Madhyam | 6 November 2019
India exits the RCEP: What happens next?
By Kavaljit Singh
On November 4, India announced its decision to exit the negotiations on the proposed Regional Comprehensive Economic Partnership (RCEP) – a mega-regional free trade agreement. Prime Minister Narendra Modi conveyed the decision at the third RCEP Summit that took place in Bangkok. The summit was attended by the leaders of all 16 RCEP Participating Countries (RPCs).
The full text of PM Modi’s address at the RCEP Summit is not yet available, but according to a tweet by Prasar Bharati (India’s official broadcaster), Mr. Modi stated: “The present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP. It also does not address satisfactorily India’s outstanding issues and concerns. In such a situation, it is not possible for India to join the RCEP Agreement.”
During a media briefing at Bangkok, India’s foreign ministry official added: “India had significant issues of core interest that remained unresolved… India has participated in good faith in the RCEP discussions and has negotiated hard with a clear-eyed view of our interests. In the given circumstances, we believe that not joining the agreement is the right decision for India.”
With India opting out of the RCEP negotiations, the remaining 15 RPCs have decided to move ahead with the proposed agreement. In a Joint Statement issued on November 4, the RCEP leaders noted: “15 RCEP Participating Countries have concluded text-based negotiations for all 20 chapters and essentially all their market access issues; and tasked legal scrubbing by them to commence for signing in 2020.”
Now onwards, 15 RPCs will be working towards signing the agreement by late 2020 while still trying to resolve India’s main concerns so that it could consider joining the pact.
What is RCEP?
RCEP is a proposed FTA between the ten member-states of the Association of Southeast Asian Nations (ASEAN) and their six FTA partner-countries – Australia, China, India, Japan, South Korea, and New Zealand.
It covers a wide range of issues, including trade in goods and services, investment, intellectual property rights, competition policy, e-commerce, dispute settlement, and economic and technical cooperation.
The RCEP negotiations began in Cambodia in 2013 with an expectation to conclude the talks by the end of 2015. After missing several deadlines repeatedly, the talks were slated for the conclusion by November 2019 during the 35th ASEAN Summit in Bangkok.
Just like any other RPCs, India’s approach towards the RCEP negotiations was guided by its core interests. Broadly speaking, India was seeking a development-friendly pact that can provide sufficient flexibility so that domestic producers can withstand competition while harnessing the gains from trade in services, especially the IT and IT-enabled services in which India enjoys international competitive advantage. Whereas, China expects the RCEP to complement its Belt and Road initiative in the region and thereby further strengthening regional economic integration.
Door Still Open for India
While the ruling and opposition political parties in India are claiming credit for the decision to exit RCEP negotiations, the fact remains that India can still join the RCEP before it is signed next year.
This option is underscored in the Joint Statement issued by the RCEP leaders on November 4, which states: “India has significant outstanding issues, which remain unresolved. All RCEP Participating Countries will work together to resolve these outstanding issues in a mutually satisfactory way. India’s final decision will depend on satisfactory resolution of these issues.”
Later on, the trade ministers of Australia, Singapore, and Japan expressed hopes that India will continue talks on the outstanding issues. While the Chinese Vice Foreign Minister, Le Yucheng, stated: “Whenever India is ready, it’s welcome to get onboard.”
Theoretically, the probability of India joining the proposed trade pact cannot be ruled out even though there are slim chances of resolving multiple outstanding issues within the stipulated time. Domestically, it may be difficult for the Modi government to take a U-turn on the RCEP given the nationwide protests organized by a wide range of constituencies, including farmers groups, trade unions, and political parties.
For India, the RCEP would have been its biggest FTA, and the country would have to offer far deeper commitments than already made under its existing FTAs with ASEAN, Malaysia, Singapore, South Korea, and Japan. Hence, most RPCs would like India to join the RCEP as it offers them preferential access to the potentially large Indian market. For Australia, additional market access for agricultural exports would be substantial if India joins the RCEP because it already has an FTA with all RPCs except India.
