Evaluating India’s stance on RCEP

By Manoj Pant

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It is now clear that India remains outside the Regional Comprehensive Economic Partnership (RCEP) agreement of November 15. Subsequently, a large number of articles have appeared that seem to argue in favour of the RCEP on strategic and economic grounds. Let us look at these two arguments in turn.

It is true that trade agreements have a political/strategic context. For example, the extension of the US-Canada trade agreement to the NAFTA (subsequently modified) and the extension of the EU 15 to the EU 27 (both in the early 1990s) were certainly driven by political/security concerns. It is possible that for the RCEP a similar strategic motivation exists. This was also argued prior to the signing of India’s RTAs with the ASEAN, the AIFTA (ASEAN-India Free Trade Area). Presumably, the AIFTA was part of the Look East policy of the 1990s and was a strategic outreach to South-East Asian countries. Subsequently, this became the Act East policy. Logically, the RCEP is supposed to bring China into the same strategic group and further India’s security concerns in the South China Sea.

However, the AIFTA did little to help reduce confrontation with China in the recent conflict since other member countries are far more economically dependent on China than on India. For the RCEP, the argument for strategy also fails given the emerging security group, the QUAD, relies completely on the backing of the US, which has little to do with the RCEP. In fact, it may be argued that, as the new US administration takes over, there may be some revival of discussion on the TPP agreement of 2016, which was the centrepiece of former President Barack Obama’s Pivot strategy for Asia. Since the RCEP (centred round China) was proposed as a counter to the TPP, staying away from the RCEP at the moment might be the wisest strategic course.

More importantly, it must be realised that, today, unlike in the last century, RTAs are driven more by economic logic than by strategy alone. Here, the RCEP brings little on board for India. Note that the RCEP was meant to be an extension of the ASEAN to its other six associate members and was first proposed at the 19th ASEAN meet in November 2011.

However, since the AIFTA was implemented in 2009, India’s total trade with the ASEAN group has remained around 10% and the RTA itself has led to no major increase in trade whatsoever. In fact, much of the limited growth in the Indo-ASEAN trade has been in agricultural commodities, which were largely excluded from the AIFTA!

So, what additionally can the RCEP bring?
There are two possibilities. One, the inclusion of South Korea, Japan, Australia, New Zealand, and two, the addition of China. Consider these in turn. India’s merchandise trade (which is the focus of both the AIFTA and the RCEP) with both Japan and South Korea is almost non-existent, while Australia and New Zealand are largely agricultural exporters and, presumably, the RCEP would lead to increased demand for access to India’s agricultural markets. All negotiations in the past have failed on political resistance to including agricultural goods in trade agreements. The AIFTA itself largely excludes agricultural products from its purview.

Consider the argument that the addition of China and the RCEP would enable India to be a part of the global supply chain and hence obtain economic benefits. This idea is a non-starter. Over the last three decades, all other RCEP members have largely exported intermediate inputs to China for assembly and export to the growing markets of the US and Europe. Here, it is worth noting that, by and large, the RCEP members have had trade surpluses with China. On the other hand, the Indo-China trade is of an entirely different composition relative to the trade of other countries with China.

It may be noted that the ‘supply chain’ argument was also mooted in the context of the AIFTA. Let us see this in a little more detail. If one looks at India’s imports from the ASEAN as inputs (at a 6-digit HS level of disaggregation) and at exports from India at a 2-digit level, there are only two export areas where these imports are important inputs: pharmaceuticals and chemicals. Since this is precisely the trade pattern observed with China, it is clear that the RCEP merely expands ‘India-China trade’. There is thus some ground for the belief that the AIFTA has led to substantial ‘tariff shopping’ by Chinese traders.

Logically, then, before looking at the RCEP, it makes far more sense for India to conclude bilateral trade agreements with China! There are no prizes for guessing why this is unlikely to happen in the near future.

The above are only tired arguments in favour of the RCEP. One should, however, ask the question whether in plurilateral trade agreements today, we should include the issue of trade in services. Considering that, since about 2008, the fastest growing segment of global trade is services trade, this would otherwise seem a major omission. That India appears to have a strong competitive advantage in some areas of services trade is an argument that does not need repetition. That our trade partners are unwilling to look at this is apparent from a study of the AIFTA from 2005 to the present. Lessons from the RCEP are similar.

The author is professor of Economics and director, IIFT. Views are personal