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Regional Comprehensive Economic Partnership (RCEP) is a trade agreement between the member states of the Association of Southeast Asian Nations (ASEAN) and its free trade agreement partners. 

Increasing population, dwindling natural resources, climatic changes have impacted the economies of many nations. In today’s strife-torn world forming economic partnerships is probably the most efficient way to bolster the economy and achieving the common good.

Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) are some good examples to cite. India is not a part of either of them, for certain cogent reasons. Despite the reasons, the impact of such partnerships on India’s trade and economy cannot be wished away.

This article tries to examine the need for economic partnerships, the scope and importance of RCEP, reasons for India staying away from RCEP, impact on India and some suggested measures.

Introduction

India, a country blessed with ample natural resources, is rising to claim its rightful position in global politics especially in the Indo-Pacific region in general and Indian Ocean Region (IOR) in particular. However, the internal strife, religious and cast divides; corruption levels and economic inequality faced by the majority of its citizens have kept it away from realising its potential.

With increasing population, dwindling resources India is facing many economic challenges. Pandemic situation and border skirmishes have added their woes. China’s concerted efforts to isolate India both geo-politically and economically is another major problem India is facing. In such a scenario Economic Partnerships can offer big succour and RCEP could have been a probable solution.

Despite that India chose to stay away from Regional Comprehensive Economic Partnership (RECP). This article would try to examine the need for economic partnership, the scope and importance of RCEP, reasons for India staying away from it, its impacts on India and some suggested measures. The article has been covered in two parts.

Need for Economic Partnerships

The stressed economies the world over have forced various national governments, as well as enterprises and other organisations to reconfigure their developmental strategies to cope with ongoing events such as financial contagion, globalization amongst others. In contrast to traditional developmental policies,  emerging strategies would need to be based on comprehensive local dialogue, which would enable the participants to be more proactive, with a view to withstanding changes in the global economic environment rather than top-down development imposed by planners (ILO, ND).

Another view promotes Partnerships and overall Development through the network of practitioners in the field of economic development, employment, skills and social inclusion. The partnership needs to build the capacities of stakeholders at all levels to better tackle current economic and social challenges. (OECD, 2006)

The United Kingdom (UK) on the other hand observed that the UK economy had been too dependent on a narrow range of industry sectors and therefore needed an economy driven by the strength of economic partnership and hence it’s joining the European Union BREXIT notwithstanding (Coetzee, 2014).  UK has now expressed the desire to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership –CPTPP (Bruce, 2021).

Factors for and Against Economic Partnerships

Though Economic Partnerships have become the best solution to tackle the current global situations, it’s not an ‘all in one solution. Thus, it would still be important to understand the basic factors ‘for and against’ Economic Partnerships. Some important factors are as mentioned below:-

Advantages

  • Trade and development objectives can be mutually beneficial through job creation and overall price reductions
  • Exporters profit from EPAs as it grants them duty-free and quota-free access to the broader market
  • Countries benefit from the implementation of wider reforms included in EPAs, such as the improvements in the rule of law.
  • EPAs promote regional integration.
  • Countries benefit from EPAs by an increased choice of products and lower prices.

Disadvantages

  • Trade agreements may not automatically lead to more trade
  • Despite the EPA some countries mange to get preferential access to the other countries’ markets too quickly, thereby harming local producers.
  • EPAs make it harder for countries to protect their infant industries by increasing competition in the market for their specialised products.
  • EPAs may have a lock-in effect on countries. Given increased regional integration, they may be bound to the region with which an EPA has been negotiated.
  • The main benefit of EPAs, quota-free and duty-free access to the major markets may fade quickly due to competition from other partners.

(Source: Buuren, 2015)

Accordingly, any country would need to evaluate the Pros and Cons before joining any trade agreement based on its national interest.

Based on the above, it could be said EPAs are becoming important for the economic development of a country/region. RCEP is one of the important trade agreement which has been recently concluded and has become a game-changer in Indo-Pacific Region. Let us now examine the Regional Comprehensive Economic Partnership (RECP) from all aspects, including those in relation to India.

RCEP Scope and Importance

China had been feeling uncomfortable with Trance Pacific Partnership and its inability to join the same. The trade war between China and the USA further accentuated that discomfort. As a counter, China tacitly came up with one of the world’s biggest free-trade pact ‘Regional Comprehensive Economic Partnership (RCEP).

What is the RCEP Agreement?

It’s a 20-chapter RCEP agreement, which aims for reduction or removal of trade tariffs in a number of areas, including agricultural and industrial products. It also sets out rules for data transmission between the signatories. The countries signing the trade pact represent 30 per cent of the global economy, the combined equivalent of about $26 trillion of GDP, and 30 per cent of the world’s population, or about 2.2 billion consumers.