Some Key Concerns
After joining RCEP, India would have had to eliminate tariffs on almost 90 percent of items from ASEAN, Japan, and South Korea; and on more than 74 percent of items from China, Australia, and New Zealand.
Even the supporters of RCEP acknowledge that the fear of cheaper imports displacing domestic production is real, and the proposed pact could negatively affect the livelihoods of millions of Indians besides posing a potential threat to the Make in India initiative.
In India, the consequences of cheaper imports displacing domestic production would be far-reaching as close to 93 percent of the country’s workforce is in the informal sector. Unlike Australia, New Zealand, and Japan, India lacks a comprehensive social safety net to fall back on.
The main concern is that India would be flooded with cheaper imported goods such as manufactured goods from China and dairy products from New Zealand once the tariff and non-tariff trade barriers are removed under the RCEP. This concern cannot be easily dismissed, given the steep rise in imports from China in recent years.
In 2018, for instance, the volume of bilateral trade between China and India reached $87 billion, with the trade deficit hitting $53 billion in China’s favor. A trade deficit is not bad per se, but such a massive trade deficit with China is not sustainable. India has been demanding lower barriers for pharma and IT exports to China, but little progress has been made so far to address this issue.
Equally worrisome is the composition of India’s trade with China. India’s exports to China primarily consist of raw materials such as iron ore, metals, and cotton, while China’s exports to India are dominated by finished manufactured products such as mobile phones and electrical machinery.
In 2018, India registered a trade deficit with 11 out of 15 RPCs. Trade analysts have pointed out that India’s trade deficit with RPCs will further increase if it joins the RCEP on the current terms.
At the same time, there was little interest among other RPCs to lower barriers to trade in services as India was keen to push for greater liberalization of trade in IT and IT-enabled services (especially in Mode 4) due to its globally competitive IT sector.
The Contentious Investment Chapter
Another contentious issue for India was the investment chapter of the proposed RCEP. The negotiations on the investment chapter were dragged on far longer than anticipated. Right from the beginning, Japan and Korea were seeking higher standards for investment protection besides the incorporation of the Investor-State Dispute Settlement (ISDS) mechanism that would allow investors from the RPCs to bypass domestic courts of host states and sue a host state through international arbitration proceedings. Japan also sought a complete ban on caps on royalty payments and a ban on technology transfer on a negative list basis.
On the other hand, India sought a more cautious approach based on public policy protection and limited coverage as the country is facing more than 12 arbitration suits under previously signed bilateral investment treaties.
Leaked documents reveal that a compromise was reached at the final round of negotiations (September 2019) for not including the ISDS in the present agreement because the negotiators wanted to conclude RCEP negotiations by November 2019. However, under the work program, RPCs agreed to enter into discussions on ISDS provision within two years after the entry of force of the RCEP agreement and conclude them within three years from the start of discussions.
Apart from the ISDS mechanism, India was also not keen to include controversial clauses (such as asset-based definition of investment, fair and equitable treatment, and most favored nation) under the investment chapter of RCEP as these clauses are inconsistent with the new model BIT text (2015) that defines India’s overall policy towards investment agreements. By accepting such provisions under the proposed RCEP, India would have effectively replaced its model text with a new template that gives extensive rights and protection to foreign investors, while constricting the national policy space.
Also, India was not amenable to accept disciplines relating to intellectual property rights (IPRs) and electronic commerce as demanded by some RPCs.
India’s Adverse Experience with Existing FTAs
As I have discussed elsewhere, India’s experience with earlier FTAs with Japan, South Korea, and ASEAN countries has been far from satisfactory. These FTAs have not resulted in a more balanced and mutually beneficial trade. Post-FTA, bilateral trade volumes have increased, but imports from partner countries have increased at a faster pace than India’s exports with partners. Due to its relatively higher tariff regime, India had to reduce tariffs much more than partner countries. With the result, India’s trade deficit with existing FTA partners in the region increased consistently after the implementation of FTAs.
