This is the 2nd article on RCEP. If you haven't read the first one, please go through it here.
In the previous article we were discussing that although trade is generally good for everyone, India still decided to pull out of RCEP. Here, we will delve deeper and will try to figure out the reason for it. We need to look for what specifically India gains and loses from participating in the RCEP.
// India rightly fears that lowering its tariffs on Chinese goods will only increase its trade deficit with China. There is also a possibility that India's small dairy farmers will fail to compete with Australia's and New Zealand's highly mechanized dairy industries. //
As stated earlier, we know that RCEP is a Free Trade Agreement (FTA) between the 10 ASEAN member states and six of their FTA members. And the problem with RCEP is that India has a trade imbalance with most member nations, except for smaller trading partners like Laos, Cambodia, Myanmar, and the Philippines (in FY19). India ran a merchandise trade deficit of $107.28 billion in 2018-19, with 11 out of 15 other RCEP members. India's total trade deficit in merchandise in 2018-19 was about $180 billion. In 2018-19, this region accounted for 34 % of India's imports, while only 21 percent of India's exports went to this region. China itself contributes 60% of the total deficit, heading to trade levels that are already unfavorable.
The national press also mentioned opposition from crucial sectors that are more prone to stiff foreign competition, such as dairy products, the steel industry, which is already undergoing a decline in demand, the agriculture industry, apparel and textiles, metals, etc. Due to increased competition with Australia and New Zealand's dairy industry, RCEP could threaten native farmers and milk cooperatives, as New Zealand exports more than 90% of its milk and butter. For Indian dairy and its products, therefore, exemptions are required.
// In 2017, NITI Aayog had published a report that was based on the analysis of multiple free trade agreements (with Sri Lanka, Malaysia, Singapore, and South Korea). The report pointed out that free trade agreements have not worked well for India. The report showed that imports from FTA countries increased while export to these destinations did not match up. NITI Aayog found that FTA utilization by India has been abysmally low (between 5 and 25 %). It was argued that India should "rejig" its existing trade agreements before entering new ones. //
India already has bilateral trade agreements with Thailand, Japan, Singapore, Malaysia, and South Korea, as well as an FTA with ASEAN. Thus, not much would have changed between India and most of the RCEP member countries after India's inclusion in RCEP.
Joining RCEP would compel India to rapidly lower its tariffs, which could worsen the situation of many struggling industries and negatively affect the external position of India. Another area of concern is the Ratchet mechanism, where a country cannot go back from relaxations on tariffs and quotas on merchandise exports and imports once they have been offered to another country via trade agreement. And, India wants an explicit exemption from Ratchet's obligations to protect the interests of exporters and importers whenever needed.
Till now, we have discussed economics, but we would be a fool if we think that India opted out of RCEP due to economic reasons only. Like in most of the agreements and decisions between countries, international politics played a significant role here too.
// According to official Chinese data on India-China bilateral trade, India's current account deficit with China rose to about US$ 95.54 billion in 2018. China-monitored RCEP talks suggested a further cut in tariffs, which could have helped in the invasion of Indian as well as other cheap Chinese goods markets, threatening indigenous industries in several countries. //
As we know that trade blocks are the new geostrategic tools that nations always seek to maintain the balance of power to evaluate the strengths and weaknesses of participant members. RCEP was one of those tools that China actively championed for reasons that were not difficult to understand. At a time when it was emerging as a significant trade bloc, the Trump administration pulled out of the TPP at a time when it was a critical trade bloc in Asia, without China being part of it. The trade war gave a significant blow not only to China's slowly declining economy but to the whole of world trade. China responded in two ways; one was to try to negotiate with the US to minimize the damage and keep the US engaged. In the meantime, Beijing took the opportunity to transform RCEP into a new special-purpose commercial vehicle, with China occupying the driver's seat comfortably. China needs greater access to Indian and other fast-growing markets to sustain its vast manufacturing industries. And a failure to find a market for its goods will have a cascading effect on the Chinese economy and its global ambitions.
To protect domestic industries from surges in cheaper imports, India wanted a mechanism that would automatically snap back safeguard duties on imports if a certain threshold were crossed. India had wanted a system that would kick in automatically, so any damage to its economy could be contained immediately. Still, there was no agreement among other member countries on this issue. Hence, India rightly so decided to opt-out from RCEP. Until India can redress its economic problem, RCEP in its current state will do more harm than good.
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