Reasons for Prolonged Negotiations

The idea of RCEP was born in 2012 when ASEAN nations started discussions on harmonising trade policies. The negotiations were tough as members had conflicting requirements. The participating members took eight years to come to a mutually acceptable compromise and finalise the agreement. Finally, it was signed on 15 Nov 2020. The RCEP signatories include the 10 ASEAN nations – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – and major trading partners Australia, China, Japan, New Zealand and South Korea (national news, 2020, Cali, 2020), with a surprising miss of India. 

India too was part of negotiations for an appreciable time but withdrew later (in Nov 2019) as its concerns remained unanswered. We will examine this aspect later. Some other countries including the USA argued the pact didn’t go far enough and called RCEP a “Paper Tiger” that didn’t even warrant being described as a trade agreement (Wall Street Journal, 2019).  

Why is RCEP important?

The RCEP has assumed importance as it gives a significant boost to foreign direct investment in the region, particularly during the upheaval caused by the Covid-19 pandemic. Countries that signed the pact faced a 15 per cent decline in FDI to a combined $310 billion in 2020. It has been forecasted that Intra-regional investment, has increased the room for growth. FDI, investment by multinational enterprises (particularly those based in China and Singapore), and global value chains emanating from the region are all likely to benefit from the pact (Hoi, 2019).

The least-developed countries – Cambodia, Laos and Myanmar – are the most likely to benefit as they typically receive more FDI from neighbouring RCEP members. Investment in infrastructure and industry would also improve their participation in global trade.

Other Views on RCEP

Another study has observed that the Regional Comprehensive Economic Partnership (RCEP) is systemically significant for the global trading system. As per the Department of Foreign Affairs and Trade, the Australian Government would account for almost half of the world’s population, over 30 percent of global GDP, and over a quarter of global exports. In GDP and population terms, a concluded RCEP will constitute the world’s largest trading bloc. As per the “Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership” of 2013, its principal purpose is to “achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement among the ASEAN Member States and ASEAN’s FTA partners.”

Given the diversity of development levels within its membership, RCEP has focused on traditional trade reforms, such as tariff reduction and at-the-border measures. This is in contrast with the other mega-regional FTA in Asia — the recently-revived Trans-Pacific Partnership (TPP) — which includes a range of advanced trade-related regulatory measures across the investment and services domains. RCEP’s more modest ambitions in comparison to the TPP reflect its status as a multilateral FTA designed by, and to suit the needs of, developing economies in Asia.

At the regional level, RCEP’s developing country-focused model will likely become the template for the next phase of trade and investment liberalisation. RCEP is thus a landmark achievement in the maturation of the Indo-Pacific regional concept.

Comparison TPP vs RCEP

RCEP emerged from a series of earlier proposals for a region-wide FTA and, along with the TPP, was positioned as a “pathway” to Asia Pacific Economic Cooperation -APEC’s longer-term goal of creating the Free Trade Area of the Asia-Pacific (FTAAP). But, unlike the TPP, RCEP offered a far more regionally-focussed approach to membership. It did not include the extra-regional APEC members of North and South America, but compensated with the inclusion of all Asian economies, including China, Korea, India, Japan, and the full ASEAN bloc. This Asia-focused approach to membership is reflected in its goals. RCEP embodies a desire to achieve a regional trade architecture that would ensure all members are provided with the opportunities to fully participate in and benefit from deeper economic integration and cooperation.

Institutionally, RCEP offers an ASEAN-focused approach to trade multilateralism. RCEP formally endorses the principle of “ASEAN Centrality,” and uses a closed membership model limited only to ASEAN and its current FTA partners. However, in economic terms ASEAN is a comparatively small party, accounting for only 11 percent of RCEP’s combined GDP. China (47 percent) and Japan (21 percent) are the economic heavyweights of the bloc.

 RCEP has given birth to a leading prospect for driving a new phase of economic liberalisation in Asia. Its membership is genuinely inclusive of all Asian countries and is of sufficient size to claim systemic importance in the global trade system. The concluded RCEP has turned a page on two decades of bilateral trade deals in the region, returning the Asian region to an inclusive and member-driven multilateral architecture.

RCEP has found greater acceptance as it offers a more “traditional” model for trade liberalisation than the TPP. Its objectives are principally focused on liberalising barriers to goods and services trade at the border, involving the elimination of tariff and non-tariff barriers and aims for a “WTO-consistent” approach (Seymour and Wilson, 2019).

