Policy | In the RCEP talks, you win some, you lose some

India’s engagement with its neighbours in the east, southeast and south is poised to get a boost with reports trickling in that trade negotiators from New Delhi have taken an accommodative stance at the latest Regional Comprehensive Economic Partnership (RCEP) discussions in Vietnam.

The RCEP is a proposed free trade agreement (FTA) between the 10-member Association of Southeast Asian Nations (Asean) and its six FTA partners (China, Japan, India, South Korea, Australia and New Zealand).

Over the last six years, 26 rounds of talks had been held, apart from seven minister-level meetings, to give shape to this ambitious trade arrangement and the member nations are racing against time to announce a deal at the next Asean summit in November. It is widely believed that the latest discussions of the trade negotiations committee in Vietnam could be the last meeting of the group followed by a possible inter-sessional meeting of trade ministers before the November deadline.

India had been in two minds about joining the RCEP as it wrestled with the conflict of staying in the group while protecting the interest of its domestic economy. However, latest media reports suggest that New Delhi has reached an understanding with other participating members, including China, on market opening commitments. During the talks in Vietnam, it is learnt that New Delhi has agreed to accept suggestions of other countries regarding rules on investments, including removal of the requirement of technology transfer and cap on royalty payments.

This is significant because the current laws in India have the provision under which foreign companies investing here can be made to transfer technology or know-hows to their domestic counterparts. Moreover, the government and the Reserve Bank of India (RBI) have put a cap on the royalties a domestic company can pay to its foreign parent or partner, for certain kinds of investments.

If India has agreed to remove these restrictions, which will bring it in line with the investment rules applicable in most comparable countries, it should help attract more investment into India from the other 15 RCEP countries. Also, it should give a huge boost to the sentiment of foreign investors.

There is, however, a niggling worry in some quarters that removing the cap on royalty payments would lead to increased outflow of foreign exchange and deplete the ability of domestic firms to pay dividends to shareholders. However, the expected rise in foreign investment, because of the tweak in rules, should outweigh the increased outflow of the US dollar.

The second positive cue coming from Vietnam is that India is planning to cut or eliminate tariffs on 80 per cent of products coming from China. Though these concessions will be less than what India is ready to offer to other countries that are part of the RCEP, observers feel that at least a start has been made in the right direction. One of the main reasons for India’s hesitation about joining the RCEP is the apprehension that such an arrangement will lead to cheap Chinese imports flooding the domestic market. It is a welcome move that India, according to media reports, has been able to shake off this doubt and tackle the issue in a pragmatic way.

Under the plan that had been reportedly worked out, India would immediately eliminate customs duties on 28 per cent of goods, while tariffs on other imports from China would be trimmed or done away with over a period of 5, 10, 15, 20 years. This back-loading of tariff cut will give India time to strengthen its domestic manufacturing.

Reports also suggest that participating countries under the RCEP have made some progress on the auto-trigger mechanism. This arrangement will give India the flexibility of raising duties if it sees a sudden spike in imports of particular items from a partner country and protect itself.

While these cues are encouraging, there are some issues that are causing discomfort to India. For example, the rules of origin. India wants strict norms to prevent Chinese goods from entering India through other RCEP member nations. The rules of origin are riders that determine the source country of a product, depending on which they either get tariff concession or are subjected to duties.

India had proposed that the last country from which a product is exported should do the most value addition with the help of indigenous inputs. Strict rules of origin are crucial for India as it had a trade deficit with 11 RCEP members.

It has to be borne in mind that for a country such as India, which has a minuscule share in world trade, initiatives such as the RCEP throw up the opportunity to economically integrate more closely with this dynamic region. The country can ill-afford to ignore it as such opportunities will not wait indefinitely. Therefore, in the give-and-take discussions at the RCEP, New Delhi should skilfully argue its cases and be prepared to lose some of the battles to win the bigger trade war for the larger benefit of the country.