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Photo: Bloomberg
Photo: Bloomberg

A confident India need not stay out of RCEP anymore

Joining this mega trade pact could spell new opportunities that are likely to serve our ambitions well

One year after India abruptly walked out of this mega trade pact, the Regional Comprehensive Economic Partnership (RCEP) was signed by the remaining 15 countries, 10 of which form the Association of South East Asian Nations (ASEAN) bloc. Coincidentally, the signing took place just days after the biannual ASEAN summit, in which India participated and renewed its pledge to deepen trade ties. India’s free trade agreement with ASEAN was signed in 2010. Since then, bilateral trade has more than doubled, making ASEAN India’s fourth-largest trade partner. This healthy growth means there have been substantial mutual gains. Underscoring India’s commitment to deeper trade, Prime Minister Narendra Modi said, “Speeding up all types of connectivity, be it physical, economic, digital, financial… is a top priority." Indeed, it was Modi who had upgraded India’s Look East policy of the 90s to an Act East policy, implying greater economic engagement and also greater road, sea and air connectivity. Joining RCEP would have taken this a notch higher to Embrace East.

RCEP is ASEAN plus 5 (i.e. China, Japan, Korea, Australia and New Zealand). Most of these already have a free trade agreement with ASEAN and each other. India too has a free trade treaty with Korea and Japan, and one with Australia is in the works. So what is there to be afraid of in RCEP? It is, after all, simply a rehash of sorts; it retains all the existing spaghetti of free trade arrangements, and makes everything consistent with each other. For instance, India has three different trade treaty relationships with Thailand. Signing RCEP would help India sort out various entanglements caused by multiple overlapping treaties. More importantly for India, there has been an implicit understanding that RCEP will not have provisions that are more liberal than those in existing treaties.

The significance of RCEP cannot be overstated now that the world’s economic centre of gravity has shifted to the east. Including India, it would cover half the world’s population and a third of global output. India has been a supporter of this plurilateral institution, and participated for seven years in the negotiations that led to the pact’s adoption. It’s unclear why India walked out last year.

The current RCEP grouping has kept the door open for India to walk in. While its signatories seem aware that RCEP would gain considerable heft if India were to join, their welcome may not last forever. Japan, which had hinted that it would not join unless India was persuaded, has signed up.

India’s main concern was that RCEP would provide de facto duty free entry to Chinese goods. This can be addressed through rules of origin and stricter enforcement at the border. The truth is that Chinese imports often have a bulk of their value added in ASEAN countries, and China is only the finishing station. China has had a consistent trade deficit with ASEAN. India’s dairy industry too raised fears of a glut of milk from New Zealand. This is unnecessarily alarmist. Even though RCEP covers 90% of products, its zero-tariff regime is backloaded, and will come into play almost after 20 years. Additionally, there are safeguards for agricultural trade. One of RCEP’s big plus points is that it will smoothen value chains that straddle multiple countries. This can only help India’s Atmanirbhar campaign. Apple’s much-vaunted production base in India depends on value-chain inputs from other parts of Asia. The same goes for the two-way flow of auto components. India can be the world’s leading exporter of bulk drugs, but not without backward linkages of active pharmaceutical ingredients, which are sourced from RCEP countries.

Let us examine what has changed since last November. First, a new US administration led by President-elect Joe Biden is likely to undo President Donald Trump’s rejection of the Trans Pacific Partnership (TPP) agreement. TPP goes much beyond trade, incorporating labour and environment standards and incentivizing value chains to stay within is ambit. It has 12 countries, of which 7 are also part of RCEP. That would leave India as the only major country excluded from all major regional trade blocs. Second, of the nascent geopolitical grouping called the Quad, Japan and Australia have already joined RCEP and are also part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Third, China is consciously moving to a more domestic-oriented growth model. This rebalancing is part of its latest five-year plan and is also captured in the phrase “dual circulation model" propounded by President Xi Jinping. China’s domestic consumer market of $6 trillion would be more easily accessible to RCEP members than others. China has pledged to import over $22 trillion of goods and services over the next decade. Fourth, India’s exports to China have grown in the past three years, a trend that can be strengthened under RCEP. Lastly, sustained high industrial growth is not possible without high trade growth. Embedded technology, know-how and management practices often accompany international flows of goods and investments.

Atmanirbhar Bharat does not mean autarky or import substitution. It means being competitive and resourceful enough to afford necessary imports. It means attracting value chains that will make India a global manufacturing hub. Walking away from RCEP is an antithesis of this, and signing up, a sign of self-confidence and ambition.

Ajit Ranade is an economist and a senior fellow at The Takshashila Institution, an independent centre for research and education in public policy.

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