Geopolitical Implications of RCEP

Based on its “Joint Declaration” and “Guiding Principles,” RCEP reaffirms ASEAN centrality in regional processes. While ASEAN lies at the heart of the Indo-Pacific region, and some member states have individually begun using the Indo-Pacific concept, ASEAN as a grouping is yet to formally adopt the construct. A concluded RCEP would likely advance its adoption in Southeast Asia by creating an Indo-Pacific institution in which ASEAN’s central position is secured. It would also be a victory for the ASEAN consensus on trade and investment processes at the same time that the ASEAN Economic Community is seeking to grow in stature and institutional prowess. RCEP will support ASEAN remaining the strategic convenor of the broader region’s processes, particularly in economic integration matters. In addition RCEP, sans USA has enhanced China’s rise as a multilateral leader. While an ASEAN-centred initiative, China is the principal economy of RCEP- making it the lynchpin of RCEP- a fact which should worry both India and the USA (Seymour and Wilson, 2019a).

Reasons for India Opting Out of RCEP

The 15 member countries chose to operationalise the regional trade agreement (in Nov 2020), without India. It is, therefore, important to examine India’s reasons for not accepting factors that were acceptable to 15 other countries. Non-resolution of India’s apprehensions ultimately led to its opting out. China’s aggression in Eastern Ladakh probably lent credence to that decision. Let us examine the said circumstances and the economic implications of India’s ‘Opt Out’ move.

One small solace is that despite walkout, RCEP the member countries have made it clear that the door will remain open for India to return to the negotiating table.

Reasons for India’s Walk Out

On 04 November 2019, India decided to exit discussions over “significant outstanding

issues”. According to a government official, India had been “consistently” raising “fundamental issues” and concerns throughout the negotiations and was prompted to take this stand as they had not been resolved by the deadline to commit to signing the deal. India’s decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector as well as avoid dumping of cheap goods. According to officials, the proposed structure of RCEP still did not address India’s issues and concerns.

Further, the China factor also had its impact on India’s decision. Escalating tensions with China probably formed one of the reasons for India’s decision. While China’s participation in the deal had already been proving difficult for India, due to various economic threats, the clash at Galwan Valley soured relations between the two countries. The various measures India has taken to reduce its exposure to China would have sat uncomfortably with its commitments under RCEP. Major issues which India felt remained unresolved during RCEP negotiations were as follows:-

  • Unfavourable exposure that India would have to China. This included India’s fears that there was “inadequate” protection against surges in imports (dumping of cheap goods).
  • Possible circumvention of rules of origin— the criteria used to determine the national source of a product — in the absence of which some countries could dump their products by routing them through other countries that enjoyed lower tariffs.
  •  No countermeasures like an auto-trigger mechanism to raise tariffs on products when their imports crossed a certain threshold.
  • Non-exclusion of most-favoured-nation (MFN) obligations from the investment chapter. Non-exclusion would have allowed other countries including those countries with which it has border disputes, the benefits it was giving to strategic allies or for geopolitical reasons.
  • Inevitability of extending benefits given to other countries for sensitive sectors like defence to all RCEP members.
  • RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
  • Unfavourable trade balances that it has with several RCEP members, with some of which it even has FTAs. An internal assessment by the government had revealed that the growth in trade (CAGR) with partners over the last five financial years was a modest 7.1%.
  • Utilisation Rate of existing FTAs has been “moderate” across sectors,  which covers pacts with Sri Lanka, Afghanistan, Thailand, Singapore, Japan, Bhutan, Nepal, Republic of Korea and Malaysia.
  • India has trade deficits with 11 of the 15 RCEP countries, and some experts feel that India has been unable to leverage its existing bilateral free trade agreements with several RCEP members to increase exports.

Will continue in the Next Part

Disclaimer: The views and opinions expressed by the author do not necessarily reflect the views of the Government of India and Defence Research and Studies

Title image courtesy: https://asean.org/

Cmde S L Deshmukh

By Cmde S L Deshmukh

Commodore SL Deshmukh, NM (Retd), has served Indian Navy for 32 years, is a Mechanical Engineer is specialised in both Marine & Aviation domains. He also holds a Masters in Defence Studies and a Post-Graduate in Management. He has served onboard aircraft carriers and is specialised on fighter aircraft and ASW helicopters. He held many operational and administrative appointments including Principal Director at Naval HQ, Commodore Superintendent at Naval Aircraft Yard, Director, Naval Institute of Aeronautical Technology and Project Director of a major Naval Aviation Project. He is alumni of Defence Services Staff College Wellington. He was with Tata Group for 5 years and is currently working with SUN Group‘s Aerospace & Defence vertical as Senior Vice President. He is also the Life Member of Aeronautical Society of India.