We can’t stay out of trade arrangements like RCEP forever

When one door closes, another opens,” is an adage good enough as a philosophical outlook, but in international relations that’s not always true. The Regional Comprehensive Economic Partnership agreement (RCEP) door is closed for India. Or rather, New Delhi closed the door to the 15-member trade body on itself. India’s presence would have added 1.3 billion people more to the world’s largest trade arrangement, but it will still represent more than two billion people and account for about 30% of global trade.

The RCEP countries are also part of other regional and global trade and non-trade blocks. Ten of the 15 are also members of the ASEAN, trading with India under the ASEAN–India Free Trade Area Agreement. India also has a Comprehensive Economic Partnership Agreement (CEPA) with Japan and Australia, who are also part of the four-member Quad with India and the US, and who play major roles in the emerging Indo-Pacific architecture. India has a flourishing bilateral trade with South Korea, guided by the successful CEPA with that country since 2009. A month before the global lockdown due to the Covid-19 pandemic, an India-New Zealand bilateral trade agreement was in its final stages of negotiation.

India’s faith and confidence in the time-tested bilateral trade paradigm, increasingly through Free Trade pacts, seems to be one of the main reasons New Delhi chose not to rush into RCEP. It would be fair to expect the trade negotiators to take stock of the situation and weigh the pros and cons of giving up or compromising on the terms and conditions of FTAs with existing trade partners for the sake of a much wider but uncharted multilateral trade avenue.

On the flip side, it should be noted that India has a $24 billion trade deficit with the ASEAN countries and unresolved trade-related differences, which if resolved can take the trade to over $300 billion. The reality is that all these FTAs put together have not been able to accrue the advantage of export revenues to Indian industries due to a number of reasons, including business-unfriendly regulations from the government besides stiff competition from China and other emerging economies. Although bilateral FTAs have increased trade in volume, trade under FTAs and with ASEAN has resulted in enormous deficit, too. If India had joined RCEP, this trade deficit would have reached a level over $93 billion. With tariff reduction and other conditionalities, the trade situation would have turned to our disadvantage, seriously impacting local industry and the MSME sector.

India’s decision not to join the RCEP for now, therefore, seems to be largely motivated by New Delhi’s apprehensions on mounting trade deficits with RCEP countries. And the 800-pound gorilla of trade deficits is the one with China, which is estimated to be $48.66 billion in 2020, down from over $50 billion in pre-Covid years.

Indeed, one of the reasons advanced by India for opting out of the RCEP was its inability to withdraw or even lower tariff in some or all of the areas as it would result in dumping by the Chinese. This, at a time when the Covid-19 pandemic is being blamed on China and the ongoing stand-off in Ladakh has vitiated the atmosphere. But China, on the other hand, has committed to scrapping tariffs in goods and services where it has a competitive edge. But this should be seen in perspective: For one, China is engaged in and wants to focus on capacity-building in some key and relevant industries of the future, such as electric vehicles, defence ancillaries, etc. It has been granted a 16-year grace period to reap the long-term benefits of these industries before allowing tariff reduction in them. By the end of that period, China would have squeezed every possible advantage to grow its indigenous industry. If China could negotiate for a long-term grace period, there is no reason why New Delhi could not have bargained for a similar concession. One can only believe that our negotiators did their best but failed to secure concessions.

It is intriguing that the uneasiness over the not-so-peaceful rise of China, which ideally should have goaded our Quad partners Australia and Japan to keep out of the RCEP, seems to have had little effect on these countries. Their economic considerations seem to have prevailed over the collective strategic objectives of some of the countries in the Indo-Pacific. Will this be interpreted as a substantial diplomatic victory for China? Will China, the largest economy in the RCEP, link the flagship Belt and Road Initiative with RCEP and be able to draw more countries into its economic and strategic orbit?

The strengthening of the view that RCEP is a China-led project will serve very little purpose for India in the ongoing perception battle. In the emerging world order, decentralised supply chain mechanisms and free and open trade regimes will get increasingly integrated with strategic objectives and security considerations. India needs to play this game smartly. To begin with, New Delhi may have to encourage and support the fledgling CPTPP and work on the idea of an Indo-Pacific trade platform, anchored on democratic principles of collective growth as against China’s hegemonic approach. Meanwhile, while it may not be prudent for India to decouple national security considerations and economic advantages of RCEP, the Prime Minister’s Atmanirbhar Abhiyan will have to be put on a fast track, ease of business indices improved, indigenous manufacturing and exports should be encouraged to get equipped for an entry into RCEP or other trade arrangements from a position of strength.