RCEP Pullout: Bold Decision or Protectionism?

Published : Nov 15, 2019 10:28 am | By: M D Sridharan

India pulled out of RCEP citing that there is no credible assurance for India on market access and non-tariff barriers. The decision got mixed reactions while a section of experts hailed the decision as bold, critics blamed it as an act of protectionism.

India has decided not to join the Regional Comprehensive Economic Partnership (RCEP), which would have been the largest free trade agreement with 40 per cent of global commerce and 35 per cent GDP involving 16 countries from Southeast Asia and East Asia, as well as China, Australia, New Zealand, Japan and South Korea - home to 3.6 billion people or half the population of the world.

According to government sources, Prime Minister Narendra Modi, attending the ASEAN summit in Bangkok, stood firm on India’s concerns in the trade deal not being addressed and decided there cannot be any compromise on core interests.

The RCEP comprises 10 ASEAN nations and six of its FTA (free trade agreement) partners – China, India, Japan, South Korea, India, Australia and New Zealand. However, India opted out of the RCEP. The original RCEP was aiming to facilitate the creation of the biggest free-trade region in the world as the 16-nation grouping is home to 3.6 billion people, or nearly half the world’s population.

The foremost factor for pulling out RCEP is while there were no assurances on getting access to markets like China, the trade pact would have opened up India's market. The Indian governments said that it did not get any “credible assurance for India on market access and non-tariff barriers". The danger that the Chinese goods would overwhelm Indian market, certainly would have had a major impact on the domestic industries especially the small and medium scale sector

Moreover, in the backdrop of growing clamour over the state of the economy, the decision to pull out has lot of political significance. At least a dozen opposition parties warned the government of the negative impact of joining the deal at a time when the Indian economy was “in a shambles". All the major farmers’ groupings – from the All India Kisan Sangharsh Samiti (AIKSCC) and the Indian Coordination Committee of Farmers Movement (ICCFM)  to Swadeshi Jagran Manch (SJM) and Bharatiya Kisan Sangh (BKS), the two affiliates of RSS – stood in staunch opposition to the deal.

They also urged the government to review the faulty Free Trade Agreements (FTAs) and Comprehensive Economic Partnership Agreement (CEPA) done with Japan, South Korea, and other countries. Also, many industry representatives voiced that joining RCEP would have meant incurring a greater trade deficit with China which has great competence in the manufacturing sector."

Prime Minister Modi during his speech at the RCEP Summit in Bangkok, Thailand, said, “The present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of the RCEP. It also does not address satisfactorily India’s outstanding issues and concerns. In such a situation, it is not possible for India to join RCEP Agreement”.

“India stands for greater regional integration as well as for freer trade and adherence to a rule-based international order. India has been pro-actively, constructively and meaningfully engaged in the RCEP negotiations since inception. India has worked for the cherished objective of striking balance, in the spirit of give and take,” the prime minister said. “When I measure the RCEP Agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the Talisman of Gandhiji nor my own conscience permit me to join RCEP,” Modi said.

“India’s decision to not sign RCEP is a result of PM Narendra Modi’s strong leadership & unflinching resolve to ensure national interest in all circumstances. It shall ensure support to our farmers, MSMEs, dairy & manufacturing sector, pharmaceutical, steel & chemical industries," home minister Amit Shah tweeted.

Modi also received whole hearted support from the opposition parties that include Congress and Left for pulling out of RCEP. Congress party said the Indian economy was 'under siege' and signing of RCEP will deal a 'body blow' to it. It is the first instance of an overwhelming support Modi received after Pulwama, especially at a time when the country is facing an economic crisis.

The RCEP negotiations were launched by ASEAN leaders and six other countries during the 21st ASEAN Summit in Phnom Penh in November 2012. The objective of launching RCEP negotiations was to achieve a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement among the ASEAN member States and its FTA partners.

Why India pulled out of RCEP?  

The RCEP covers trade in goods and services, and also investments, economic-technical cooperation, competition and intellectual property rights. While India pulled out of RCEP, the rest 15 countries decided to move ahead. But, without India, RCEP does not look as attractive trade pact as it promised to be during negotiation stage.

While India maintained that the pact does not address satisfactorily India's issues and concerns, there were complaints that India pitched in its demands at the "last minute". But, India had raised the issues during negotiation stage itself as industry and farmers had expressed their serious concerns over RCEP.

Moreover, currently India's economy is passing through a difficult phase and the rate of GDP growth has been slowing down for five consecutive quarters, since January-March 2018. The opposition parties point out the combination of the demonetisation move in November 2016 and the GST rollout as the major factors for the economy slow down.

Further, India has massive trade deficits with almost all economic powerhouses of the world and ironically India has serious trade deficits with at least 11of the 15 RCEP countries. Worryingly, India's trade deficit with these countries is only getting increased in the last few years - from $54 billion in 2013-14 to $105 billion in 2018-19.

Incidentally, RCEP pact was opposed by both the industry and farmers alike. Manufacturing sector in India is in crisis and output grew at its slowest pace in two years in October. Services sector is also not doing well.

On the other hand China and ASEAN countries have robust service sector and a FTA with these countries may further damage the Indian economy. In agriculture, domestic players dealing in dairy products, spices would face dumping from the South Asian spice majors.

When it comes to manufacturing, undoubtedly India is not competitive at a global level. Further, it has gone down in the last decade or so for many reasons. We are certainly way behind many countries. India simply does not enough to export to become a monopoly.

Already India is facing tough competition from the ASEAN countries.  For example, Indian traders are finding it difficult to compete with spices from Sri Lanka and rubber from Vietnam and Indonesia. In addition, Australia and New Zealand are known for their dairy products all over the globe and their entry will further damage Indian dairy industry.

