ECONOMIC IMPLICATIONS OF NOT JOINING RCEP

Subject : Economy

Context : Even as India opted to stay out after walking out of discussions last year, the new trading bloc has made it clear that the door will remain open for India to return to the negotiating table.

Concept :

Reasons for India’s Withdrawal

• Unfavourable Balance of Trade: Though trade has increased the post-Free Trade Agreement with South Korea, ASEAN countries and Japan, imports have risen faster than exports from India.
• Chinese Angle: India has already signed FTA with all the countries of RCEP except China. Trade data suggests that India’s deficit with China, with which it does not have a trade pact, is higher than that of the remaining RCEP constituents put together.

This trade deficit is the primary concern for India. Further, from a geopolitical perspective, RCEP is China-led or is intended to expand China’s influence in Asia.

• Non-acceptance of Auto-trigger Mechanism: To deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism.

Auto-trigger Mechanism would have allowed India to raise tariffs on products in instances where imports cross a certain threshold. However, other countries in the RCEP were against this proposal.

• Protection of Domestic Industry: India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products like dairy, steel etc.

For instance, the dairy industry is expected to face stiff competition from Australia and New Zealand. The RCEP binds countries to reduce that current level of tariffs to zero within the next 15 years.

• Lack of Consensus on Rules of Origin: India was concerned about a “possible circumvention” of rules of origin.

Rules of origin are the criteria used to determine the national source of a product. Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs.

Reasons For India to Review

• Global Economic Stagnation due to Covid-19: With global trade and the economy facing a steep decline due to Covid-19 pandemic, RCEP can serve as a bulwark in containing the free fall of the global economy and re-energising economic activity.
• Further, the RCEP presents a unique opportunity to support India’s economic recovery, inclusive development and job creation even as it helps strengthen regional supply chains.
• Need For Economic Realism: India should deter seeing RCEP only from the Chinese perspective.
• Staying out of RCEP may result in suboptimal economic growth without leveraging Asia-Pacific demand.
• In this regard, India can draw inspiration from Japan & Australia, as they chose to bury their geopolitical differences with China to prioritise what they collectively see as a mutually beneficial trading compact.
• Strategic Need: It is not just because gains from trade are significant, but the RCEP’s membership is a prerequisite to having a say in shaping RCEP’s rules.
• This is necessary to safeguard India’s interests and the interests of several countries that are too small to stand up to the largest member, China.
• Moreover, staying out of RCEP may also affect India’s Act East policy.