The Regional Comprehensive Economic Partnership (RCEP) is a trade deal that was being negotiated between 16 countries. They include the 10 Association of Southeast Asian Nations (ASEAN) members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and the six countries with which the bloc has free trade agreements (FTAs) — India, Australia, China, South Korea, Japan, and New Zealand. The purpose of the deal is to create an “integrated market” spanning all 16 countries. This means that it would be easier for the products and services of each of these countries to be available across the entire region.
The RCEP is billed to be the “largest” regional trading agreement. The countries involved account for almost half of the world’s population, contribute over a quarter of world exports, and make up around 30% of the global Gross Domestic Product (the value of all goods and services produced in a year). Negotiations to chart out the details of this deal have been on since 2013, and all participating countries had earlier aimed to finalise it by November 2019.
INDIA’S CONCERNS
India on November 5, 2019 refused to sign the agreement. Key issues that have prevented India from coming on board include “inadequate” protection against surges in imports. This is a major concern for India, as its industry has voiced fears that cheaper products from China would “flood” the market. India had been seeking an auto-trigger mechanism that would allow it to raise tariffs on products in instances where imports cross a certain threshold. India has also not received any credible assurances on its demand for more market access, and its concerns over non-tariff barriers. RCEP participants like China are known to have used non-tariff barriers in the past to prevent India from growing its exports to the country.
India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products from the country. Its concerns on a “possible circumvention” of rules of origin — the criteria used to determine the national source of a product — were also not addressed. Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs. This is anticipated to allow countries like China to dump in more products.
India had sought to safeguard the interests of its domestic industry through measures like seeking a 2014 base year for tariff reductions instead of 2013, when negotiations on RCEP began, as it has raised import duties on several products between 2014 and 2019. Using a base year before 2014 would mean a drastic drop in the import duties on these products.
India’s trade deficit with the ASEAN bloc – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam and the five others in the RCEP pact – China, Japan, South Korea, Australia, and New Zealand is already massive, and only increasing every year. Trade deficit with the above countries which stood at $54 billion in 2013–14 had increased to $105 billion in 2018–19
India’s trade deficit with China alone is $53 billion. Electrical machinery, equipment, appliances, plastic articles, iron and steel, aluminum, ceramic products, man-made fibres and furniture are a few of the many goods that China dumps into India every year. Thus, manufacturers of the above products fear increased dumping from China post the RCEP deal. The NITI Aayog report of 2017 makes an interesting point on how China’s entry into a market can change the scenario completely. Since the enactment of the ACFTA (ASEAN-China Free Trade Agreement) in 2010, ASEAN-6 countries’ (Indonesia, Malaysia, Thailand, Vietnam, Philippines, Singapore) the value of the goods traded with China has gone from a surplus of $53 billion to a deficit of $54 billion in 2016.
India’s dairy farmers feared that dairy products could be dumped from milk-surplus countries such as New Zealand and Australia, if India joined the deal. As projected by the NITI Aayog, India’s milk production is likely to touch 330 million tonnes (MT) by 2033, from the current about 180 MT. But the projected demand is likely to be about 292 MT. This shows that India would continue to have sufficient surplus to meet its own requirement, hence there was no case for allowing import of milk products even after a decade.
INDIA’S PAST EXPERIENCE WITH FREE TRADE AGREEMENTS (FTAs)
Post 2000, India started aggressively signing bilateral trade agreements, including the first bilateral FTA with Sri Lanka (ISFTA). This came into effect in March 2000. After that, India had signed bilateral trade agreements with Malaysia, Singapore and South Korea. It had also become a partner in many Regional Trade Agreements (RTAs) like the ASEAN CECA.
However, India has always been at the receiving end of the FTAs. According to the data, the imports from FTA partners have been more than India’s exports to them after the signing of FTAs. In fact, in a report published by the NITI Aayog two years ago, India’s exports to FTA countries have not outperformed the overall export growth or exports to rest of the world.
Among the domestic manufacturing industries, the metal industry has been hit the most by FTAs. A 10 per cent reduction in FTA tariffs for metals has increased imports by 1.4 per cent, says the report. In the agricultural commodities basket, it is dairy products, pepper, and cardamom, which will face the heat of higher dumping if India had signed the RCEP. At present, cheap imports of cardamom and black pepper from Sri Lanka and ASEAN countries have been hurting farmers in Kerala. The same has been the case with rubber farmers as rubber at cheaper rates from Vietnam and Indonesia are getting dumped into India. Coconut farmers too are distressed with coconut oil cakes coming-in from the Philippines and Indonesia.
WAY OUT
India before signing RCEP and FTAs must strengthen its domestic sector. At present India’s economy is going through a slowdown. It is imperative that India makes its domestic industry more competitive by increasing competition between domestic players, strengthening the Micro, Small and Medium Enterprises (MSME) sector so that they can get integrated into the global value chain.
The contribution of the manufacturing sector to India’s GDP has remained stagnant at around 17% since the 1990s, and the sector needs a big push in order to drive potential GDP growth. The focus on the manufacturing sector is critical for sustainable economic growth. Manufacturing not only creates strong positive backward and forward linkages in the economy, but, according to estimates, every job created in manufacturing has a multiplier effect of creating jobs in other sectors. Industrial revolutions don’t happen overnight. They require careful planning, policy interventions, regular upgrades, and innovations and investments at every stage of development.
The central and state governments must come together to strengthen India’s manufacturing sector by creating a single window approval for all regulations to set up a manufacturing unit. India’s plans for the manufacturing sector need support in the form of a new industrial policy that creates incentives for key sectors. Strategies to enhance domestic competitiveness and to protect the industry from a surge in imports due to trade diversion are sorely needed. If the domestic industry has to thrive, protection, product market reforms and enabling conditions have to be created. When India’s manufacturing sector is competent, India stands to benefit from RCEP and various FTAs. India must most importantly protect its agriculture, plantation and dairy sector from FTAs. These sectors must not be within the ambit of FTAs.