India’s Stand on RCEP

INTERNATIONAL RELATIONS
14 Oct, 2022

NEWS HIGHLIGHTS

Theme : Important International institutions, agencies and fora - their structure, mandate.
Paper : GS - 2

India pulled out of the RCEP negotiations earlier, citing its negative impact on the domestic producers.
RCEP is a regional Free Trade Agreement between ASEAN and 6 other countries, viz. India, China, Japan, South Korea, Australia and New Zealand. It was finally signed in November 2020 after 8 years of negotiations.

TABLE OF CONTENT :

  1. Context
  2. RCEP
  3. Why did India Withdraw?
  4. Challenges with RCEP
  5. Benefits of RCEP
  6. QUAD & SCRI
  7. Road Ahead

Context : India pulled out of the RCEP negotiations earlier, citing its negative impact on the domestic producers.

RCEP : 

RCEP is a regional Free Trade Agreement between ASEAN and 6 other countries, viz. India, China, Japan, South Korea, Australia and New Zealand. It was finally signed in November 2020 after 8 years of negotiations.

  • Last year, India walked out of the negotiations. Therefore, it is now an agreement between 15 countries. However, the members have said that the doors will be kept open for India to join the agreement at a future date of India’s liking.
  • RCEP members constitute nearly a third of the global population and 29% of global GDP.

Why did India Withdraw?

  • Import Surge protection: If due to tariff rationalization, there is an import surge in the country, then that country should reserve the right to impose a safeguard duty to protect its domestic industry from injury.
  • Transparency obligations: India contended that the use of subsidies and state capitalism by China to provide an additional advantage to the Chinese industry would be detrimental to the cause of free trade and should be addressed before finalizing the agreement.
  • Rules of origin: India wants strict rules of origin to prevent domestic markets from being flooded by indirectly-exported Chinese products. Here, indirect export refers to the export of Chinese products from a member nation having lower duty levels.
  • Free trade in services: India is more interested in trade in services, as it has a strong service base. Therefore, any agreement without explicit provisions regarding services would have limited utility for India.
  • Special status of a non-member country: India wants to protect its right to enter into a trade deal having special terms with a third country, without being forced to confer same terms on the RCEP members. For e.g. If India enjoys a close relationship with UAE and is entering into an investment agreement having a higher rate of return on investment, there should be no obligation for imposing the same rate of interest by the RCEP members.
  • Redefined economic priorities: Apart from the obvious economic implications, there has been a wave of increased Protectionism around the world. This is shaping global economic and trade policies of the international community with respect to the relationship between foreign imports and protecting nascent domestic industry. The sub-prime crisis of 2008 has also led to dampening the spirit of free trade around the world.
  • Dependency on China: India wants to be a part of global order, which is evolving into a trading environment away from dependence on one particular country (i.e. China). In this aspect, it is trying to achieve synergies with like-minded countries. For example, Japan has recently come up with the concept of Supply Chain Resilience Initiative (SCRI).

Challenges with RCEP :

  • Centrality of one country: Global experience points to dominance of one country in international groupings. For e.g. the US in North American Free Trade Agreement (NAFTA) or India in South Asian Association for Regional Cooperation (SAARC). In the case of RCEP, this centrality is mostly attributed to China, which is not appreciated by India.
  • Limited success of trade blocs: As already stated above, the on-going wave of protectionism has put a question mark over the sustainability of even the most successful trade blocs. For e.g. Brexit has questioned the viability of the European Union.
  • Existing FTAs: India is having FTAs with most of the member countries of RCEP. Therefore, it might be futile to get into RCEP, unless it provides some additional benefits for India. Rather, it makes sense to invest diplomatic energy into strengthening the relationship with ASEAN countries and other members of RCEP.
  • Border issues with China: At a time when Indian army is engaged in a standoff with People’s Liberation Army (PLA or the Chinese army) along with Chinese expansionist tendencies in Bhutan and other neighboring countries, it does not send a right message to the domestic as well as international audience, to engage with China economically.
  • Atmanirbhar Bharat: Prime minister’s clarion call for self-reliance would mean that India provides better opportunities for the development of its domestic industry. This might also mean that India has to be wary of groupings which might be a deterrent to growth of the domestic industry.

