Moneycontrol PRO

RCEP deal: The case for India keeping its steel industry out of the trade pact

Concern of some of the countries, including India, is critical as a complete tariff elimination could widen their trade deficit and severely harm some vulnerable sectors.

October 09, 2019 / 01:25 PM IST

Pritish Kumar Sahu

The Regional Comprehensive Economic Partnership (RCEP) of Asia and the Pacific is inching towards a final deal, as negotiators from the 16 member countries try to resolve the outstanding issues in the last official negotiation round of the year, in Vietnam this week.

In the earlier concluded 27 rounds of negotiation, a lot of issues were ironed out and positive progress was made to create a mutual ground for trade and investment, especially amidst concerns on protecting interest of domestic producers and maximizing market access.

The RCEP, comprising of ten members of ASEAN and its six FTA partners- India, Australia, China, Japan, New Zealand and South Korea, accounts for almost one-third of global GDP and about 40 percent of global trade in goods and services.

Some countries continue to have concerns: for India, a complete tariff elimination could widen its trade deficit and severely harm some vulnerable sectors.


Within India, many domestic sectors (such as the dairy, textile and lately the steel, sectors) have asked to be kept out of the RCEP. This ambitious trade pact puts India in the dilemma of protecting the interests of its sensitive sectors, on one hand, and market-opening commitments, on the other.

With negotiation heading towards a decisive stage, a quick solution to all the outstanding issues is needed, so that the participating countries can seek enhanced market access in the region without succumbing to the pressure of the other.

India has direct FTAs into effect with majority of the RCEP negotiators except with Australia, New Zealand and China. Despite the existing FTAs, the tariff lines on many product lines are at higher side, mainly because of the sensitivity of the sector and the proposed timeline. Hence, for India, issues of tariff are as important as other areas under negotiations.

On the other hand, for countries common to CPATPP  (The Comprehensive and Progressive Agreement for Trans-Pacific Partnership) and RCEP (viz. Australia, Japan, New Zealand, Vietnam, Malaysia, Singapore and Brunei), the tariff cut is relatively a less important issue as these have lowered or will lower the rates in due course. In addition, it is less important for countries such as Malaysia, which has zero tariffs on almost all products.

Given this, the RCEP will not affect these countries much in terms of increase in their imports.

But that is not the case for India and any decrease in import tariff would be severely reflected on its import, particularly, an increase in unfairly

low-priced imports from China.

Even at the present stage, India has a whopping trade deficit ($57.4 billion in 2018) with China despite taking measures of anti-dumping duties, safeguard duties and other countervailing measures to protect the domestic industry.

While RCEP offers India an opportunity for greater market access but imports from the partner countries is the major concern. Incidentally, it is evident that after India signed the FTA with ASEAN, South Korea and Japan, it has witnessed a higher trade deficit with all these countries.

Using the World Integrated Trade Solutions (WITS) simulation, the post RCEP shows an increase in India’s export by $5.5 billion annually to its partner countries as against an increase in import by a whopping $29 billion annually under a zero tariff situation (which the RCEP does not propose to do so).

The highest increase in export will be to China followed by Vietnam and Thailand. Similarly, almost two-fifth of the increased in import

will be from China followed by South Korea and Japan.

The steel industry's concerns

While at the product level, the import of machinery, electrical and mechanical equipment is likely to be the highest in a zero- tariff situation, concerns of the steel industry to keep it away from the RCEP negotiation needs further evaluation.

The challenges of raw materials, high cost of capital, inadequate technology and low productivity make India’s production cost higher at about $40 a ton compared to a low cost of production in many countries.

The industry has urged the government to provide an export incentive to put the global and the domestic steel industry in the same footing before opening the steel sector.

Another worrying factor for the steel industry is the steady increase in import from the FTA partner countries such as Indonesia, Japan and Korea in the recent past.

As these countries along with China are a major source of steel, elimination in tariff would influx the Indian market and threaten the domestic producers in the industry. There is a surge in import from India’s FTA partners to 77 percent in August’19 as against 58 percent in FY’ 19.

The present estimation using WITS database shows that at the current volume of trade, complete tariff elimination would increase India’s net import of iron and steel by about $1.4 billion annually, as against an increase in the export of over $540 million annually.

From China alone, iron and steel import would increase by over $540 million annually as against India’s increase in export by just over $23 million to China.

With the RCEP poised to become an overarching RTA, India needs to review its gains by staying within the RCEP purview and if needed, certain safeguard mechanism should be extended in the future, in the post RCEP period.

(The writer is an Associate Professor at Birla School of Management, Birla Global University, Bhubaneswar)
Moneycontrol Contributor
first published: Oct 9, 2019 01:25 pm
ISO 27001 - BSI Assurance Mark