India should act tough and exit RCEP

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BusinessLine | 6 August 2019

India should act tough and exit RCEP

by Amiti Sen

India at last seems to have found its lost voice at the on-going Regional Comprehensive Economic Partnership negotiations. After months of indecisiveness, the Indian negotiating team finally went to attend the RCEP Ministerial meet in Beijing last week with a clear mandate. It was instructed to say no to any pact which did not fulfil its wish list.

With the support of the political bosses, Commerce Secretary Anup Wadhawan and his team adopted an aggressive posture and listed out India’s demands individually to the partner countries of the RCEP in the bilateral meetings on the sidelines of the event. The message to each of the partners — be it the ten-member ASEAN, China, South Korea, Japan, Australia or New Zealand — seemed to be common: if you don’t humour us, we may quit the game.

It is heartening that after years of gradual softening of its position, which resulted in doubling of its initial market access offer to its biggest competitor China despite protests from the domestic industry, India is now preparing to change tack.

But the more important question is whether India, will show the spine to exit the RCEP if it must. If India realises that like in the case of most free trade pacts it has signed so far, it will end up paying a much higher price compared to what it stands to gain in the RCEP, will it dare to say no?

Can it face the diplomatic pressure from its friends in the ASEAN? Anyway, it doesn’t have very long to decide as the year-end deadline for implementing the pact, that was reinforced at the Beijing meeting, is looming near. While from the looks of it, the proposed RCEP — with a third of world’s GDP, almost half its population and 40 per cent of exports — seems to be too big a market for India to ignore, if one thinks lucidly enough the country may not lose out on much if it decides to keep out of the pact.

For one, the average import tariff levels in the region are just 6.8 per cent, much lower than India’s 13.8 per cent (industrial and agriculture). Moreover, most of the RCEP countries, including Japan and South Korea, have very high tariffs on certain products sensitive to them, such as rice, footwear, dairy products and honey, which they can continue to shield through the sensitive lists.

Even if a country like China, which has average tariffs almost as high as India’s, offers to eliminate tariffs on all its goods, it may not really result in a substantial increase in market access given the non-tariff barriers that the country specialises in imposing. Eliminating tariffs for even a modest 70 per cent of the items coming from China could totally disrupt the Indian industry, irrespective of the market access offered by China to India.

Although in the bilateral with the ASEAN, India has demanded that the 10 countries improve their offers in the services sector so that Indian professionals and workers can have easier entry into their market, it is doubtful whether much would come from it. The very reason the ASEAN had not offered anything to India in services in the FTA they have already in place is that most of its members are very sensitive about protecting the sector and have not offered much liberalisation even within the bloc to each-other. So, in terms of enhanced market access, India would get relatively much less from its RCEP partners than it would be giving to them.

In fact, tariff elimination could worsen the trade deficit with RCEP, at $105.2 billion in 2018-19. Since import duties are also a source of revenue for India, it could experience a disproportional loss of customs revenue if it gets into the pact.

Change in stance

The fact that Commerce Minister Piyush Goyal stayed away from the Ministerial meeting and sent the Commerce Secretary to take his place was the first indication of the change in India’s defensive stance adopted so far.

While the official reason for the Minister skipping the meeting was the extended Parliament session, many in the Ministry say that it was the industry consultations on RCEP that Goyal held just a few days prior to the Ministerial meet that left him confused and unsure.

The marathon sessions that Goyal had with the Indian industry pointed towards the total disaster that the pact could end up being for the country. Of the over 500 representatives that the Minister met from numerous sectors ranging from steel, engineering goods and plastics to dairy and sea-food, most were completely against dismantling of tariffs for the RCEP countries, especially China.

Almost every sector registered its apprehension that once the RCEP agreement was in place, China would wreak havoc in the domestic market with its cheap exports and would also dump its products.

The Indian industry also feared that Japan and South Korea, which were already reaping huge benefits for items like steel and electronics from the bilateral free trade agreements signed with India, would penetrate the local markets further.

A large number of farmer organisations also came together to appeal jointly to the government not to sign the RCEP as they said that it would threaten farm livelihoods, autonomy over seeds and also endanger the country’s self-sufficient dairy sector. Thus, when Wadhawan left for Beijing with his team for the RCEP meeting where all countries were expected to move towards final outcomes, the instruction was to be offensive rather than defensive.

However, it is important to ensure that this offensive posture does not dissipate after the Beijing meeting. India already has had an unhappy experience with many of the RCEP members it had earlier signed FTAs with.

While there are a number of research papers that point out how the Indian industry has suffered after signing FTAs with its regional partners, one done by the NITI Aayog explicitly says that India’s trade deficit with the ASEAN, Korea and Japan has widened post-FTAs.

True, the lure of being part of the largest free trade bloc in the world can indeed be very strong. But when it is difficult to find any support for a pact from the sections it is intended to serve it shouldn’t be very difficult for the government to decide what to do.

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source: BusinessLine