Explained| What is RCEP, the largest trade bloc in history that went live on January 1

Leaders of all RCEP nations at the final signing of the trade deal, which took place online. (File Image) Source: AP

Coming into effect as the New Year began, the Regional Comprehensive Economic Partnership (RCEP) deal sees the largest trade bloc in history being created. It showcases China’s leadership in the region and would lead to more trade remaining within this mega-region henceforth.

After nearly 10 years of active negotiations, India had finally decided not to join the bloc back in early 2020. This was despite some of India’s major trade partners such as Japan and South Korea being part of the RCEP grouping.

In a world where nations are increasingly opting for regional trading arrangements in favour of multilateral rules, Moneycontrol takes a look at RCEP, and how it may affect India’s trade.

What is RCEP?

RCEP is a trade deal agreed to between 15 nations in Southeast Asia. These include the 10 economies of the Association of Southeast Asian Nations group (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) and five nations with which the grouping currently has free trade agreements (FTAs)—Australia, China, Japan, South Korea, and New Zealand.

Officially the largest regional trading bloc in the world, RCEP accounts for nearly 30 percent of the global population at 2.2 billion and a combined gross domestic product of $26.2 trillion or 30 percent of world GDP. RCEP’s share of the world economy could account for half of the estimated $0.5 quadrillion global GDP by 2050, the World Trade Organisation has estimated.

Under RCEP, more than 90 percent of merchandise trade among members will eventually be subject to zero tariff, periodically reducing over 20 years. According to the Asian Development Bank, RCEP members are projected to gain $174 billion in real income by 2030 itself.

More trade within the grouping would lead to certain losses in trade for other nations. Intra-RCEP trade was already worth about $ 2.3 trillion in 2019 and the new tariff concessions would further boost the intraregional exports of the newly formed alliance by nearly 2 percent, or $42 billion.

What are the main areas it covers?

The deal is extensive across 16 categories. These cover conventional items such as tariff reductions on goods and services, market access, investment, dispute settlement, customs and rules of origin, and newer items such as intellectual property rights, small and medium enterprises, and e-commerce.

Interestingly, it does not focus on labour rights, environmental protection or government subsidies, key points of discussion in all major global trade deals. Concerns have also been raised on the RCEP agreement’s relatively lax rules on copyright protection.

Lower tariffs within RCEP would redirect trade away from non-members to members, with the resultant trade diversion estimated at $25 billion.

How did the talks go?

In the last three years of negotiations, India stuck to its position of offering differential rates for tariff reduction. Under this scenario, India had offered to reduce its import tariffs by 74-86 percent on all goods from all nations.

But it suggested a lower rate of reduction for competitor and manufacturing giant China. Also, while Beijing asked that India reduce tariffs on 90 percent of all goods trade if it wanted non-reciprocal market access, the government refused to provide concessions on more than 75 percent of items.

Developed nations like New Zealand and Australia wanted tariffs cut on up to 92 percent of all goods, while traditional trade partners like Japan and South Korea wanted special benefits. India was the most generous to the Asean bloc but said more developed Singapore, Indonesia, and Malaysia could not expect the same treatment as Laos, Cambodia, or Brunei.

India was also under pressure to open its large consumer market to foreign products and cut non-tariff barriers. But the sensitive nature of its domestic market meant that it held out on providing market access for agricultural items, kay pharmaceutical products, and services.

Why did India decide to opt-out?

Negotiations formally began in November 2012. Since the beginning, RCEP presented a platform to India to further its strategic and economic status in the Asia-Pacific region. Since it brought the biggest economies of the region into a trading arrangement for the first time, India felt it would be a singular opportunity to enhance its exports to the region.

However, there was a pervasive fear among policymakers that Indian industries would be unable to compete with China and Chinese goods would flood Indian markets. Coupled with its competition with China, the tussle kept the deal on hold for nearly one decade.

India also did not secure the kind of benefits it had hoped for in the services sector. The government had been focused on getting nations to open their services industries more to Indian professionals such as healthcare professionals, lawyers and accountants, apart from labour.

As the talks reached the final stage the government had been vocal in drumming up public support in favour of joining the deal. However, in a sudden turn of events, India decided to unilaterally exit in November 2019. The government said the deal did not benefit India the way it stood.

What has been the domestic reaction to India’s exit?

The government’s final decision was publicly claimed as a nod to concerns raised by farmers, most of whom had opposed the pact fearing it would lead to uncontrolled dumping by China. Farmers’ groups, civil society and a large segment of trade experts warned India was not ready for the deal.

Dairy was another vocal sector opposing RCEP membership. It feared that products from dairy heavyweights Australia and New Zealand would corner the consumer market through processed items like cheese, butter and cream, which is where the future growth of the industry lies.

However, the domestic manufacturing industry was divided on the issue. The local electronics manufacturing industry, for one, which was afraid of the nascent growth in manufacturing being decimated by a resurgence in cheaper imports, opposed it. On the other hand, the Confederation of Indian Industry (CII) had said India needed to enter the bloc so as to not lose access to Southeast Asia. Large segments of the industry, including, pharmaceuticals, heavy machinery and textiles, as well as the services sector, were confident of making substantial gains.

How will India be affected?

The deal is set to affect India’s regional and global trade ambitions as well as the competitiveness of India’s exports. However, the potential damage seems to be minimal at this stage. According to the Centre for Advanced Trade Research, signing the deal would’ve worsened India’s trade deficit with RCEP countries. It had been estimated that post-RCEP, India’s annual imports would have grown by $30 billion and its exports only by $5.5 billion.

The bloc is expected to divert about $42 billion worth of trade inwards. As a result, the United Nations Conference on Trade and Development has flagged a drop of $0.9 billion in India’s overall exports. It also believes India will only lose 2 percent of its current exports to RCEP.