What Does India’s Exit from RCEP Indicate?

By Biswajit Dhar | Commentary | December 7, 2020

On November 15, 2020, 15 East Asian countries agreed to take their economic integration several notches higher by forging the Regional Comprehensive Economic Partnership (RCEP), the largest free trade agreement (FTA) ever. In 2019, RCEP members accounted for about 30 percent of world output and population and 28 percent of world trade. But about 44 percent of their total trade was intra-RCEP, which is a major incentive for the members of this agreement to agree to the deal, for this could contribute to the strengthening of the regional value chains. This may well prove propitious for the RCEP member countries in their efforts to recover from the downturn.

The initiative to establish RCEP was taken by the member states of the Association of the Southeast Asian Nations (ASEAN) in 2011. These countries had adopted a resolution “to establish an ASEAN-led process by setting out principles” that would allow ASEAN members to “engage interested ASEAN FTA partners in establishing a regional comprehensive economic partnership agreement.”

The “Guiding Principles and Objectives,” the de facto negotiating mandate for RCEP, spoke of “progressively eliminating tariff and non-tariff barriers on substantially all trade in goods” and achieving “high level of tariff liberalization, through building upon the existing liberalization levels between RCEP participating countries and through tariff elimination on a high percentage of both tariff lines and trade value.”

As regards services, RPCs agreed to conclude a comprehensive and high-quality agreement that would “substantially eliminate restrictions and/or discriminatory measures.” Finally, RCEP negotiations on a framework for investment “to cover the four pillars of promotion, protection, facilitation and liberalization.” It was, therefore, quite clear that the RCEP participating countries (RPCs) had given themselves an ambitious agenda of trade and investment liberalisation.

The idea of an FTA in the East Asian region was, however, mooted by Japan in 2006 when it had proposed the Comprehensive Economic Partnership in East Asia (CEPEA) between the then members of the East Asian Summit (EAS), which also included India. But while the Japanese initiative received a tepid endorsement from the EAS leaders in 2009, the ASEAN seized the moment to initiate the process of establishing RCEP, immediately after the grouping’s FTAs with New Zealand and India became effective from 2010. Now, as RCEP members’ focus shifts to their capitals for the ratification of the agreement, one question that would be uppermost in most minds is the role that China could play in the dynamics of RCEP. Will this FTA of East Asia conceived by Japan and, in which ASEAN has been looking to play a central role, eventually hinge on China? The commitments made by the major economies while endorsing RCEP will provide an answer, as we shall see below.

Deeper Economic Integration

Several commentators have observed that RCEP is not likely to usher in comprehensive economic integration in East Asia. This view has arisen by comparing RCEP with the Trans-Pacific Partnership (TPP), which would have been the world’s most extensive FTA in terms of market opening had the Trump Administration decided not to abandon it. But there have always been doubts whether TPP was promoting “free trade” or a highly discriminatory “managed trade.” This was because TPP included several regulatory issues including the controversial labour and environmental standards and issues such as “anti-corruption”, all of which could raise regulatory barriers and severely impede trade flows.

In contrast, the RCEP includes traditional market access issues, following the template provided by the World Trade Organization (WTO). However, it also includes issues that are currently being discussed by several groups of WTO members as a part of their agenda to “reform the multilateral trading system”. These issues are electronic commerce, investment facilitation, which seems to be the first step towards a multilateral agreement on investment and creating an enabling environment for the participation of small and medium enterprises in global trade. While India has been opposed to including all these issues in the WTO, the formation of RCEP could provide serious momentum to the discussions in Geneva, especially after the Organization convenes under its new Director-General.

The question is, would RCEP be able to realise its primary objectives of trade and investment liberalisation? In the case of trade in goods, RCEP members have taken big strides towards lowering their tariffs. For instance, China has agreed to cut its average tariffs from 9.4% in 2014 (adopted as the “base year” for tariff cuts”) to 1.2% for Australia and all ASEAN members, by the 10th year of implementation of RCEP, and has also committed to reducing tariffs on almost 90% of its imports from these two RCEP members to 5% or less. Further, less than 4% of its products figure in the exclusion list, implying that their tariffs will not be reduced. Its market opening to the Republic of Korea goes even further; the average tariff on Korean imports will be below 1% by the 10th year. Besides tariff cuts, China has offered to maintain tariffs at 5% or less on almost 90% of its imports.

Several RCEP members, including Indonesia, Malaysia, and Vietnam, have reciprocated China’s offers by agreeing to deep cuts in their tariffs. Vietnam’s tariff offers to China look similar: average tariffs would drop from 10% in 2014 to 2% by the 10th year, and nearly 90% of its imports from China will be tariff-free. Moreover, Vietnam does not have an exclusion list. Among the major economies in the region, Malaysia has had the lowest levels of protection and this will be reduced as it implements its commitments under RCEP.

China’s Grand Strategy

A policy announcement made by President Xi Jinping earlier this month during the China International Import Expo suggests that opening China’s market to RCEP members is part of its larger strategy. Xi is quoted to have said, “we will remain open and cooperative, and build the Chinese market into the world’s market, a shared market and everyone’s market”. He proposed several measures to meet these objectives, three of which are significant. First, open the market to a new level; second, promote innovative development of foreign trade through government support to cross-border e-commerce; and, finally, making additional efforts to forge FTAs with more countries and regions. It should be pointed out that RCEP, which includes a chapter on e-commerce fits Xi’s strategy very well.

