RENUKA MAHADEVAN and ANDA NUGROHO. RCEP must move forward, with or without India (East Asia Forum 19-9-19)

Sep 26, 2019

As the international trading system grows increasingly strained under the escalating US–China trade dispute and the paralysis of WTO reform, many have eagerly called for the conclusion of the Regional Comprehensive Economic Partnership (RCEP) by the end of 2019. The ASEAN-led initiative is a mega regional free trade agreement (FTA) that was first launched in November 2012 and to date has seen 27 rounds of negotiations.

India’s hesitance to comply with RCEP’s tariff requirements is currently stalling the negotiations. RCEP proposes that 92 per cent of India’s traded items must have zero tariffs by the end of a 15-year period. But ASEAN countries are keen to have India as part of the partnership and made India a concessional offer in November 2018 to open up about 83 per cent of its tariff lines instead.

The main point of contention for India is the presence of China, with which it has a massive US$60 billion trade deficit. India is concerned that greater market access for China will bring harm to its key manufacturing sectors like steel and textiles. India is also worried about giving greater market access to other non-FTA partners like Australia and New Zealand.

Following the 7th RCEP Ministerial Meeting in Bangkok on 8 September 2019, RCEP members have agreed that talks should be wrapped up and that the results of the negotiations should be announced in November. Therefore, the signatories have asked India to make up its mind on whether it still wants to remain in the group.

But India is adamant to protect its domestic industries and on 11 September 2019, the Commerce and Industry Minister Piyush Goyal invited representatives of the RCEP countries to continue the discussions in a bid to push for a better deal for India.

This is despite the fact that since May 2019, China has started pushing for a free trade pact within the ASEAN+3 (China, Japan and South Korea) that excludes India, Australia and New Zealand. This move was potentially to pressure Australia and New Zealand into encouraging India to be more flexible in the RCEP negotiations, as Australia and New Zealand would not want to be excluded from the final deal.

To analyse the effect of concluding RCEP without India, recent research has simulated the effect of the RCEP tariff concessions (it must be acknowledged that the computations in this piece are tied to a conventional Global Trade Analysis Project model which, like any model, has limitations). India is better off joining RCEP as it will face a marginal fall in real GDP growth if it does not join, while it stands to gain at least 0.06 percentage points of growth in 2020 if it does. While the results do not show how the other RCEP countries would be affected if India does not join RCEP, the deal would undoubtedly be more strategically significant if it contained three of the world’s largest economies — China, Japan and India.

Though India fears cheaper imports flooding its market, some key industries have much to gain from lower tariffs under RCEP. India’s textile and garment factories will weather some of the competition from Vietnam and China and register positive growth. The biggest winners will be electronics and competitive areas of manufacturing and agriculture, followed by steel and oil and gas. India is well positioned to increase its share of the soybean export market in particular, as it is currently the 10th largest exporter in the world.

India will also gain in pushing RCEP countries to liberalise service sectors to the benefit of skilled professionals seeking gainful employment. So far, RCEP member countries have only agreed in principle and have not made any concessional offers. To make further progress on this front, India first needs to commit to RCEP. Simulation results also show that India’s trade deficit will become a surplus in due course if India manages to convince RCEP members to liberalise IT services.

India stands to gain from RCEP. But first it needs to acknowledge that opening its economy to international competition will deepen the engagement of its labour-using manufacturing sector and improve its productivity in the long run. India should swallow the bitter pill of ‘pain now, gain later’ as RCEP provides the platform for it to lock in domestic reform priorities for more sustainable long-term growth.

Besides, India cannot afford to retract from RCEP as economic integration with East Asia is its natural path to global economic integration. Asia is not only the largest and most rapidly growing centre of global economic activity, it also plays a major role in global value chains. Now that the Indian elections are over, all eyes are on India and how it will engage with RCEP in its concluding stages.

If India stalls progress in the negotiations, the delayed launch of RCEP will mean giving up real GDP gains that compound over time. This represents a permanent loss. Simulations using a moderate discount factor of 5 per cent show that there will be an unrecoverable loss of US$17.7 billion for the world. RCEP members stand to lose US$19.6 billion if RCEP is launched a year later in 2020.

The conclusion of RCEP will also support the rules-based order as it reflects the commitment and political will of the 16 economies in this trade agreement to willingly work together to agreed rules and norms. As the RCEP covers almost half the world’s population and more than a third of world GDP, this is not only a very positive move in trade liberalisation, it is also a strong signal for the continuation of the rules-based order amidst the US–China trade war.

There is too much at stake if RCEP does not move forward, with or without India. The conclusion of RCEP will serve as an instrument for ASEAN to gain regional influence, with the body seen as having successfully maintained its centrality in driving regional integration in the Asia Pacific. Further stalling in negotiations will weaken ASEAN and undermine the bloc’s ambitions to become a regional strategic force.

Renuka Mahadevan is Associate Professor at the School of Economics, the University of Queensland.

Anda Nugroho is a researcher in the Fiscal Policy Agency at the Ministry of Finance, Indonesia.

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