GETTING OFF THE RCEP BOAT: A HOBSON’S CHOICE OR A POLITICAL GIMMICK?
Updated: Nov 11, 2019
This piece has been authored by Pulkit Gera and Shubham Shuka, both second-year students of B.A.LL.B(Hons.) at the Rajiv Gandhi National University of Law, Patiala.
“The difficulty lies not in the developing new ideas, rather escaping the old ones”
- J.M. Keynes
In a country where government has, for long, remained impervious to the economic challenges faced by its small business sectors, any real attention to their condition is welcome. After 7 years of negotiations, India decided to walk out of Regional Comprehensive Economic Partnership (RCEP) which is said to be the world’s largest free trade bloc agreement covering 39% of the global commerce[i]. RCEP aims to break down the shackles of trade barriers and promotes free trade among the economically developing nations. It was transcribed by China in 2012 at ASEAN summit held in Cambodia and is often characterized as China led response to the Trans Pacific Partnership (TPP), put forth by United States (US). Comprising of ten ASEAN and five foreign trade agreement (FTA) nations including the export giant China, RCEP was poised to connect half the world’s people and marking the dominance of China in ASEAN trade.
The history of RCEP can be traced back to the 19th ASEAN summit held in November 2011, where the RCEP was introduced for the first time. Since then it has gone through plethora of rounds of negotiations. Unfortunately, all these rounds of negotiations were unable to fulfill the economic interests of New Delhi and it finally decided to move out of the RCEP agreement citing financial and political reasons. Hon’ble PM of India, Mr. Modi, while declaring India pulling out of the RCEP agreement at RCEP summit in Bangkok stated that “When I measure the RCEP agreement with respect to the interests of all Indians, I do not get a positive answer”[ii]. India worries that the agreement will flourish the Indian markets with foreign goods and would affect the small business sector extensively.
WHAT WAS INDIA SEEKING FROM R.C.E.P NEGOTIATIONS
At the time when our country is already grappling with the economic slowdown, it becomes imperative on the part of the Government to opt for a more protectionist stance. A closer look towards the contemporary trade practices and its implications on trade deficits do not suggest an affirmation to RCEP. According to Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI, “India suffered an enormous trade deficit, with 11 out of 15 other members of RCEP in 2018-19 itself, reaching to $107.28 billion out of total $184.00 billion. Among these members, the biggest trade partner and the major concerns that India had throughout were with regard to China[iii]”. The trade deficit with China alone counts to around $50 billion USD and hence, it makes no sense to opt for an FTA with China. There are a couple of reasons cited for India seceding out of RCEP agreement. One, the recent international context seems unfavourable for doing so. The prevalent US-China trade war and the challenges brought up by the multilateral trading system has pressurised and led to the concluding of the RCEP negotiations at a much faster rate. Consequentially, these problems somewhat shifted the focus and could not meet the expectations of crafting an agreement that worked for all.[iv]
Second, the final package offered to India by RCEP was seen as lacking fairness and balance. It appears that India was not able to get its key issues addressed. Its worries included that the pact could force India to cut duties on about 90% of the goods[v] that are currently imported to India. In order to understand the concerns of India in the negotiations, it is necessary to ponder over the following interests -
1. Vulnerabilities in Small Sectors
Among the list of reasons given for opting out, one of the many reasons given was “inadequate protection against the import surge”. [vi]This reason was the immediate concern expressed by all major stakeholders including small sector producers and opposition parties. Though being one of the largest economies in the world, India still uses the tariff to protect the vulnerabilities of the less technology oriented sectors such as agriculture and dairy sector. Moderately high tariffs are imposed on agricultural goods as compared to other goods to camouflage the inabilities of small and marginalised sector to face competition from Global agri-business. Australia, one of the member of RCEP has majority interest on stake of Wheat and sugar, two important legs of the Indian farming sector. Moreover, RCEP agreement would also effected the small scale manufacturers and would have been detrimental to the India’s initiative, to enhance the use of Swadeshi Goods, such as Make in India and Startup India schemes etc.
2. Clarity on 'the origin of goods'
The main issue which was raised by India during negotiations was that the current provisions of the RCEP do not prevent the countries alien to RCEP agreement from routing their products through other countries, generally the products on which India would maintain higher tariffs. It can further be explained with the help of an illustration of the car manufacturing company Bentley, established in UK with which India does not have free trade agreement (FTA) having its manufacturing plants in China. Now, with this RCEP agreement, it can easily export its cars to India at a no or minimal import tariffs. As a consequence, the foreign goods will be available at much cheap prices and it would flood the Indian Markets and this would not only effect an individual businessman but would also affect the economy as a whole. Indians want an access to markets for its service sector.
3. Induction of Auto-trigger mechanism
India wants induction of an auto trigger mechanism to curb sudden surges in imports. This mechanism can be understood as a process that automatically trigger increased tariffs if imports went up which would allow it to have a check over flooding of imported goods in the market. The main purpose of this move is to obtain one of its own kind of protective mechanism that can be invoked by any of the member country to safeguard in case of an unexpected flow of imports at any instant after RCEP comes into effect. Therefore, Indian negotiators have taken fortified steps to ensure that unfair competition would not hamper the domestic sector manufacturing in no case.
4. Exemption from Ratchet Obligations
Besides, there is presence of certain other snags like Ratchet obligations. India wants exemptions built into the ratchet obligations as part of the pact. Once the pact comes into effect these obligations do not render member countries to raise tariffs i.e. once a member country agrees to relax tariffs and quotas on merchandise exports, it cannot revert back on them and bring in more restrictive measures. Later, an exemption would further result into such a scenario that a country will be able to put in place proscriptive measures on grounds of protecting national interest.
5. Determination of base-year
Moreover, the pact also includes that all the members would lower their tariffs and freeze it with a base year which in this case is 2013. Since the change in government in 2014 also resulted in a paradigmatic shift in terms of economic strategies which included shifting to a defensive or protectionist stance, it has been increasing tariff rates of imports in India. Hence, it wants to freeze the base year a couple of years ahead at a higher tariff rate[vii].
As it is rightly said that “isolation is not the sustainable option”, India cannot overcome the deficits in its economy by always acting in protectionist forms. But the move of India opting out of the RCEP agreement could be said to be the Hobson’s choice taking into consideration the exigencies in the economic conditions and the trade deficit of India with other member countries. The maladministration in the implementation of Demonetisation and Goods and Services tax (GST) has already lowered the country’s long-run economic trajectory, thereby leaving no opportunity to the government to take any further risks.
However, on the other hand, this is a globalized world.
We must accept that this Swadeshi economics[viii] is damaging India’s cause as now is the time to become competitive and embrace the world. Even one cannot win the game of cricket by playing defensive without scoring runs. In the same way the road to take India to a 5 trillion economy cannot be built just by keeping a protectionist stance rather one needs to chalk out certain alternate means to reach the ulterior motives. At the time when India lie at the 18th spot in terms of exports[ix], one of the measures could be adopting a policy that would lead to manifold increase in the manufacturing goods that would bolster the current amount of export in the country.
Though India is moving ahead in the ease of doing business but it still lags behind the ASEAN countries such as Australia, New Zealand, and China. Indian competitiveness has gone down over the past decade. In the World Economic Forum’s latest Global competitiveness Report, of the 141 countries measured, India ranks 68th, losing 10 ranks as compared to the previous year.