Xi Jinping has thus produced this counter-narrative to the “decoupling from China” thesis, which has received a powerful endorsement through the establishment of RCEP. Despite the political differences that several RCEP members have had with China, their economic engagement with the world’s largest trading nation is poised to go several notches higher with the implementation of the East Asian FTA. This is a development that all major economies must take serious note of.

In contrast to their market access commitments under goods, commitments made by RCEP members for services trade liberalisation look shallow in terms of the coverage of the sectors. The movement of natural persons, an area in which India had had considerable interest, is considerably restricted. RCEP members have allowed relatively limited market access only to individuals in managerial positions or those having high levels of skills.

In the areas of investment and electronic commerce, in both of which India had expressed its reservations on the template adopted during RCEP negotiations, the outcomes are varied. The text on investment rules shows that it is a work-in-progress. The rules on dispute settlement procedures are yet to be written in, and therefore it will be interesting to see whether the controversial investor-state-dispute-settlement (ISDS) mechanism is included.

In the case of electronic commerce RCEP members have agreed not to “prevent cross-border transfer of information by electronic means where such activity is for the conduct of the business of a covered person”. However, a member can deny the transfer of information if it is necessary to “achieve a legitimate public policy objective, provided that the measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade”. In addition, members are free to adopt a “legal framework which ensures the protection of personal information of the users of electronic commerce”.

Re-engaging India

In the months following India’s disengagement from the RCEP negotiations, several RPCs had expressed their strong desire to get India re-engaged. These efforts are now “official”: prior to the signing of the deal, RCEP Ministers adopted a Declaration on India’s participation in the agreement through which the door has been left open to India to join RCEP Agreement as an original signatory.

Further, India has been invited to participate in RCEP meetings as an observer and in economic cooperation activities undertaken by the RCEP members. And, finally, RCEP members have agreed to commence negotiations with India once the country submits a request in writing of its intention to accede to the agreement. The question is, have the circumstances under which India had distanced itself from the RCEP negotiations become any better for it to join the agreement in the near future?

The answer to this question seems to unambiguously in the negative, at least in the short-run, for two compelling reasons. The first that during the RCEP negotiations, India had raised a number of concerns that were not taken into consideration while finalising the agreement. Importantly, after India had disassociated from the negotiations, Australia and Japan had given assurances that its concerns would be addressed, but no concrete initiatives were forthcoming. The second set of factors include the views of the External Affairs Minister, Mr. S. Jaishankar on FTAs in general, and RCEP in particular, as also recent policy changes effected in the aftermath of the pandemic-induced crisis.

India’s Key Concerns

Among the several concerns that India had were issues of tariff cuts, especially regarding its imports from China and shifting of the base year for tariff cuts from 2014 to 2019, the threat of circumvention of rules of origin because of tariff differentials across RCEP members, exclusion from Most Favoured Nation (MFN) obligations in the chapter on investment in the investment chapter. Besides, some of India’s principal areas of interest, for instance, movement of natural persons under Mode 4 of services trade, never received the requisite importance from the other RCEP participating countries.

China’s expanding footprint on the Indian economy has been ringing alarm bells for the country’s businesses for the past few years. Over the past two years, the Government of India had responded to the demands of several manufacturing sectors to increase import tariffs, which reversed the decade and a half trend of lowering tariffs. Further, to provide a degree of comfort to the domestic interests, India had proposed that import tariffs on Chinese products will be reduced significantly lower than those for other RPCs. This proposal did not pass muster.

In addition to the manufacturing interests, India’s farm sector also faced uncertainties given that Australia and New Zealand, countries having dominant agriculture and dairy sectors, were also looking to make an entry into the Indian market through RCEP. In other words, a defensive India found it difficult to accept the high demands for cuts in import tariffs by other RPCs.

Regarding the agreement on investment between RCEP members, in the early rounds of negotiations, India had laid down the ground rules of remaining faithful to its Model Text of Bilateral Investment Treaty that was revised in 2015. Among the key features of this Model Text was an exclusion from the MFN obligations as well as a less intrusive Investor-State Dispute Settlement Mechanism (ISDS). The RCEP chapter on investment includes MFN obligations, and although provisions relating to dispute settlement have not been included for now, the area of investment has become assumed significance for India for entirely different reasons over the past several months. Since the border clashes, India has imposed several import restrictions on Chinese products and has also subjected investment flows from its northern neighbour to greater scrutiny. Both these measures would have been rendered infructuous if India were a party to RCEP.

Is India Rethinking Openness?

The more important and the most significant is a critical comment from the External Affairs Minister, S. Jaishankar, after the formation of RCEP, which signalled that the government had foreclosed its options of joining the grouping, especially owing to China’s presence. The Minister had expressed scepticism about the policies of “openness,” arguing that such policies had allowed  “other countries,” “unfair” trade and manufacturing advantages. In fact, not only has the government shut its doors to RCEP, but it has also adopted an economic strategy that militates against the logic of globalisation supported by the FTAs.

While FTAs have foisted the production networks cutting across national boundaries, the Government of India has been focusing on building domestic value chains in a number of critical sectors through the Atmanirbhar Bharat Abhiyan. This policy direction promoting self-reliance was further reinforced by the External Affairs Minister’s observation that India’s past trade agreements have been detrimental to the country’s interests, causing deindustrialisation in some sectors. The Minister’s prognosis on FTAs, coupled with the newly minted economic strategy, could be a signal of the government’s rethink on India’s tryst with globalisation.

Biswajit Dhar is a Professor of Economics at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.

Image Courtesy of www.asean.org