India’s exit from RCEP IASToppers
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India’s exit from RCEP: Implications and Way ahead [Mains Articles]

India has announced not to join the Regional Comprehensive Economic Partnership (RCEP) agreement after continuously getting disappointed over its concerns not being addressed in the long seven year RCEP negotiations.
By IT's Mains Articles Team
November 12, 2019

Contents

  • Introduction
  • What is Regional Comprehensive Economic Partnership or RCEP?
  • Background of the issue
  • Contentious issues which made India exit the RCEP
  • Other external factors behind the decision
  • What was three tier tariff reduction mechanism proposed by India?
  • Benefits of joining RCEP
  • Disadvantages of coming out of RCEP
  • Farmers’ point of view with respect to RCEP
  • Indian Business group point of view with respect to RCEP
  • Victory for Indian Dairy Sector
  • Is all RCEP option are closed?
  • Future course of action
  • Conclusion

India’s exit from RCEP: Implications and Way ahead

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Introduction

Commerce and Industry Minister has clarified that India has taken a final decision to stay out of the Regional Comprehensive Economic Partnership (RCEP) agreement for the present as the India’s all demands were not being met by the RCEP countries.

Commerce and Industry Minister has clarified

What is Regional Comprehensive Economic Partnership or RCEP?

  • The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA).
  • It is proposed between:

rcep

  1. the ten-member countries of theAssociation of Southeast Asian Nations (ASEAN) [Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam] and
  2. the six countries with which ASEAN has existing FTAs(Australia, China, India, Japan, South Korea and New Zealand).
  • RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia.
  • It is among the proposed three mega FTAs in the world so far. The other two is:
  • The TPP (Trans Pacific Partnership, led by the US) and
  • The TTIP (Trans-Atlantic Trade and Investment Partnership between the US and the EU).
  • RCEP is viewed as an alternative to the TPP trade agreement, which includes the United States but excludes China.

Background of the issue

RCEP--Background-of-the-issue

  • To counter the US led Trans Pacific Partnership (TPP), China endorsed the RCEP.
  • In all, the proposed trading bloc would include more than 3 billion people, a combined GDP of $17 trillion and about 40% of world trade.
  • The negotiation started way back in 2013, but the final agreement is yet to be achieved.
  • India was looking at greater integration through the trade deal and had made efforts in that directions from the very beginning but with RCEP negotiations on the table, India faces a demand to reduce theses tariffs to a considerably low level.
  • It was demanded to eliminate duties on 92% of its products and keeping very low duties on another 7%, covering a total of 99% of all its agricultural and industrial products.
  • In order to protect its interest, India had proposed a three-tier tariff reduction mechanism under which the RCEP countries were categorised into three tiers based on the level of trade imbalance and existence of free trade agreement with the member country.
  • The liberalisation of Services was also a key point of India which met always met with disappointment.
  • India had been facing stiff opposition from the member countries and of late, it had been branded as the one impeding the overall negotiations with its unjustified demands of three-tier tariff reduction and services liberalisation.

Contentious issues which made India exit the RCEP       

  • The big point of concern was the ‘rules of origin’. According to it, till all countries did not have similar tariffs, till then India would need protection to ensure that goods from one country should not find its way into its market through another country by means of circumvention. India did not compromise on the matter.
  • Similarly, India stood its ground on its demand that the base rate of duty (for calculating tariff cuts) should be 2019 instead of 2014, as agreed earlier because those rates were not relevant any more.
  • India had also been firm in its demand that an adequate Auto Trigger Safeguard Mechanism be put in place to save the economy against dumping of cheap imports and import surges.
  • The country also did not want to accept `ratchet’ obligation in the investment chapter that would have prevented it from changing its existing rules.
  • A big reason behind aborting the RCEP is the uncompetitiveness of Indian exports and the fear that a flood of imports from the partner countries would wipe out many of the Indian players. Out of 15 other countries in RCEP, India has a total trade deficit of more than $105 billion with 11.

Other external factors behind the decision

  • The current international context has been seen as unhelpful. The China-US trade war and the challenges of the multilateral trading system brought added pressure for quickly concluding the RCEP negotiations. This shifted the focus somewhat from crafting an agreement that worked for all.
  • The economic slowdown and a sombre mood within the country that inter alia has seen exports stagnating.
  • There has also been opposition to the RCEP in recent weeks from several quarters in the country. 

