India has decided not to join the Regional Comprehensive Economic Partnership (RCEP) trade deal saying it did not get any “credible assurance for India on market access and non-tariff barriers".

• The Prime Minister conveyed this decision during his stay in Thailand for attending India-Asean summit, East Asia summit and the RCEP summit.

What is RCEP? The Regional Comprehensive Economic Partnership (RCEP) aimed to bring the 10 countries of ASEAN with Australia, New Zealand, South Korea, India, China and Japan to create the world’s largest trading block.  If it comes into being, RCEP will constitute more than 40 per cent of the global population and almost half of the world's economy. It consists of three of the six largest economies of the world, especially, the two fastest growing large economies — India and China. During the Mammalapuram visit of Xi, the Chinese side is expected to urge India to open up more of its market to Chinese goods, especially now since the ongoing trade dispute of Beijing with the United States has already impacted its own exports.

India’s reasons for not joining RCEP:

• Changed scenario due to the China-US trade war: 

  • China has been seeking to tie up the deal expeditiously as the country faces slowing growth from a trade war with the U.S.

  • This shifted the focus somewhat from crafting an agreement that worked for all to an early conclusion of agreement.

• RCEP lacking balance and fairness: 

  • India was not able to get several of its key concerns addressed. 

  • The biggest concern in the bloc is still with China with whom the Indian bilateral trade deficits lurk around USD 55-60 billion.

  • There are too many non-tariff barriers in place in China which have to be removed.Otherwise, progressively low tariff rates which form the core of the RCEP treaty, will seriously hurt our dairy, steel, MSME and textile sectors.

• Lopsided ‘Free Trade Agreements’: 

  • India has already signed a host of free trade agreements (FTAs) and comprehensive economic cooperation agreements (CECAs) with the South-east Asian nations, with whom India’s trade deficit only increased after the agreements came to effect. 

  • Even with other RCEP nations with whom India does not have trade agreements, namely, Australia, New Zealand, and China, India faces a massive and growing trade deficit. 

  • Domestic opposition: Agricultural producers and farmers are fearing that cutting tariffs on dairy and other produce would open the door to cheap Chinese imports and threaten sectors that support a vast swathe of the population.

• The economic slowdown: Indian industries facing consumption slowdown, would have been further hit by cheap imports.

• Stagnating Indian exports: India's exports have declined along with an increase in imports.

India’s main issues with RCEP: 

• The main issues that need resolution include 

  •  e-commerce chapter 

  • number of goods on which import duties should be completely eliminated 

  • norms to relax services trade

  • investor-state dispute settlement 

  • Rules of Origin (ROO)

1. The e-commerce chapter & the issue of cross-border transfer of electronic information: 

The e-commerce chapter contains clauses that, if India had agreed to them, would have prevented it from implementing data localisation rules on companies doing business in India.

• India has proposed locating computing facilities inside the country if it is meant to protect its essential security interests and national interests.

• Also Reserve Bank of India’s (RBI) in its April 2018 notification mandated “all system providers shall ensure that the entire data relating to payment systems operated by them are stored in a system only in India”. 

RCEP does not want data localization. It said that these requirements raise costs for suppliers of data-intensive services by forcing the construction of unnecessary, redundant data centres.

2. Number of goods on which import duties should be completely eliminated 

• • RCEP members want India to eliminate or significantly reduce customs duties on maximum number of goods it traded globally. 

  • To protect domestic industry against surge in imports, India suggested an auto trigger method that would automatically increase import levies once shipments cross a given threshold limit.

  • India is negotiating ‘standstill’ and ‘ratchet’ clauses which mean that the governments have to freeze their current levels of market opening, and if they liberalise more they cannot go back.

  • Dairy Sector - New Zealand and Australia would gain significantly for commodities- Milk powder and fat. Already Malaysia and Indonesia have successfully exploited the Indian market in palm oil, as did Argentina and Brazil in soyabean oil and Ukraine in sunflower oil. 

     2. Norms to relax services trade

• • Under services, India wants greater market access for its professionals in the proposed agreement. 

