The Regional Comprehensive Economic Partnership (RCEP) aims to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement among the Asean member states and its FTA (free trade agreement) partners.
However, as negotiations to finalise the long-overdue agreement entered its final stages, in November 2019, Prime Minister Narendra Modi surprised fellow member nations by choosing to opt out of it.
Following India’s withdrawal, the remaining 15 nations signed the RCEP on Sunday on the sidelines of the annual summit of the 10-nation Association of Southeast Asian Nations, which Vietnam was hosting virtually. However, many participating nations are also becoming too economically dependent on China with the pact seen as a coup for it in extending its influence across the region.
What is RCEP
The RCEP negotiations were launched by leaders from 10 Asean member states (Brunei Darussalam, Cambodia, Indonesia, Loas, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and six Asean FTA partners (Australia, China, India, Japan, Korea and New Zealand) during the 21st Asean summit in Phnom Penh in Cambodia in November 2012.
The agreement allows for common one set of rules of origin to qualify for tariffs reduction with other RCEP members. This means less procedures and easier movement of goods. That should encourage multinational firms to invest more in the region, including building supply chains and distribution hubs.
Since China is the key source of imports and is also the main export destination for most member nations, the deal is likely to it in a better position to shape the region’s trade rules. The new tariff regime will kick in from 2022 and will see duties go back to 2014 levels.
India’s exit from RCEP
India pulled out of the China-backed trade agreement as negotiations failed to address its core concerns. These were threat of circumvention of rules of origin due to tariff differential, inclusion of fair agreement to address the issues of trade deficits and opening of services.
The deal would have brought down import duties on 80% to 90% of the goods, along with easier service and investment rules. Some in Indian industry feared that reduced customs duty would result in a flood of imports, especially from China with which it has a massive trade deficit. India’s trade deficit with other RCEP countries were also rising.
In its negotiations, the government had also raised the issue of unavailability of MFN (Most Favoured Nation) obligations, where it would be forced to give similar benefits to RCEP countries that it gave to others. It had raised a red flag over the move to use 2014 as the base year for tariff reduction.
Prime Minister Narendra Modi said India’s decision was guided by the impact it would have on the lives and livelihoods of all Indians, especially vulnerable sections of society. Despite its withdrawal, officials have said India could rejoin talks if it chooses to do so at a later date.
What it means for India
India would have the third biggest economy in the RCEP. Analysts believe that India might lose investments while its consumers may end up paying more than they should, especially when global trade, investment and supply chains face unprecedented challenges due to the Covid-19 pandemic.
Countries in the RCEP agreement would also lose out on an opportunity to access the Indian market that is notoriously hard to get into especially during the current global economic situation.
For India, it will be an opportunity to strengthen its domestic industries and move towards its dream of becoming self-reliant. A large number of sectors including dairy, agriculture, steel, plastics, copper, aluminium, machine tools, paper, automobiles, chemicals and others had expressed serious apprehensions on RCEP citing dominance of cheap foreign goods would dampen its businesses.
India-Asean relations and impact on RCEP
India’s relationship with Asean is a key pillar of its foreign policy and the foundation of the Act East Policy. Its focus on a strengthened and multi-faceted relationship with Asean is an outcome of the significant changes in the world’s political and economic scenario since the early 1990s and India’s own march towards economic liberalisation.
In 2012, Asean and India had commemorated 20 years of dialogue partnership and 10 years of Summit level partnership with a Commemorative Summit held in New Delhi under the theme ‘ASEAN-India Partnership for Peace and Shared Prosperity’ on 20-21 December 2012.
India-Asean trade and investment relations have been growing steadily, with Asean being India’s fourth largest trading partner. Its trade with Asean stands at $81.33 billion, which is approximately 10.6 per cent of India’s overall trade. While, India’s exports to Asean stand at 11.28 per cent of our total exports.
Investment flows are also substantial both ways, with Asean accounting for approximately 18.28 per cent of investment flows into India since 2000. FDI inflows into India from Asean between April 2000 to March 2018 was about $68.91 billion, while FDI outflows from India to Asean countries, from April 2007 to March 2015, as per data maintained by department of economic affairs (DEA), was about $38.672 billion.
Under the UPA government, India had opened 74 per cent of its market to Asean countries but richer countries like Indonesia opened only 50 per cent of their markets for India. It also agreed to explore an India-China FTA in 2007 and join RCEP negotiations with China in 2011-12. However, the impact of these decisions resulted in increased trade deficit with RCEP nations – from $7 billion in 2004 to $78 billion in 2014.