world, India has more benefits and opportunities than costs and risks in her membership to the largest trading bloc in the world, but Indian government emphasized strategic calculus based on rising Chinese influence and leadership in RCEP and beyond.