The RCEP deal: Why India decided to move out?

On November 15, 2020, 15 countries signed arguably the largest free trade agreement in history. Originally, 16 countries were supposed to sign the deal. Who was the 16th one? India. But on 4th November 2019, India decided against signing the RCEP pact. Why did India choose to stay away from the largest FTA which could help the nations thrive economically? Let's see here.

1. What is the RCEP Agreement?
2. Why did India Opt-Out?
3. The Never-Ending Debate
4. What Can India Do Now?

What is the RCEP Agreement?

RCEP or The Regional Comprehensive Economic Partnership is an agreement between the members of the Association of Southeast Asian Nations (ASEAN) and countries with which they have free trade agreements (FTAs), namely India, China, Australia, Korea, Japan and New Zealand. The 16 countries involved in this deal (including India) covered almost one-third of the global population. Together these countries account for 29% of the world's gross domestic product (GDP).

According to the deal, RCEP members will eliminate about 92% of the tariffs on goods traded between all of them. The countries involved will work to create an integrated market. With this, products and services of each of these countries can be easily available. Other than trades of goods & services, RCEP members will focus on investment, intellectual property, economic cooperation and dispute settlement. 

Why did India Opt-Out?

"The present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP. It also does not address satisfactorily India's outstanding issues and concerns in such a situation" - PM Narendra Modi during the RCEP meeting last year.

According to the Indian officials, the RCEP deal will give freeway to the importers to import in huge quantities. Many products made in China cost much less than what an Indian variant of that product cost. Thus, importers will import foreign goods to generate higher demand. This will decrease the expenditure of the people but at the same time, it will haunt domestic producers.

If India removes the import duties, there will be no protection for the domestic players. The domestic manufacturers will not be able to engage in the price war due to expensive raw materials or poor technology. Eventually, people will choose the cheaper foreign goods, thus, pushing the domestic players out of the market. India has an enormous trade deficit with China. In 2019-20, the deficit stood at $48.64 billion. Indian officials fear that this number would increase if the current RCEP agreement is inked. 

There is another benefit for India if they maintain their distance from the RCEP agreement. The "largest regional trading agreement" does not include the United States of America and the European Union. This step away from the deal could serve in India’s favour to clinch bilateral trade agreements with the US and the EU. The global negative sentiments against China has already pushed the US and India on similar fronts. Any step against China can be counted as a step towards the United States.

The Never-Ending Debate

Globalisation has been a topic of deliberation for decades. Whether its the economists, politicians or other policymakers, there has always been people "for-globalisation" and "against-globalisation". Often people have voiced that globalisation will fall under the stress of economic nationalism. Globalisation has both positives and negatives which gives birth to this divided opinion.

The positives come mainly to the customers. They get a variety of products to choose from. These products may vary in cost and quality. Thus, customers have the luxury to choose what is best for them. Also, globalisation helps to increase the productivity of the company. More competition from foreign brands forces the domestic players to upskill themselves and produce better output. Economic theories also say that all nations should have open economies for the world to prosper.

On the other hand, the vulnerable sections of Indian society are negatively affected due to this "openness". Foreign competitors may have better human, capital or technological resources. Whereas the small-scale industries in India still aim to survive rather than thrive. Under the pressure of foreign products, these small-scale or medium-scale domestic ventures lose their business. “In the name of openness, we have allowed subsidised products and unfair production advantages from abroad to prevail. And all the while, this was justified by the mantra of an open and globalised economy. Those who argue stressing openness and efficiency do not present the full picture" - External Affairs Minister S. Jaishankar.

One of the recent targets of this has been the Indian textile Industry. They struggled to cope up with the low prices offered by the garments coming from other Asian countries like Bangladesh and Sri Lanka. With the RCEP agreement, the Indian government is fearing that unlimited foreign influx of goods will expose the domestic players.

What Can India Do Now?

Agriculture and Industrial sectors will benefit from India shying away from this deal. But many sectors which produce better and cheaper products than other nations will lose a golden opportunity. They will miss a chance to tap into the huge global market and generate more revenue. The gates for India to return in RCEP are not closed. The current signatory countries have said that they will welcome India for negotiations but only if they submit a request to join the pact “in writing”.

The RCEP countries are also aware that India offers them an enormous market to explore. If Indian rejoins the pact, it will benefit every country. But the Narendra Modi led government is standing firm on their grounds. The recent struggles with China in the Ladakh region have made their comeback even tougher. The RCEP agreement will help every country but China is one of the biggest beneficiaries of the deal. With this strain in the relationship, it is very tough to see India inking the deal without any favourable amendments.

India does have an alternative: the bilateral trade agreement. They already have Free-Trade Agreements (FTA) with some of the members of RCEP. Currently, India has a kind of trade treaty or agreements with Nepal, South Korea and Japan. They are also reported to be negotiating with Australia and New Zealand on bilateral trade deals. They can strengthen their existing bilateral FTAs and explore the possibilities of newer agreements. It will give Indian producers a chance to explore international markets. Also, it will help the Indian government to keep their market away from Chinese goods and services.

That being said, consistent steps away from foreign competition will increase the prices of goods. Keeping that in mind, the Government should not show their backs to international trade. But yes, they have to make sure that their rivals are not gaining more than them. RCEP should be just one of the events where they felt to move out due to much larger benefits to China.