India on Monday decided against joining The Regional Comprehensive Economic Partnership (RCEP), a trade pact that has been spearheaded by China with the 10-nation Asean and four others. Mint explains what was at stake for India and why it opted out.

1) Why did the RCEP deal become important?

RCEP negotiations started in 2013 but acquired fresh impetus after the rise of protectionism globally that saw the US pulling out of the Trans-Pacific Partnership. The continuing US-China trade war is hurting economies of South-East Asia. In the face of growing protectionism around the world, the free-trade pact, RCEP, through commitments of tariff elimination, can safeguard the export markets of these economies. India and China account for half of the GDP of the grouping. The hope was that early conclusion of RCEP will potentially open up India’s vast market to the other 15 countries in the grouping.

Graphic: Paras Jain/Mint
Graphic: Paras Jain/Mint

2) What were India’s reservations?

India has seen its trade deficit with most countries rising manifold after an FTA was operationalized. It feared the same happening again with RCEP. To join RCEP, India would have had to commit to doing away with tariffs on about 90% of items from Asean, Japan and South Korea, and on over 74% from China, Australia and New Zealand. This could result in cheaper imports, especially from China, flooding Indian markets. Indian industries ranging from iron and steel, dairy, marine products, electronic products to chemicals and pharmaceuticals and textiles feared that the proposed tariff elimination would hurt them.

3) Have free trade agreements (FTAs) worked for India?

India’s FTA utilization rate is under 25%, among the lowest in Asia, according to the Asian Development Bank. Due to faulty commitments, strict rules of origin and high logistics costs, Indian exporters are unable to utilize FTAs. India’s trade deficit with Asean nearly trebled from under $8 billion in FY10 to $22 billion in FY19 after Ceca was signed in 2010.

4) Do Chinese exports pose a serious threat?

China accounts for about 50% of India’s total trade deficit. The India-China trade deficit rose to $57.86 billion in 2018, according to official Chinese data. The compo-sition of bilateral trade with China is a policy challenge for India. Half of India’s exports to China comprise primary commodities such as non-ferrous metals. About half of the imports from China comprise sophisticated products such as telecom equipment. New Delhi has raised import duties on several items to protect its industry against Chinese imports.

5) What will make FTAs work for India?

Besides protection for vulnerable industries, commitments from trade partners to lower barriers to trade in services, and easier and more work visas for India’s pool of skilled labour would have made the RCEP deal work for India. This is essential to counter the challenge of global resistance to immigrants. India should explore FTAs with its key markets—the EU, US and UAE—that impose up to 30% tariffs on India’s apparel exports but nothing on exports from competitors.

Puja Mehra is a Delhi-based journalist.

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