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RCEP: India's Stand (17 November 2020)

RCEP: India's Stand (17 November 2020)

Why in News:

RCEP: 15 nations sign world's largest free trade agreement.

Context:

A day after the Regional Comprehensive Economic Partnership Agreement (RCEP) was signed by 15 countries — without India — External Affairs Minister S Jaishankar said on Monday that the impact of past pacts has been de-industrialisation and the consequences of future ones would lock India into “global commitments” — many of them not to India’s advantage. He also said that those who argue “stressing openness and efficiency” do not present the full picture, and that this was “equally a world of non-tariff barriers of subsidies and state capitalism”. Fifteen Asia-Pacific nations, including China, on Sunday signed the world's biggest trade agreement, the Regional Comprehensive Economic Partnership (RCEP), sans India with hopes that it will help recover from the shocks of the COVID-19 pandemic. 

Background:

The RCEP was signed after eight years of negotiations at the conclusion of annual summit of Southeast Asian leaders and their regional partners, held virtually this year due to the COVID-19 pandemic.

 India, one of the leading consumer-driven market in the region, pulled out of talks last year, concerned that the elimination of tariffs would open its markets to a flood of imports that could harm local producers.

But other nations have said in the past that the door remains open for India's participation in the RCEP, influenced by China.

Summary of the Debate

Why India refuse to sign RCEP deal?

Some of the arguments that India had raised which were not satisfied were:

  • Most favoured nation status: There should be a carve out for grunting most favoured nation status on investment because if India were to give for instance, some special status to Kuwait or Saudi Arabia or European Union to invest in India and on MFN basis that would get pocketed by the RCEP partners that would not be in India’s interest.
  • Lowering of Tariffs: That could give rise to an import surge and if that was so, then barring the secular increase which was to be provided, if the import surge went beyond that then a country should have the right to impose safeguard duty. That was also not agreed upon.
  • Transparency obligations: Which countries were expected to adhere to and the main objection underlying all these was the way the Chinese specifically used subsidies and state capitalism to circumvent the provisions of an agreement and to bring in cheap goods and then destroy the industrial growth that is taking place in the country.
  • Services Sector: India has demanded that the ASEAN countries should open up their services sector so that Indian professionals and workers can have easier entry into their market.
  • Rules of origin: In the unilateral agreement of the kind of RCEP, there is a provision that the country where the most value addition has taken place need not be the country of origin. It could be finished in some other country and it could be exported from there. So, it would be known as accumulation of value addition. In this case, because the duties were going to be different from the ASEAN, China or Australia and New Zealand. So, if the countries were to come down much later for China, China could circumvent and send the goods through ASEAN into India at a much lower rate. Thereby, defeating the provisions of the agreement.

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Economic implications of India opting out of RCEP:

  • Direct investment: Policy of not allowing direct investment into India under the automatic route by firms in countries which have a border with India. But, that is under review at the moment. It may be relaxed up to 25 percent in non strategic sectors and can be invested by firms in countries which have a border with India.
  • Technology: India already has FTAs with ASEAN, with Japan and with Korea and Japan and Korea are the drivers of modern technology. As far as Australia and New Zealand are concerned, not much comes out from there by way of new technological advances. So, it is basically China was collaborating and providing assistance to India to fill this technological gap. Investment from China was coming in the tech industries, digital industries and there it was basically with the motive to make profits and to gain strategic advantage in certain industries. So, India has to look elsewhere for technology and India has to develop its own technology.
  • Quad: It will have some implications on Quad at the symbolic and psychological levels because it’s odd that there is so much talk about coordination within the Quad and at the same time all the 4 countries are not able to coordinate. Strategically, USA was never in it anyway. It is a very important and the pivotal member of the Quad. Japan has been very careful trying to cajole India into joining or at least to join as an observer to start with.

Way Forward:

  • India needs to strengthen the existing FTAs, need to upgrade them and make sure that they are abreast with the times.
  • The door is still open for India as well as RCEP is concerned, if India’s concerns are addressed, India could join the RCEP sometime in the future.
  • India needs to put in more money in R & D and attract investments from the countries which are more favourable.
  • India is undergoing a massive shift in the way it looks at its economic strategy and it looks at its economic integration into the world. India will have to build its own capacities at the end of the day, if India is to be a global player.
  • India needs to build its comprehensive national power, shifting from a balancing to a leading role.
  • By not joining RCEP, India will face some backlash from some of its closest partners including Japan and Australia that perhaps India is not playing the kind of economic role that it should. But, that’s a short term phase, in the long term, if India can manage its domestic, political economy properly, then India can be very very credible member of the larger economic dynamic that is shaping the larger Indo-Pacific as well as the larger global reality.

Important points made by the Guests

Jayant Dasgupta, Former Ambassador, WTO

  • There were several grounds on which India was not satisfied with the final outcome.
  • India has been raising these issues right from the beginning, but it was told that these would get sorted out before the final draft was ready but unfortunately that did not happened and undue pressure was brought to bear on India at the last stage.
  • Many of the ASEAN countries and the RCEP members will have to get national ratification before they can formally join. Though, the governments in power there have signed on to the agreement according to their past commitment.
  • So, that has to be seen especially in view of the bellicosity shown by the Chinese and many other partners including Australia because they have stopped the imports of many of the products.
  • This should not be viewed in isolation because 7 of the members of RCEP are also part of the CPTPP (The Comprehensive and Progressive Agreement for Trans-Pacific Partnership), which has gone without USA participation. After President Biden takes over he may in keeping with the commitment of the Obama administration towards TPP. He may rejoin the CPP and take the initiative to lead that coalition to greater prosperity.

 Harsh V. Pant, Head, Strategic Studies, Observer Research Foundation

  • In Nov 2019, India pulled out from these negotiations which have been going on for years and the idea was to create one of the mega trading blocks in Asia with ASEAN at its core and all the member states that trade largely which are large trading partners of ASEAN.
  • The arguments that India has presented, the arguments that India has made are very much sync with the evolution in thinking not only in India about the costs and benefits of such fact but also in the larger global economic space.
  • In the context of RCEP Agreement, it is important to look at the interests of the multifarious countries that were involved in this process. 
  • India have to look at the interests of the ASEAN plus its surrounding member states with the partner countries that were involved in this process as well as India which is for a long time been contending that unless there are tangible benefits from this mega trade deal for India, it would not be possible for India to join it.
  • Therefore, India presented a set of demands and when those demands were not met last year, PM announced that India would pull out of this agreement.
  • Most of the FTAs, where India has huge trade deficits with countries and it have been a challenge. Most of these FTAs have not really worked in ways that perhaps when they were crafted it was envisioned and the challenge is to redraft the economic strategy which needs to be more in sync with the political strategic realities of the day along with building the domestic economic strength of India.

Jitendra Nath Misra, Former Ambassador

  • It is the China that going to be central to it, because USA and other major economies of the world are excluded, it was supposed to be a regional partnership, but USA is a regional power, so it was very expressly excluded.
  • If it going to be China led and India has a political difficulty and a strategic problem with China, a border issue flaring right now. In the midst of this, it is going to be politically very difficult for India to come on board.

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