RCEP decoded: Why India chose to stay out of Asia's mega free trade pact

Indian business community felt it would be swamped by imports with low duties, which it would not be able to compete with. The govt decided that it cannot afford to take the chance

What happened with the Regional Economic Cooperation Agreement (RCEP)?

Last year, in November, when heads of state of 16 nations (10 ASEAN+6) met at Bangkok to conclude the discussions on RCEP, the expectation about the formation of the regional trade bloc was at its peak. It got punctured to quite an extent when Prime Minister Narendra Modi decided to withdraw from the commitment to sign the RCEP agreement a year later in 2020. Modi made the announcement hours before the leaders were to go on stage to affirm they had concluded the negotiations that had been on since November 2011. On Sunday, after a four-day summit at Hanoi, leaders of the 15 nations signed the RCEP document. The agreement will have to be ratified by the legislature of each country before it comes into effect, a process that could take more than a year to complete.

Why is the RCEP a big deal?

Trade blocs predate the formation of nations. These arrangements were meant to reduce barriers to trade and offer preferential access among the partners. However, today’s trade blocs have become more ambitious to become free trade areas, then customs unions, graduating to a common market and then become economic and monetary unions. The European Union has traversed the length of these arrangements to emerge with a common currency, the Euro. RCEP is far more modest and aims to establish a free trade area among the nations that sign it. 

While the European and the American nations were the first to create trade blocs among themselves as the balance of global economic power shifted to Asia, the rush to include these countries, particularly China, in regional trading blocs became intense. A decade after China joined global trade in 2001 by becoming a WTO member, trading blocs in Asia are either meant to include it or keep it out. The chief example of the former is RCEP; and of the latter, the US-promoted Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Where does India stand?

India is a relative latecomer into the trade blocs. Its first free trade agreement was with Sri Lanka in 1999. Thereafter, India rapidly went to sign these agreements, with the most ambitious being the Comprehensive Economic Cooperation Agreement with Singapore, in 2005. India has found that most of its domestic industry is satisfied with the access to the local market and has little appetite to export. Reliance Industries, India’s largest company by market cap, for instance, exports mostly petroleum products where there is little scope for playing around with duties.

Except for Singapore, all of India’s free trade agreements have a long list of items that it protects from having to lower duties on. This makes India’s free trade agreements riddled with exemptions. In this environment, RCEP has few attractions for India.

Would RCEP have helped India?

In his speech last November announcing withdrawal from RCEP, Modi noted that India will not shy away from opening up to global competition across sectors, but demanded an outcome favourable to all countries and all sectors. What he meant is that for Indian companies’ larger imports imply higher competition. This encourages them to demand a protected environment. 

For a brief period during the RCEP negotiations, India became interested. The sixth round of these negotiations in December 2014 was held in New Delhi. The government reached out to the business community to educate them on the goals of RCEP. The response was not enthusiastic as business felt it would be swamped by imports with low duties, which it would not be able to compete with.

India has decided that it cannot afford to take the chance. Instead, it has raised a tariff wall around itself and told industry it has the space to improve its performance. These are captured in the Rs 1.45 trillion sop it has offered as production-linked incentives for 13 sectors. The deal is industry shall have to produce more and come up to speed to match the quality of foreign competitors. This shall need the import duties to stay. RCEP’s promise of low duties shall have to wait.