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India did well in not joining RCEP

The Hindu BusinessLine | 18 January 2024

India did well in not joining RCEP

By Zaki Hussain, Aishwary Kant Gupta

On November 4, 2019, at the third Regional Comprehensive Economic Partnership (RCEP) summit in Bangkok, India decided to withdraw from one of the world largest regional free trade agreements (FTAs). RCEP is an FTA among 15 countries in the Asia-Pacific region, including major economies such as China, Japan, South Korea and members of the Association of Southeast Asian Nations (ASEAN). These countries together represent around 30 per cent of global GDP and population.

The fundamental reasons for India not joining RCEP was non-consideration of five key demands, namely, amendments in tariff differentials, alterations in the base rate of customs duty, modifications to the most favoured nation (MFN) rule, incorporation of certain exemptions into ratchet obligations within the agreement, and the recognition of India’s federal character in investment determinations.

However, apart from these, the most crucial factor behind India’s withdrawal from RCEP was the presence of China — a country with which India already has a substantial trade deficit even without a formal FTA. The fear was that India’s trade deficit could widen further if it opened its markets to cheaper Chinese goods without commensurate market access for Indian products in other RCEP countries. Also, there was increased opposition from various industry segments and bodies, raising doubts about how RCEP would bring about a difference considering that comparable benefits hadn’t materialised from certain existing FTAs.

China’s balance of trade

It has been around two years since the RCEP came into force in January 2022. The balance of trade (BoT) between China and the 15 combined members of the RCEP reveals a noteworthy shift (see Chart 1(A)). On average, the BoT has transitioned from a negative value during the pre-RCEP period to a positive value in the post-RCEP period. This indicates the significant benefits that RCEP has brought to China.

A detailed examination of China’s BoT with RCEP members provides a nuanced perspective (see Chart 1(B)). Notably, following the implementation of RCEP, China saw notable enhancement in its trade surplus with nations where it previously maintained a positive trade balance.

Simultaneously, there was a substantial reduction in the trade deficit with countries that previously exhibited a negative trade balance. A case in point is China’s BoT with ASEAN, which, having already been in surplus at $61.2 billion pre-RCEP (January-September 2021), further increased to $106.7 billion post-RCEP (January-September 2023). Similarly, in the case of Japan, China’s BoT underwent a transformation from a negative $31.3 billion to a positive $0.3 billion.

Contrastingly, China’s BoT with Australia, South Korea and New Zealand during the pre-RCEP period displayed a negative trend. While the BoT continued to be negative in the post-RCEP, there has been a noteworthy reduction in the trade deficit, particularly evident in the case of South Korea. The deficit with respect to South Korea, which stood at (-) $48.6 billion in January-September 2021, considerably diminished to (-) $6.6 billion in the corresponding January-September 2023 period.

The product level analysis reveals that China registered a significant increase in trade balance in the post-RCEP period mainly on account of the manufacturing sector (see Chart 2).

Nuclear reactors, boilers, machinery and mechanical appliances, vehicles other than railway, plastics and articles thereof, inorganic chemicals, and articles of iron or steel are some of the product categories that saw a substantial increase in BoT .

Exports of machinery and mechanical appliances (chapter 85) witnessed an impressive change in BoT — a nearly three-fold increase post-RCEP, from a high base of $9.2 billion (January-September 2021) to $29.2 billion (January-September 2023). Similarly, another notable sector that saw a substantial export growth from China is vehicles (chapter 87), which surged from $1.8 billion to $15.2 billion during the same period.
Right move by India?

Did India make the right choice by withdrawing from RCEP? Answering this would require detailed ex-post impact assessment of RCEP. However, analysing exclusively from the standpoint of BoT with China, initial data indicates that India’s decision to abstain appears to be one of foresight.

Early trends indicate that this stance was crucial in safeguarding India’s domestic manufacturing base, especially the MSME sector. Opening up the Indian market to RCEP members, particularly China, could have had an adverse impact on the country’s manufacturing sector and some of the flagship initiatives of the government like the Production Linked Incentive (PLI) scheme.

It must, however, be noted that the impact of an FTA cannot be assessed relying solely on the movement of goods; services and investments must also be considered.

An additional concern is with respect to the question of dependency. Given the prevailing political tensions with China, it appears sensible for India to maintain a level of autonomy in its supply chains.

Relying heavily on China, especially for crucial inputs, could potentially undermine our ability to assertively address any misconduct by that nation. Thus, by ensuring a degree of self-sufficiency, India can not only safeguards its economic interests but also take a firm stance in response to any unfavourable actions by China.

The writers are Senior Research Fellows at the Centre for WTO Studies, IIFT. Views are personal

 source: The Hindu BusinessLine