  • But the RCEP grouping had earlier rejected India’s proposal for a visa fee waiver on a common reciprocal basis, fearing migration and subsequent loss of jobs. 

  • Computer related services is a sector of India’s interest and in that Mode 4 is India’s main concern.

3. Proposed inclusion of the controversial investor-state dispute settlement (ISDS):

• This mechanism gives the exclusive right to bypass domestic legal systems and sue governments at international arbitration tribunals whenever they feel government regulation can limit their profits. 

• India does not want an ISDS mechanism in RCEP as it does not want its domestic laws to be challenged in offshore arbitral tribunals. 

4. Rules of Origin (ROO): 

• Rules of origin are the criteria used to define where a product was made and are important for implementing other trade policy measures, including trade preferences, quotas, anti-dumping measures and countervailing duties. 

• India wants strict rules of origin to prevent Chinese goods from flooding the country through member countries that may have lower or no duty levels. 

What India has accepted so far?

• India has so far agreed to several provisions that bring it in line with the investment rules applicable in most comparable countries, including 

  • banning host countries from mandating that the investing companies transfer technology and training to their domestic partners

  • removing the cap on the quantum of royalties domestic companies can pay their foreign partners.

Possible implications of India’s decision:

Losing out a big market:

• Once concluded, RCEP would be the world's largest integrated trading zone and the biggest trade pact after the World Trade Organization (WTO) was formed.

Cheaper goods and free trade: 

• Prime Minister insisted that his decision on RCEP would have to meet the test that Mahatma Gandhi specified for policy: It must improve the lives of the poorest. 

• But the reality is that, for a country like India, freer trade, cheaper goods and more reliable prices do indeed improve the lives of the poorest. 

Losing a foothold in Asia-Pacific: 

• While India is a member of the East Asia Summit, the premier regional forum for strategic dialogue, it is not involved in the economically-focused Asia-Pacific Economic Cooperation (APEC). 

• RCEP countries (barring Cambodia, Laos and Myanmar are members of the APEC and are participants in its various initiatives. RCEP could have boosted India’s position in the Asia-pacific.

Missing Act-East policy: 

• Joining the RCEP would have given more substance to our Act East policy. 

• The economic pillar of this policy has remained weak compared to those pertaining to political ties, strategic and security aspects and people to people relations.

Way forward:

Economic reforms: 

• India will have to accelerate reforms to make exports more competitive. 

• It also includes making available round-the-clock good quality electricity, cheap and efficient logistics, and access to cheaper and quality capital. It could certainly manage to insert itself into the global value chains that will henceforth be dominated by RCEP.

• A CII study had also outlined elements of a time-bound action plan till 2025 — and beyond. India should have had such an action plan in place to be RCEP ready.

Leveraging free trade agreements (FTAs): 

• Based on the RCEP negotiation experience, a realistic yet meaningful FTA strategy needs to be formulated for the next five years. 

• Further, getting more from the existing FTAs is critical; for this, the ongoing reviews need to be fully utilised. 

• Already in strategic shift, India is mulling a trade agreement with US.

• A trade deal with the US will underscore the growing convergence with the US as well as suspicions of the giant across the border.

Continuing the negotiations:

• India should continue to maintain its position of proposed dual tariff structure in the RCEP as it will help India to protect its tariff lines which are more vulnerable to cheap Chinese imports.  

• China has to give more access to Indian exports, especially of pharmaceuticals and agricultural products. 

• India should try to evolve a framework to negotiate sanitary and phyto-sanitary regulations, technical regulations, conformity assessment systems, sectoral regulations and their compliance frameworks. 

Leveraging India’s service sector:

• India’s main strength lies in the services sector and it must therefore, ensure that RCEP includes unbridled access for Indian service providers as well as a liberalised visa regime for people working in these fields. 

Tackling the slowdown: 

• Given that India is experiencing a structural and cyclical slowdown, the RCEP can also serve as an additional external factor for reformers to push for difficult yet important domestic reforms.

Conclusion:

Meanwhile, RCEP countries-in their final declaration-left a window open for India to return, believing they may be able to convince it on their demands. They will wait for New Delhi to join them in signing the agreement by February 2020. Only time can tell now.