Under the circumstances where the industries are reeling under pressure and the government is struggling to revive the domestic economy, a massive free trade pact like RCEP would have further exposed the Indian businesses and agriculture to unhealthy competition from countries which are waiting to grab a pie in the export arena. Undoubtedly a free trade agreement with the grouping would have increased it further.

Widening trade deficit would empty foreign exchange reserve of India at a faster rate. And, a depleting foreign reserve is never good for any economy and is least desirable for the one trying to recover. Indian businesses would be hit hard as RCEP does not offer enough protection to them.

India opted out of Regional Comprehensive Economic Partnership over fears that its industry would be deluged with imports from other Asian markets, especially from China. India has been forcefully raising the issue of market access as well as protected lists of goods mainly to shield its domestic market.

At present, India ships 20 per cent of all its exports to the RCEP countries and receives 35 per cent of all imports from them. China is the largest exporter to almost all countries of the group, including India. Of India's $105 billion trade deficit with RCEP countries, China accounts for $53 billion.

Several key Indian industry players have cautioned the government about Chinese game plan to use RCEP countries as a connecting network to flood the Indian market and red-flagged the Chinese agenda.

China has emerged the dominant partner in the RCEP. China is an exporting super power and its supremacy lies in its ability to export almost all things they manufacture. Further China is armed with a good manufacturing base and an excellent supply chain. Their agenda is low qty products and mass production. Currently, for every Dollar India export to China, we import three Dollars from China. India, with its 1.3 billion population offers the biggest free access market to the Chinese companies and already Chinese products are already flooding the Indian market.

China has already covered most markets united under RCEP umbrella.  ASEAN-6 (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam) had a trade surplus of $53 billion in 2010 which turned into a trade deficit of $54 billion in 2016.

China needs greater access to Indian market to sustain its manufacturing industries. A failure to find a market will have cascading effect on Chinese economy, especially after the trade war with Donald Trump administration.

India wanted a key clause to be included in the RCEP pact for auto-trigger mechanism as a shield against sudden and significant import surge from countries like China. Modi wisely just refused to be a willing dumping ground of China's trade imperialism.

Also the RCEP would have undone various good initiatives such as Make in India, Digital India, and Skill India done by the NDA government under Modi.

Sound political judgement

Experts point out that pulling out of RCEP was not only an economic decision, but indeed a sound political judgement too. Further, India not only boldly refused to cave-in to pressures from the global powers on trade issues but also stressed on the need to address India’s concerns over trade deficits and the need for other countries to open their markets to Indian services and investments. Indeed, Modi has demonstrated a strong resolve in matters of international trade and related negotiations. Recently, Modi demonstrated his negotiation skills with US President Donald Trump also.

It was not only a big decision but a tough one too as the RCEP is no ordinary free trade agreement about import and export of commodities. It essentially covered goods, services, investment and intellectual property rights. It is not an easy call to keep off from such a large agreement with potentially huge volumes of trade and investment.

While, knives are now out attacking the Modi government for turning its back on RDEP, critics also question Modi about the uncertainty of India’s economic future. Many criticized Modi for being turning “protectionist” of Indian industries and traders as they point out that  on one side  by pulling out of RCEP, Indian consumers have been kept away from the possibility access to  cheap goods and services from outside and on the other hand denied bigger markets for Indian products.

Some experts while recognising what PM Modi has done is in India’s interest, slam that the decision has left India isolated.  “This is a great time for India to bring in large multinationals as investors to the country and if they have duty free access to the large Asian markets it will be an added kind of incentive for them to locate themselves in India. If RCEP is signed by other 15 countries and we are sitting outside, no multinational will want to come here”, said former NITI Aayog vice chairman Arvind Panagariya.

Critics points out that protecting Indian farmers, businesses, consumers and workers from global competition, leads to not only isolation but also speaks of a defeatist attitude.

At the same time one must value potential gains against serious possible losses. While Indian manufacturers feared an onslaught of cheap Chinese goods, the retailers feared big investment in e-commerce. There exists a palpable anxiety from the producers of primary goods.   While critics point out to the inefficiencies of the Indian manufacturers and traders to compete at a global level, indeed there lies an underlying, and legitimate, need for the government to support against predatory trade practice by multinational giants.

Ironically, free trade agreements have not worked well for India in the past. A Niti Aayog analysis on multiple free trade agreements that India signed in the past decade and published in 2017, revealed that import from FTA countries increased while export to FTA countries did not match. The report said that FTA utilisation by India has been abysmally low between 5 and 25 per cent. The past experience of FTA only resulted in the losses to rubber, coffee, coconut, cardamom and pepper farmers had served a warning to Indian agriculture. A similar fate awaited wheat, cotton, oilseed farmers and dairy sector if India signed the RCEP.

Finally, this was a purely a political decision. Had Modi signed the RCEP, the opposition would have consolidated against him and also labelled his government as anti-farmers and anti-small traders.

While it is widely acknowledged that India’s walking out of the RCEP deal makes economic and political sense. Equally, it is time to introspect why India has been always at a disadvantage when it comes to trade agreements, and why have we become reflexively defensive?

Experts are of the opinion that lack of competition will eventually make Indian businesses and farmers even more unfit, wary of competition and lack of exports will make it harder for India to register the kind of growth that it seeks to register. Such moves, in the long run will cripple India's ability to move towards becoming a strong economy. 

It is time the government needs to show political will in implementing deep-seated economic reforms by developing the markets, increasing the scope for exports and face up to the competition glo

Other Blogs