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Last Updated : Sep 18, 2019 12:47 PM IST | Source: Moneycontrol.com

RCEP: Can India head off China threat? The devil is in the detail

Under ‘rules of origin’ clause, ‘region’ will get access to Indian markets regardless of which RCEP country exports to India

Moneycontrol Contributor @moneycontrolcom
Representative image
Representative image

Arjun Raghavendra M

The all-crucial ‘rules of origin’ provision that determines the country of origin and in turn the economic nationality of goods will take final shape in the concluding phase of Regional Comprehensive Economic Partnership (RCEP) talks.

That, in effect, will seal the fate of this multilateral agreement.

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The deliberations during this phase could be chaotic for three reasons – One, in the present global value chain, no good is ‘entirely’ produced or manufactured in any single country. Second, neither the ‘country of origin’ nor ‘production’ is defined. Last, China desperately needs access to Indian markets more than the other way round.

Media reports suggest that India is offering very few concessional tariff lines to China to prevent any onslaught of Chinese duty-free goods, which may gradually increase over the next three decades. The devil lies in the rules of origin.

Most multilateral agreements are rooted in the concept of borderless region and focus will be on the ‘origin’ of the region and not the country. If this is true for RCEP -- which it will be -- any variance in tariff concessions becomes redundant.

The argument that substantial reduction in tariffs pertains only to ASEAN countries -- and not China -- appears farcical in this context. China belongs to the same trade bloc and may set up manufacturing and assembly plants in ASEAN countries to exploit the China-ASEAN compensatory tariffs (for raw materials and intermediate goods). It may then make the most of ASEAN-India concessions (finished products) under the RCEP umbrella.

RCEP ‘region’ will get access to Indian markets irrespective of which RCEP country exports to India. If electronic goods from China, after retail packaging in Vietnam, get imported to India, it can rightfully claim zero-duty offered to the ASEAN, even though no such concession is offered to China.

The apprehension of our dairy sector is also not misplaced. Australia and New Zealand, not finding it lucrative to export milk today owing to heavy customs import tariffs, post RCEP may export it to an ASEAN country, bottle it there and flood our market with canned milk imported at 0 percent tariff, likely crippling our dairy entrepreneurs.

Any trade remedy (anti-dumping duty) introduced by Indian authorities will be crushed under the RCEP bandwagon as it will be very simple to circumvent by using 'RCEP origin' to dump cheap goods. Past investigative experiences must help us realise that tweaking the local value addition content percentage or juggling around the tariff heading digit change is just going to be a band aid therapy for cancer treatment.

A counter argument that our exports will also get similar access in the RCEP region does not make sense. While our reduction in import duties is significant, there is hardly anything to gain for us as the import tariffs and MFN rates in other RCEP countries are already very low. The export-import data, for the past three years, published by the Commerce Ministry indicates a consistent and continuous increase in the imports of FTA (free trade agreement) partners to India, with no commensurate increase in exports from India.

Significantly, Indian demands on services have got completely buried in the early rounds of negotiations.

What is the market access India will gain from all RCEP countries put together compared to the market access we will concede? Has there been any employment generation after a decade of India-ASEAN FTA or are the whispers of a few manufacturing belts tuning into ghost towns real?  What is India doing to the eventuality of non-originating goods that will be conferred originating status in the post RCEP era?

There certainly appears to be no official study on this “increase in imports into India versus decrease in exports from India” theory in the context of existing FTAs and if there is one, it must be made public to generate an informed debate. Such a debate will clearly have an impact on the scope of RCEP negotiations, the way India is negotiating and to what extent the negotiators will defend the domestic interests.

Badly negotiated rules of origin cannot be implemented properly for two reasons -- Authorities at ports will not be able to go beyond the country of export that is declared in the import documents to ascertain the origin of the raw materials. Second, once the damage is done, no investigations sanctioned under the treaty shall serve any purpose. The continuing onslaught owing to the non-RCEP existing FTAs should also be factored in as we move forward.

While the objectives of the administration are commendable, it remains intriguing as to how the twin interests of the exporters and the domestic industry shall be protected. Rules of origin negotiations will be the last nail in the RCEP story. Will India stand up or surrender? What is the way forward?

(This is the second of a three-part series on the evolving dynamics of RCEP.)

(Arjun Raghavendra M previously worked for the Government of India and is a lawyer based in Delhi. Views are personal.)

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First Published on Sep 18, 2019 12:47 pm
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