What was three tier tariff reduction mechanism proposed by India?

  • The first tier proposed 80% trade liberalisation for ASEAN countries of which 65% would be implemented immediately and remaining 15% would come into effect in the course of 10 years.
  • The second tier proposed 65% trade liberalisation for South Korea and Japan with which India already has free trade agreements (FTAs). In return, the two countries agreed to offer 80% trade elimination for Indian Goods.
  • In the third tier, India has agreed to 42.5% trade tariff reduction to China, Australia and New Zealand. In return, these countries will offer India 42.5%, 80% and 65% tariff line reductions respectively.

Benefits of joining RCEP

rcep 1

  • Once concluded, this would be world’s largest integrated trading zone and the biggest trade pact after the World Trade Organization (WTO) was formed.
  • It will cover nearly half of the world’s population and nearly 30 per cent of global GDP.
  • A closer association with RCEP could have been of help to India in playing catch up with countries which are members of the group.
  • It could have also promoted formation of supply chains and facilitated participation in mutual recognition agreements.
  • Joining the RCEP would have given more substance to India’s Act East policy.
  • Manufacturing today requires greater integration with global supply chains. Signing the agreement would have signalled an embrace of freer trade, which could have aided in the shift of companies out of China to India.

Disadvantages of coming out of RCEP

  • India has succumbed to the protectionist impulses that have guided much of its recent trade moves by deciding not to join.
  • It reduces the opportunities for trading with RCEP countries which together accountfor roughly a third of global trade. 
  • The decision has complicated India’s course to integrate into global value chains and India has also ceded space to China to have greater say in the region.

Farmers’ point of view with respect to RCEP

  • All the key agricultural States such as Uttar Pradesh, Punjab, Telangana, Andhra Pradesh, Karnataka, Tamil Nadu and Haryana was witnessing the protestsby farmers, who demanded India’s exit from the economic pact.
  • The farmer’ union, NGO’s and intellectuals formed a group called Indian Coordination Committee of Farmers’ Movements (ICCFM) to organise and coordinate the protests.
  • The farmed had the opinion that they will be severely affected by dumping of heavily subsidised products and the IPR clauses are likely to seriously impinge on farmers’ seed freedoms.
  • The RCEP could have brought down import duties on most agricultural commodities to zero. 
  • The Dairy and Plantation sector would have been the most affected area.

Indian Business group point of view with respect to RCEP

  • The Confederation of Indian Industry (CII) said India would be cut off from the RCEP region in terms of preferential access and this would hinder investments from many RCEP countries.
  • Not being part of the RCEP is like not having an even footing in terms of preferential access and losing export competitiveness only harming India’s export and investment flow in the future.

Victory for Indian Dairy Sector

  • The key fear of the dairy sector was that tariff clauses for agriculture in the RCEP were much more severe compared to the existing World Trade Organization (WTO) agreement.

World Trade Organization (WTO)

  • While the WTO allows a country to fix tariffs up to a certain bound tariff, the RCEP binds countries to reduce that level to zero within the next 15 years.
  • There are 70 million household’s dependent on dairy in India which will now be saved with the opening of dairy sector to MNCs and other big companies big scale dairy production haul.

Is all RCEP option are closed?

  • RCEP countries-in their final Bangkok declaration-left a window open for India to return, believing they may be able to convince it on their demands.
  • They will wait for New Delhi to join them in signing the agreement by February 2020.

Future course of action

  • Back home, India will have to accelerate reforms to make exports more competitive. 
  • The imports should be regulated in conformity with domestic and international standards.

Conclusion

  • We hope that India’s decision to not join the RCEP will not detract the country from mounting a focussed effort in enhancing its competitiveness and expanding its export base.
  • India needs to explore other means for enhancing its market access. Therefore, bringing the ongoing trade negotiations with the US which is India’s largest export destination, to a successful conclusion should be a priority.
  • A realistic yet meaningful FTA strategy needs to be formulated for the next five years based on the RCEP negotiation experience.

 

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