Benefits of RCEP :

  • Enhanced market access and trade facilitation: RCEP is expected to create better opportunities for the suppliers of member countries into each other’s territory and enhance ease of doing business by creating better import infrastructure at the entry point.
  • Technological advancement: Countries like Japan and South Korea can be helpful in fulfilling technical gaps which are felt by India in case of high-end technologies. They can also help in taking care of strategic advancement, especially in building defense capabilities.
  • Investment from China: Despite its security implications, China has been a source of investment for Indian firms. Therefore, it is imperative that no door, which can be helpful for economic growth, is closed for eternity.
  • Global value chains: RCEP can make India an integral part of global supply chains. This can be better understood in the context of the Supply Chain Resilience Initiative (SCRI), a recent initiative of Japan. 
  • Strategic Considerations: Like India, Japan is also inclined to steer away RCEP from Chinese dominance. Therefore, it is pushing for an Indian presence in RCEP, even as an observer. Apart from that, India’s pullout from the RCEP despite the presence of Japan and Australia, two important members of Quad (Quadrilateral Strategic Dialogue), might show lack of coordination between the members of Quad.
  • Safeguarding India’s overseas markets: Countries like Vietnam are well-positioned to replace Indian textile exports, by the virtue of decreased tariffs in the territory of RCEP member nations. India might be staring at more such loss scenarios if it chooses to stay out of RCEP.
  • India’s huge domestic market: India can leverage its huge domestic market as it is clear to the other RCEP members that it is not just India, which will benefit from membership of RCEP. Even other countries will benefit if India joins the grouping. The exponential growth of the service sector in India and rising incomes have led to increasing disposable incomes, which make it a lucrative market for any exporting country.

QUAD & SCRI :

QUAD :

It is an informal security forum, formed to discuss security implications in the indo-pacific region and to impart synergy between member-nations.

  • Its members are the US, India, Japan and Australia.China has complained of quad being directed against itself.

SCRI :

SCRI is a Japanese initiative.

  • The origin of the initiative lies in the corona related outage in the global industry, which was dependent heavily upon Chinese manufacturing.
  • Since Wuhan was the ground zero of COVID, the lockdown led to crippling of the global industry which was over-reliant on Chinese supply of the raw materials.
  • In response to this, Japan came up with SCRI, to ensure diversification of supply chains, to ensure uninterrupted supply of raw materials in the case of stoppage of supply of raw material or intermediate goods due to natural disaster or economic sanctions.

Road Ahead :

  • Wait and watch: It will be two years when RCEP actually comes into force. Therefore, India can meanwhile observe the behavior of China towards the ASEAN countries and other member nations to better understand the dynamics coming into play in RCEP. On the basis of this observation, an informed decision can be taken regarding India’s membership of RCEP.
  • Building domestic economic strength: It is important to concentrate on the manufacturing strength of India, so that in the future even if India has to join the RCEP, the domestic industry is not impacted by the surge in imports. Rather, the effort should be to build the competitiveness of Indian exports to make India a global economic player.
  • Not a zero-sum game: Although strategic concerns dominate media reports and talk shows, it has to be kept in mind that RCEP is an economic grouping and should be treated as such. The historical baggage might only lead to India being left out of a global partnership, which has the potential to redefine global trade.

FAQs:

1. What is QUAD?

Answer :

  •  It is an informal security forum, formed to discuss security implications in the indo-pacific region and to impart synergy between member-nations.

  • Its members are the US, India, Japan and Australia.China has complained of quad being directed against itself.

2. What is SCRI ?

Answer : SCRI is a Japanese initiative.The origin of the initiative lies in the corona related outage in the global industry, which was dependent heavily upon Chinese manufacturing.