The RCEP effect on India

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The Hindu | 11 July 2016

The RCEP effect on India

by Ajay Srivastava

As the Regional Comprehensive Economic Policy negotiations enter the fourth year, contours of the probable final outcome are gradually emerging. Based on the developments after the 13th round of negotiations that took place in Auckland between June 12 and 18, we get a big picture of what industry can hope to get from RCEP.

Firstly, RCEP will not create a large integrated market. Experts are convinced that replacing the current ‘noodle-bowl’ of numerous competing free trade agreements (FTAs) with an overarching RCEP would have simplified trade rules and created stronger production bases in the RCEP area.

To become a large integrated market, RCEP must agree to a zero tariff area among members. However, this ambitious solution was never on the agenda. The next best solution could have been RCEP countries agreeing to a single tariff concession list providing uniform tariffs for products across member-countries. However, even this was not agreeable to all.

Following the negotiations, all current FTAs will continue and RCEP will just be adding numerous new concession lists.

Of consensus and contours

Secondly, RCEP will not slash tariffs substantially in most cases. Large-scale slashing is theoretically not possible among the countries already connected through FTAs. For example, Asean countries and their FTA partners have already opened over 80 per cent trade through existing FTAs. They can, at best, make small incremental offers to each other, under RCEP.

Country groups such as India-China, India-Australia and New Zealand or China-Japan do not have any existing FTA relationship with each other and hence there’s scope for exchanging deeper tariff slashing. However, many countries in the group are not enthusiastic about this, probably due to a tough economic climate. The level of tariff slashing these countries will finally agree upon is yet to firm up.

Thirdly, consensus on adopting common Rules of Origins (ROO) will make movement of goods easier, predictable across the member-countries. However, this is just a framework and product level details for almost 5,200 product sub-headings are yet to be negotiated. ROO criteria determine nationality of goods. For instance, if squash is made in India from Nagpur oranges, the squash obviously originates in India. But what if the squash is made in India from oranges grown in the US? Which is the country of origin for squash here: India or the US?

There is no standard answer. However, two broad interest groups are visible: Export-driven trading economies such as many Asean countries argue that even minor processing should qualify a product for FTA benefits whereas manufacturing economies such as the US, China or India argue that processing should be substantial else non-FTA country products will enter the domestic market. RCEP will have a tough time balancing the conflicting needs of the stakeholders, comprising a mix of manufacturing and trading economies.

While a few countries are pushing for large MNC-centric rules, RCEP being home to over 100 million SMEs, may struggle to find a balance.

Fourthly, contours of the final outcome are yet to emerge in the area of IPR, services and investments. RCEP will have to reconcile the interests of many conflicting interest groups to ensure that IPR provisions do not compromise on public health issues as it contains 45 per cent of the world population, of which the majority is poor. Another contentious issue before it is ‘investor-state dispute settlement (ISDS)’ that seeks to enable an investor to sue a foreign government. Detailed provisions of these issues are expected to be debated till the last day of negotiations.

Industry trends

These developments at the RCEP negotiations would broadly translate into the following trends for industry sectors and countries:

RCEP will influence new investment decisions in textiles, leather, processed food, machinery and electronic component sectors. This will happen on account of the common ROO framework and the entry of China as the new FTA partner of Japan, India and Australia. However, no change in business strategy is expected in sectors such as basic agriculture and automotive products as these may not see fresh tariff concessions and face restrictive ROOs. New investment in steel may not happen on account of large over-capacities.

Intra-Asean trade will come down. This trade for intermediate products such as integrated circuits accounts for over 60 per cent of Asean import of these. Much of this trade may relocate to one or two Asean countries or even to China on account of the common ROO framework and to achieve economies of scale.

China’s exports to India may increase. Today, China exports to India at full duty as it does not have an FTA with India. But for products where duty differential matters, it needs to set up joint ventures in Thailand or Malaysia from where products can be exported to India at zero duty under the Asean-India FTA. With RCEP, many such facilities will not be required as China will export directly to India. While China’s exports to India may increase, most of these will be at the expense of Asean’s exports to India. However, China and Asean’s combined exports to India may not see much change.

Preparing the ground

India may emerge as an attractive investment destination for China. To offset the increasing labour costs, Chinese firms have been relocating labour-intensive manufacturing to Vietnam, Cambodia, Thailand and Indonesia. By setting up manufacturing joint ventures in India, China can effectively reach India’s domestic market and also a large European market once India signs an FTA with the European Union. If this story plays out, India’s trade deficit with China will come down as well.

RCEP may still take over a year to conclude. We may use the intervening period to tie up loose ends. The Cabinet’s decision on June 22 on introducing labour reforms for the textiles and apparel sector may prove to be a welcome grand step in this direction.

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source: The Hindu