Making haste slowly: By not signing RCEP in a rush, India is prioritising its self-interest

India’s stance to seek satisfactory resolution for its trade, investment, national security and intellectual property concerns has been the focus of the statement at the third summit meeting of the Regional Comprehensive Economic Partnership (RCEP) in Thailand. The negotiations to create a Free Trade Agreement (FTA) between the ten member states of Asean and six other trade partners (Australia, China, India, Japan, New Zealand and South Korea) have been going on since 2012.

Views on how India has worked on protecting its interests have differed. One school of thought has advocated India joining the RCEP for fear of missing out on any export growth at all in the post-RCEP world. Indian negotiations have however demonstrated a continuity of intent in ensuring that it does not rush headlong into a bad trade deal, budging under deadline pressures.

Domestically, several sections of Indian industry are already opposing RCEP, worried about cheap goods flooding in from China. Farmer groups are worried about cheap dairy from New Zealand. Whenever India signs RCEP, it will commit to tariff elimination for about 90% of items from the Asean, Japan and South Korea, and 74% from Australia, China, and New Zealand.

It is quite clear that several of India’s objections raised in self-interest are yet not fully addressed. So India not signing the deal now and standing firm until the other member nations decide on India’s concerns is hardly a surprise.

From India’s standpoint, even the current FTA with Asean has not delivered enough. Signed in 2009, this FTA was negotiated for six years. Despite the time spent, India has built up huge trade deficits against Asean countries. India eliminated 74.4% of tariffs against Vietnam, which eliminated only 69.7% in corresponding tariffs. Similarly, Indonesia only eliminated 50% of its tariffs. Lack of safeguards built in the 2009 FTA are still costing us. Prime Minister Narendra Modi secured a renegotiation of the India-Asean Trade in Goods Agreement (AITIGA) last month.

Had India signed a half-cooked RCEP deal now, a similar fate would have awaited it at a later point. One of India’s key objections to the RCEP deal structure is to not use a 2014 tariff structure for a deal which will get operationalised only in 2022. India’s own focus on domestic manufacturing has changed since then. India has logically insisted on applying tariff differentials to all items which are not offered to China. Else, there will be a real threat of circumventing rules of origin, where Chinese goods can find their way to the Indian market via other member nations with lower tariffs.

India already runs a $50 billion trade deficit against China. Although reduced in the last year, this deficit is still very high for Indian comfort. It is also a geopolitical issue in the face of regular political tension with China. In general, India seeks faster access to the Chinese market while opening up its local market for Chinese imports gradually. An auto-trigger mechanism which allows India to control the trade deficit with China is a fair ask.

Under RCEP, India will be required to accept the ratchet measures, which means any future liberalisation of rules for bilateral treaties cannot result in harsher rules for any other member nation including China. Indian insistence on restricted participation of specific countries in specific sectors during the RCEP negotiations is very much in national security interests.

The potential RCEP signatories constitute more than half of global population and almost 40% of global gross domestic product (GDP). Just China and India constitute half of that GDP. While we have a lot to gain by joining RCEP, especially in terms of positioning ourselves in global supply chains, it has to be on our terms for our net benefit. India also has monopsony power and there is no reason to not leverage it in negotiations.

India already has amongst the freest Foreign Direct Investment (FDI) regimes of all emerging markets. India is not looking to impose any license raj – our domestic markets are and will continue to be free to all goods and technologies. A large country, open to most foreign investments, can only promote local manufacturing and hence exports, with a moderate tariff barrier.

Our World Economic Forum competitive score has improved in the recent years, with a slip in rankings in 2019 after improvement in 2018. By slashing the corporate tax rates, a potential cross-country arbitrage has been mitigated for manufacturing. India’s labour laws are being reformed and will potentially take another few years to consolidate and match some of the other export-oriented countries. The cost of capital continues to be an issue, but there’s also greater recognition of this problem.

Trade policy is a key instrument of statecraft. No large country has become rich backing completely free trade. A mercantilist approach to safeguarding national interest has been the de facto historic view of all of today’s proponents of absolute free trade. India needs reciprocal market access and safeguards in key sectors while pushing domestic reforms and competitiveness.

India has sought the opening of service markets and investments from the Asean bloc countries as part of the RCEP negotiations. It is good that India is aiming for a win-win RCEP deal, surrendering neither to the domestic political opposition nor the global advocates of absolute free trade. As Modi has emphasised, meaningful market access for all parties is critical before India signs on the dotted line.

DISCLAIMER : Views expressed above are the author’s own.

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