Apart from the lack of competitiveness, Indian exporters have not been able to achieve greater benefits from existing FTAs due to low awareness and cumbersome rules of origin. According to the estimates of the Asian Development Bank, the utilization rate of India’s FTAs varies between 5 and 25 percent – one of the lowest in the region.
As far as the services sector is concerned, India could not secure greater market access in its trade agreement with ASEAN. In the case of bilateral trade agreements with South Korea, Japan, Malaysia, and Singapore, where India successfully negotiated the Mutual Recognition Agreements (MRAs) – aimed at facilitating the movement of IT and other service professionals – anticipated gains have not yet materialized because of weak enforcement of MRAs.
Goodbye RCEP, Hello India-US FTA
While India has now opted out of the RCEP negotiations, it has not completely abandoned its policy of pursuing free trade agreements. At present, India is negotiating as many as 15 free trade agreements (including with Australia and New Zealand) while another 12 FTAs are proposed/under consultation and study.
Currently, bilateral discussions are underway between India and the US on a limited (“interim”) agreement in the near-term and a highly ambitious and broader FTA over the longer-term. The broader FTA may also cover a wide range of issues, including trade in services, IPRs, e-commerce, and investment. As the negotiations on a standalone India-US bilateral investment treaty have not progressed, both trading partners may incorporate an investment chapter under the broader FTA.
In the interim agreement, the US would like India to consider lower tariffs on ICT items and agricultural products besides removing price controls on medical devices such as stents and knee implants whereas India would like the US to immediately restore benefits to Indian exporters under the Generalised System of Preferences that was terminated by Trump administration in June 2019.
The Indian trade negotiators should draw red lines around many issues of India’s interests to achieve desired outcomes from a trade pact with the US. Make no mistake: Indian trade negotiators will face daunting challenges, particularly in the areas of IPRs, investments, e-commerce, and agricultural sectors, once they start negotiations on an ambitious India-US FTA with their American counterparts in the coming days.
The same will the case when Indian and European trade negotiators resume negotiations on the long-pending India-EU free trade agreement.
Stop Chasing Elusive Strategic Gains
A section in the Indian policy establishment strongly believes that free trade agreements could be useful policy tools to achieve geopolitical and strategic objectives and, therefore, should be evaluated through strategic lenses too. To a large extent, this viewpoint shaped India’s approach towards FTAs and paved the way for several trade pacts with East Asian countries since the mid-2000s.
Across the world, there is plenty of evidence to show that free trade agreements are not useful tools to pursue geopolitical and strategic objectives. To illustrate, take the case of the North American Free Trade Agreement (NAFTA), a trilateral agreement between the United States, Canada, and Mexico, also known as the “gold standard” of the trade deal. Thanks to NAFTA, 80 percent of Mexico‘s global exports go to the US, but this trade agreement did not deter Mexico from voting against the US over Iraq at the UN. Mexico pursues an independent foreign policy determined by its national interests. In recent years, Mexico and the US have often differed on many strategic issues.
As a member-state of ASEAN, the Philippines is a signatory to a free trade agreement with China, yet this small country filed a case against China at the Permanent Court of Arbitration (PCA) in The Hague in 2013 claiming that China had infringed on its territorial rights in the South China Sea. In 2016, the PCA ruled in favor of the Philippines.
Back home, India signed a Comprehensive Economic Cooperation Agreement (CECA) with Malaysia in 2011, in addition to an India-ASEAN CECA that came into effect in 2010. Even though both these agreements are currently in operation, the Malaysian Prime Minister, Mahathir Mohamad, recently criticized New Delhi’s actions in Kashmir at the United Nations General Assembly this year.
Sri Lanka and India have opposing views on several geopolitical matters despite both countries signed a free trade agreement way back in 1998.
