MC explains: Should India join RCEP?

The trade deal was inked after more than a decade in negotiations, with talks launched in 2013 and the agreement finally being signed in 2020 and coming into effect in January 2022.

The Regional Comprehensive Economic Partnership creates a free trade zone covering about 30 percent of the world’s gross domestic product, trade and population.

The participating countries say the objective of the RCEP is to  eliminate close to 90 percent of tariffs within 20 years as well as reduce duties and red tape with unified rules of origin facilitating international supply chains with trade within the region.

India already has Free Trade Agreements (FTAs) with 13 of the 15 RCEP countries, excluding only New Zealand and China.

Why did India abandon RCEP?

Prime Minister Narendra Modi back in 2019 announced the decision to not join RCEP citing outstanding issues and concerns with the present form of the agreement, which does not fully reflect the basic spirit and the agreed guiding principles of the deal.

India pulled out of this multi-nation trade deal in 2019 after entering negotiations in 2013.

This call was seen as a step to protect India’s farmers, dairy producers, fishermen, and small and medium businesses.

One of the primary concerns of joining RCEP stemmed from the possibility that India may have been flooded with cheaper imported goods, such as steel from China and dairy products from Australia and New Zealand.

This when India had a huge trade deficit with China, a trend that continues till date. Interestingly, the gap has grown close to 120 percent to $85.1 billion in FY24 versus FY13 when the country started talks for RCEP.

According to Ajay Srivastava, Founder of Global Trade Research Initiative (GTRI ), some of the other reasons for walking out of RCEP includes, limited commitments around meaningful access for the country’s services sector, such as labour mobility and stricter rules of origins to prevent Chinese goods from channelling products through other member nations to gain tariff advantages.

The Indian government continues to be adamant on its decision to abandon the RCEP, with Commerce Minister Piyush Goyal as recently as this month terming the multi-nation deal as effectively a foreign trade agreement with China.

He added that India in the past was striking trade agreements that weren’t advantageous for the country.

Re-emergence of RCEP

Unlike Goyal, government think tank NITI Aayog CEO BVR Subrahmanyam has asked India to consider being part of RCEP.

"India is one of the few countries that are not a part of large trade agreements. India should be part of RCEP and CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership)," Subrahmanyam had said on November 7 at an event organised by industry body Assocham.

His comments come at a time when the Indian government is preparing standard operating procedures to standardise FTA negotiations in a bid to maximise gains for Indian manufacturers and exports through such trade deals.

In fact, the Reserve Bank of India's (RBI), in its latest monthly bulletin, said India needs a wide array of bilateral trade agreements with better market access to capitalise on the China plus one trend in global manufacturing.

The central bank added that the key is to improve market access given that over the last five years, it is estimated that India’s total imports from FTA partners (ASEAN, UAE, SAFTA, Australia, South Korea, Japan, Mauritius) increased by 37.9 percent while exports grew only 14.5 percent.

Notably, India is at present in the process of reviewing the trade deal with the 10-nation grouping of the Association of Southeast Asian Nations (ASEAN), after New Delhi felt that it had lost more than gained.

The NITI Aayog CEO is neither the first nor the only policy maker who has batted for the RCEP deal for India.

Last year, veteran economist and former Finance Secretary, Montek Singh Ahluwalia had told Moneycontrol in an interview that India should focus on signing trade deals with blocs over individual FTAs, since the latter is not a solution in a world that is increasingly characterised by interlinked supply chains.

Ahluwalia saw merit in India joining RCEP despite China’s presence in the mega trade pact.

GTRI’s Srivastava however warns that RCEP would likely add little new export opportunity for India as Indian exports to China have not been growing since the last 5 years.

“Zero tariff imports would conflict with India’s domestic manufacturing programmes, like the Production Linked Incentive (PLI) and Phased Manufacturing Performance (PMP), which favour low import duties on raw materials but higher duties on finished goods. Zero-duty imports of finished products could disrupt these programmes, making it harder for domestic production to compete,” Srivastava said.

Trade deficit of RCEP members with China have also worsened post the deal.

While ASEAN’s trade deficit with Beijing grew sharply from $81.7 billion in 2020 to $135.6 billion in 2023, Japan's gap with China has doubled.

This indicates that RCEP’s gains are disproportionately skewed toward China, leading to unfair competition and validating India’s fears that joining would lead to a surge in Chinese imports without corresponding benefits, Srivastava said.

India-China Bonhomie?

The re-emergence of a debate around RCEP comes at a time when there are signs of a thaw in relations between India and China.

The two sides are said to have withdrawn troops from certain standoff areas in eastern Ladakh, a shift since the deadly clash between Chinese and Indian forces in 2020.

Weeks later, External Affairs Minister S Jaishankar and his Chinese counterpart Wang Yi discussed ways to stabilise India-China relations during their meeting at the G20 Summit in Rio de Janeiro on this month.

The Ministry of External Affairs (MEA) in a statement said, “the discussions focused on the next steps in India-China relations. It was agreed that a meeting of the Special Representatives and of the Foreign Secretary-Vice Minister mechanism will take place soon.”

There are also reports suggesting that the two nations may look at starting direct flights between them. Apart from that, India is said to be reconsidering a ban on certain Chinese apps implemented in 2020, while talks of fast-tracking e-visas for Chinese technicians to help India’s PLI scheme have gained steam in the recent months.

Back in July, the finance ministry’s Chief Economic Advisor Anantha Nageswaran in his Economic Survey 2023-24 pitched for more foreign direct investment (FDI) from China to improve India’s linkages to global supply chains.

These developments may be further fuelling questions around whether India could look into RCEP with a fresh pair of eyes.

Notably, New Delhi's re-entry into RCEP can happen easily thanks to a footnote that says that while the whole agreement is open to new members 18 months from the date the agreement into force, there is a special provision that allows India to join anytime without a waiting-period.