The Hindu | 12 September 2016

India need not genuflect at RCEP

by Amiti Sen

Negotiations for the regional comprehensive economic partnership (RCEP), which could make India a part of one of the largest proposed free trade blocs in the world, are gaining momentum. But the crucial question is whether New Delhi is comfortable with the direction the talks are now taking.

While the BJP government is rightly critical of the free trade pacts that the UPA government signed with Japan, South Korea and Asean as the increase in India’s imports from these regions far outstrip the rise in exports, it may face the danger of treading on the same path if it is not careful.

The China factor

In the case of RCEP, the fallout of a badly negotiated pact for India would be much graver than the consequences of the FTAs signed so far, because of the China factor. Unbridled competition from the neighbouring country could be a nightmare come true for an Indian industry already reeling under the burden of a growing bilateral trade deficit which now accounts for nearly half the country’s total trade gap.

Although the negotiations on RCEP by its 16 members — which account for 45 per cent of the global population and 40 per cent ($21.3 trillion) of world trade — are far from being wrapped up, there are already signs that things may not move the way India envisages.

At the meeting of trade ministers in Laos early August, India gave up a long-held position of providing different levels of market access to different members. It had earlier opted for a three-tier structure in which it offered tariff elimination on 42.5 per cent of traded goods to China, Australia and New Zealand (the countries with which India doesn’t have FTAs), followed by 65 per cent to South Korea and Japan with which it has FTAs. The highest level of 80 per cent was to 10-member Asean.

The thought of moving towards tariff elimination for Chinese products, even when it was expected that it would be restricted to 42.5 per cent of traded items, was enough to give sleepless nights to Indian industry. New Delhi did make a brave attempt to move away from a zero-duty regime to one of low tariffs, where duties would be reduced but not eliminated, by moving a proposal in the Jakarta meeting in July, but it was rejected. The proposal not only went against RCEP’s idea of a free trade bloc, but was also not in line with India’s trade pacts with Asean, Japan and South Korea, where tariffs are being eliminated on a wide range of products.

On the back foot

With RCEP countries refusing to drop tariff elimination in favour of moderation, how wise was it for India to agree to equal market access for all? If Asean, which has been making a case for tariff elimination on almost all traded items, keeps up the pressure, will New Delhi be ready to offer zero tariffs to China for 80 per cent of the items or even more? Even if Indian negotiators are able to offer some resistance, it is highly improbable that they would be able to lower the overall ambition significantly.

On the positive side, New Delhi has managed to make RCEP countries tentatively agree to a different/longer implementation period for the tariff cuts for different countries and different products depending on sensitivities. This means that if it agrees to eliminate tariffs for most products from Asean over ten years, it might get a longer time period to do so in the case of China, especially for sensitive items such as steel. But there is a limit beyond which the implementation period cannot be staggered, and tariffs will ultimately have to go. Is our industry prepared to face zero-tariff competition from China even if the tariff elimination happens gradually?

A question of even greater significance is, what is India getting in return? Gains on the goods front would be limited as it already has FTAs with Asean, Japan and South Korea where commitments to eliminate tariffs on a large number of items have been made. Australia and New Zealand, which don’t have free trade pacts with India, already have low tariffs on goods. The Chinese market is big, but it is not a big attraction for Indian industry which stands to gain just a fraction of the market there compared to what the Chinese would wrest on their domestic turf.

So, as the Government has been saying, India’s gains from a deal with RCEP would mostly lie in the area of services. Indian negotiators take pride in stating that due to their insistence, services would be part of a single undertaking and not carved off as a separate agreement as was done in the case of the FTA with Asean. In the India-Asean FTA, India got a raw deal in services as the pact on goods had already been signed and it did not have any bargaining chips left, but this time, negotiators say, they will not make the same mistake.

Unfortunately, despite efforts by India to get members to give substantial offers in services, especially for professionals, the offers made so far are insignificant. Including a toothless pact on services in the proposed RCEP would not justify India’s participation in a trade pact where China is to be ultimately provided unrestricted market access for most products.

Clear choices

Another reason why India has been keen to be part of RCEP, despite the presence of China in the group, is the fact that two other mega regional trade pacts — the Trans Pacific Partnership (TPP) and the Trans-Atlantic Trade & Investment Partnership (TTIP) — are simultaneously being forged and it is not a part of either. Its worry is that if it is excluded from all major regional trade pacts, it could soon become uncompetitive in its traditional markets where rivals would get access at lower import duties.

But how real is the fear? The TPP — which is a US-led group of 12 Pacific Rim countries — has been signed but is nowhere near being ratified even in the US. While the Obama regime is unlikely to ratify it in its remaining few months, both the front-runners for the presidential race, Hillary Clinton and Donald Trump, have voiced their opposition to the deal.

The TTIP — the proposed FTA between the US and the EU — too is in trouble, with French Trade Minister Matthias Fekl and Germany’s Vice-Chancellor Sigmar Gabriel describing the talks as having failed.

India, therefore, need not feel threatened by other trade blocs while it is negotiating the RCEP. Nor should it fear losing market access in the RCEP region in the absence of a deal, as it already has FTAs with most member countries. It has to continue its negotiations, not with an imaginary gun pointed at its head, but with the clear understanding that it has the freedom to decide whether to stay or opt out.