This is not to say that a trade pact may not have any strategic implications, but one should not overlook the fundamental point that India’s future engagements with the FTAs should be premised on hard economic terms. What must be kept in mind is the real economic costs and benefits rather than elusive geopolitical gains as fantasized by the successive Indian governments in the recent past.
Reshaping India’s Trade Policy
As there are strong protectionist sentiments against India’s software and services exports industry in key markets, the chances of India becoming an economic powerhouse through services exports are very slim.
At a time when the Indian economy is passing through a difficult time with weak industrial growth, agrarian distress, and a severe unemployment crisis, the government should pay more attention to boost domestic demand in the short and medium-term. A policy change is essential to ensure that unbridled integration through FTAs should not accentuate multiple crises.
Before expanding global footprint through FTAs, India must put its own house in order by strengthening the domestic productive capacities, enhancing R&D, and mobilizing resources to improve the physical and social infrastructure so that domestic producers can compete in the international markets. There are a host of domestic issues that needs to be addressed to make the Indian industry globally competitive.
Simultaneously, New Delhi should conduct a thorough review of India’s existing FTAs. Based on that review, the government should delineate its policy approach towards bilateral and regional trade agreements.
All negotiations on future FTAs should be carried out in tandem with, or as part of, the overall FTA policy framework in close consultations with other ministries. It becomes all the more important as nowadays, FTAs are increasingly becoming broader with provisions on trade in services, public procurement, investment, e-commerce, and IPRs. The Indian authorities should collect country-wise data on trade in services and other transactions to assess the effects (both positive and negative) of free trade agreements on the economy.
Domestically, the government should initiate meaningful consultations with various stakeholders, including the state governments, on all trade policy matters.
RCEP is not the last free trade agreement in the world. There would be plenty of opportunities for India to engage with bilateral and regional free trade agreements in the coming years. What is needed is a holistic approach towards trade policy in general and FTAs in particular. India’s overall trade policy needs to be much less ad hoc than it is now.
 The transcript of media briefing by Secretary (East) during PM’s visit to Thailand (November 04, 2019) is available at: https://www.mea.gov.in/media-briefings.htm?dtl/32007/Transcript_of_Media_Briefing_by_Secretary_East_during_PMs_visit_to_Thailand_November_04_2019.
 The full text of Joint Statement is available at: https://asean.org/storage/2019/11/FINAL-RCEP-Joint-Leaders-Statement-for-3rd-RCEP-Summit.pdf.
 “India to continue talks on RCEP trade deal: Australian minister”, Reuters, November 4, 2019, accessed from: https://www.indiatoday.in/world/story/india-to-continue-talks-on-rcep-trade-deal-australian-minister-1615539-2019-11-04; Mathew Mohan, “15 nations complete ‘text-based’ negotiations for RCEP, signing expected in 2020”, November 5, 2019, accessed from: https://www.channelnewsasia.com/news/asia/rcep-negotiations-signing-expected-2020-12062560; Isabel Reynolds and Emi Nobuhiro “RCEP deal: Japan keen on having India aboard; says will find a workaround”, Business Standard, November 5, 2019, accessed from: https://www.business-standard.com/article/international/rcep-deal-japan-keen-on-having-india-aboard-says-will-find-a-workaround-119110500452_1.html.
 Dipanjan Roy Chaudhury, “RCEP: India still has a year to be part of trade deal but chances are dim”, November 5, 2019, The Economic Times, accessed from: https://economictimes.indiatimes.com/news/economy/foreign-trade/rcep-india-has-a-year-to-be-part-of-trade-deal-but-chances-dim/articleshow/71915590.cms?from=mdr.
 See Biswajit Dhar, India and Regional Comprehensive Economic Partnership: Key Issues and Implications, Briefing Paper No. 29, October 2019. Available at: https://www.madhyam.org.in/wp-content/uploads/2019/10/BP29.pdf.
 Kavaljit Singh, India Changes Tack on RCEP Negotiations, Madhyam, August 13, 2016.