Government was not guided by political considerations in RCEP and was focused on economic outcomes.
India has taken a stand not to be a part of RCEP at the ASEAN, East Asia and RCEP summit meeting held during 2-4 November at Bangkok. Prime Minister Narendra Modi felt that the agreement negotiated did not meet the interests of Indians. Commerce Minister Piyush Goyal has, however, kept the door open for India joining RCEP if others suitably accommodate India’s demands.
RCEP is a Free Trade Agreement (FTA). When negotiations commenced for RCEP, it consisted of the ten ASEAN countries and China, Japan, South Korea, Australia, New Zealand and India. Negotiations started seven years ago, but intensified since 2015. India postponed its negotiations on FTA with Australia and New Zealand since these countries would be part of RCEP. The 16 RCEP countries had 47% of the world population, 32% of global GDP and 31% of global trade during 2017. India’s objective was to get a foothold in the Indo-Pacific region, be a part of the global value chain, benefit from the RCEP market for exports and source investment. India already has FTAs with 12 of the 15 other countries in RCEP and a limited PTA with China.
As the negotiations reached the final rounds, India became aware that other countries were reluctant to address its concerns. The current situation of slowing world growth, India’s plummeting growth rate and the pains that it created on employment, wages and investment made it weary of a deal that would have brought in more suffering. It fought to protect its agriculture, MSMEs and manufacture from cheap and more efficiently produced items of import from other RCEP countries. The fact that we run adverse trade balance from our FTAs with ASEAN, Japan, Korea and Singapore and the pressure that RCEP was to provide better market access than these FTAs also made us uncomfortable. Domestic constituencies conveyed their apprehensions more effectively than they did when other FTAs were being negotiated.
The timing of the RCEP agreement is significant. There is a trade war going on between US and China. Disruptions to the existing arrangements and institutions in trade on the top of slowing global growth create uncertainty in investments. US has pulled out of TPP and believes in using its power to strike bilateral deals in trade. As Malaysia pointed out, RCEP like arrangements would be a credible answer to such disruptions. China was keen to conclude the RCEP at its earliest because of its trade problems with the US even if India’s concerns were not met. It used its political, economic and commercial powers to get the deal done. In the process, it went back on the Mamallapuram and Wuhan spirit. Other RCEP countries wanted India to be in the arrangement since otherwise the agreement would not achieve the full benefit and in addition, India’s presence would be a balancing factor in RCEP.
India was guided by its past experience in negotiating FTAs. We were adversely affected by early harvests and lack of balance between goods and services in the earlier FTAs. India, therefore, wanted balance in goods, services and investment outcomes in RCEP agreement. China’s entry had its own set of problems to take note of with its State owned enterprises, opaque subsidies, technology transfer and IPR issues and other non-tariff barriers. As negotiations progressed and many such issues could not be resolved, India perhaps decided to get its defensive interests adequately addressed. Reports indicate that we wanted a better differential tariff arrangement with China, automatically triggered safeguard arrangement when imports would increase, protection for its agricultural products, stricter rules of origin to prevent circumvention and more access inservices.
Multilateral fora like WTO, as it is constituted today, do not seem to serve interests of some advanced countries. Except for the dispute settlement process in the WTO, this institution is not advancing the cause of growth of trade because of its consensus process. The FTAs were, therefore, becoming a vehicle for market access and deeper economic integration. But the advanced countries were seeking deeper outcomes in the FTAs by including non-trade issues like labour, environment, IPR, government procurement etc., which certainly did not suit countries like India. Under these circumstances, RCEP would have been a good vehicle for India to promote trade.
It begs the question whether India was not aware of the difficulties in joining RCEP. We would have certainly weighed the balance of advantages in entering the negotiations. We are conscious of the movement of production away from China because of trade wars and increased cost of production in China. RCEP would have certainly suited India’s interests since it is a huge market and the agreement was sought to be not so intrusive like TPP. However, any FTA carried with it a derogation from sovereignty. Observers of trade negotiations point out that at least this time, the government was not guided by political considerations in getting into RCEP and was focused on economic outcomes. Government was also conscious that there were limitations in seeking efficiencies in the economy through trade agreements. It was rewarding to see that the political leadership was clued on to finer details of negotiation since it was fully aware of the downside. It is certainly a disappointment that we did not join RCEP now since a deeper economic integration with these countries could not have been provided by the existing FTAs. It was, however, clear that without longer period for adjustment and certain measures of defence till we put our house in order would have created more pains than gains. It is still possible that we may form a part of RCEP before legal scrubbing commences in February if in the meanwhile some of our concerns are addressed meaningfully.
Our exports as percentage of GDP have been falling in the recent years. This should worry us, especially when countries like Vietnam and Bangladesh have increased their share of exports to GDP. It costs less to import zinc products to our east coast from an FTA partner like Korea than move the same from Rajasthan because of freight cost. We need to become more competitive in manufacturing, services and institute reforms in land, labour and capital markets. We need to develop clusters of production, SEZs, skilled manpower, efficient infrastructure, seamless processes to decrease transaction costs so as to improve our share of exports to GDP and put in place standards to ensure that sub standard goods do not get sold in the country. It is gratifying to see that in Indonesia all two wheelers have good standards as Japanese products there have created a culture of quality. We also need to see how we should take advantage of the FTAs we have already entered into.
What could be the way forward? Commerce Minister referred to negotiations with the US and completion of trade negotiations with the European Union. We have outstanding issues in our trade relationship with the US. It is not clear if we would be interested in opening e-commerce further with the US and in any case there could be social issues in trade negotiations and compulsory licensing and data protection matters on which the US has a defined stand. We are yet to settle issues like government procurement, IPR and services issues with EU. Surely if we were comfortable with negotiation on these issues we could have been better off with signing the RCEP as it is currently negotiated. Some analysts feel that this could be a pressure tactic being adopted by the Commerce Minister to get back into RCEP.
RCEP negotiations have shown that it is time we had a meaningful policy for entering into FTAs. It has also proved that our political ambition like Look East can be advanced with economic integration only if we are able to carry out meaningful reforms domestically.
R. Gopalan served as Member, PESB. He was Secretary in the Ministry of Finance in the Department of Economic Affairs and in the Department of Financial Services. An IAS officer from Tamil Nadu, he conducted negotiations at the WTO on behalf of India.