Premature membership of RCEP would not serve Indian interests

Nearly a year after India’s decision to pull out the 16-member Regional Comprehensive Economic Partnership (RCEP), the remaining 15 nations have finally inked the deal. The mega trade pact involving countries from the Asia-Pacific region, however, has kept the door open for India to join from the very date the agreement goes into force.

Following the signing of the mega trade pact by 15 nations, the jury in India is out once again, analysing the possible consequences for the country. India has stayed out of the block, citing existing trade deficits with China and 10 other RCEP countries as a major reason. India was also peeved because members of the bloc failed to address its concerns of inadequate measures against an insurge of cheap imports and its demand for easier access to its members’ markets for services.

While the Indian government remains unmoved despite continuous cajoling by RCEP nations, both through formal and informal channels, some experts are not impressed with India’s sustained indifference towards joining the pact. In the past two weeks, a series of opinion articles have appeared in the national and international media questioning India’s decision of not joining RCEP; some of them even termed it a “historic blunder”.

No one should question India’s intention of sincerely exploring ways to remain a part of RCEP. The government gave it adequate thought before arriving at this decision. India participated fully in all RCEP negotiation rounds, including several inter-session meetings, and hosted two rounds of talks in India. On the domestic front, more than 100 stakeholder consultations were organized across big and small cities, with the aim of arriving at a better-informed negotiating stance. Most industry leaders across business sectors, big and small, as also farmer associations and civil society organizations, were not in favour of India joining the trade bloc. And, in the end, the offers on the table remained unfavourable to India.

By joining RCEP, India would have further risked a flood of cheap Chinese imports in sectors like electronics, which India has been trying to resurrect almost from the ashes. India had tried and failed to win substantial concessions in areas like work visas for its information technology-enabled services. Two of India’s proposals—an RCEP business travel card and an RCEP service supplier card—failed to find favour with a majority of the bloc’s members.

Let me now turn to address some of the oft-repeated arguments made in favour of India signing up. Firstly, RCEP would have provided an excellent opportunity for Indian firms to get integrated with regional value chains. This, no doubt, is a strong reason to stay in such a large trading block. However, merely joining a trade bloc does not automatically result in integration with global value chains. The complex nature of global production networks requires a lot of economic and trade policy reforms on the domestic front.

The second important argument made is that India would lose an opportunity to access RCEP’s common market, touted as the world’s largest trading bloc (even bigger than the European Union). But this argument too doesn’t hold much water if Indian producers are not competitive. Competitiveness is driven by factors both within and beyond the control of domestic industry. Eco-system costs, for example, are not in India Inc’s control. So it would be an over-simplification to assume that Indian industry does not have the capability or appetite to be competitive. Often, global competitiveness inside factory gates gets diluted by costs borne outside those gates.

Countries and companies often export products on the principle of marginal costing, and hence tend to sell at lower prices in export markets than they do domestically, as only a small proportion of their output is exported. Labelling a domestic producer as ‘uncompetitive’ just because an exporter from elsewhere is willing to sell at a lower price on a marginal-cost basis, by which all it aims to recover is the add-on expense of additional output, amounts to ignoring some fundamental issues. Also, economies of scale in countries like China, where most manufacturers are 8-10 times in size because of their vast domestic markets and decades of exports, work to the disadvantage of Indian manufacturers that are only in their initial stages of achieving global scale.

If one analyses India’s export data of the last two decades, the trend seems to weigh against free trade agreements (FTAs). India’s merchandise exports grew at an annual rate of more than 18% between 2000-01 and 2010-11, which was largely a pre-FTA period. In this period, India activated only two FTAs—with Sri Lanka and Singapore.

India joined the FTA bandwagon in a big way from 2010 onwards. It operationalized big trade agreements with the 10-nation Association of South East Asian Nations (ASEAN), Japan, Korea, and separately with Malaysia. However, despite these deals, India could realize annual merchandise export growth of only 2.5% between 2010-11 and 2019-20. This disappointing performance shows that FTAs are no magic wand for exports.

The message, then, is loud and clear: Unless we address the structural issues that impact Indian competitiveness, our domestic industry will find it difficult to leverage any FTA to its advantage. While RCEP may theoretically offer India new opportunities for exports and integration with pan-Asian production networks, we have a lot of work to do internally before we are in a position to make the most of free-trade deals.

T. V. Narendran is CEO & managing director, Tata Steel