Opinion: India Did Right in Not Joining the RCEP

India opted to leave one of the biggest regional free trade agreements (FTAs) in the world on November 4, 2019, during the third Regional Comprehensive Economic Partnership (RCEP) conference in Bangkok. India had been a member of the RCEP drafting committee since the agreement's founding in 2011, writes Radha Raghuramapatruni.

India was a member of the RCEP drafting committee from its inception in 2011, but on November 4, 2019, at the third Regional Comprehensive Economic Partnership (RCEP) summit in Bangkok, India decided to withdraw from one of the world's largest regional free trade agreements (FTAs).

The RCEP is an FTA among the 15 countries in the Asia-Pacific region, including the major economies such as China, Japan, and South Korea, and the 10 members (Indonesia, Malaysia, Singapore, Philippines, Thailand, Laos, Cambodia, Brunei Darussalam, Vietnam and Myanmar) of the Association of Southeast Asian Nations (ASEAN) and two countries Australia and New Zealand in the Oceania region.

These countries together represent around 30 per cent of global GDP and population. The fundamental reason for India not joining RCEP was the non-consideration of five key demands, namely amendments in tariff differentials, alterations in the base rate of customs duty modifications to the most favored 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. There is a fear 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 if India were to join the RCEP, this could hamper its transition towards industrialisation in the face of a surge in imports, which would leave its economy dominated by agriculture and services. The analysed data indeed presents that the deeper the trade relation between India and China grew, the more we have seen a shift towards imports of high-skill and technology-intensive manufactures from China, while India's exports consist of a stable chunk of commodities.

Basically, the RCEP is a trade bloc of net exporters focused more externally than internally. China is focusing increasingly on accelerating its export market and is not going to fulfil the buyer of last resort in the RCEP region. India, if would have been a part of RCEP, is an obvious candidate to take up this the role, as RCEP members were responsible for almost 70 per cent of India's trade deficit over the last five years.

Non- tariff barriers (NTBs) to trade have become increasingly important and India is hardly the most protectionist country from this perspective, being outflanked by RCEP members Australia, Japan, and China. RCEP has not made any arrangements on lowering these NTBs. Also there was an 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 on 1st January 2022. The balance of trade (BOT) between China and the 14 combined members of the RCEP reveals a noteworthy shift. China's largest export market is no longer the US or Europe but now it is the South East Asia. Shipments from China to the members of ASEAN have soared to nearly $600 billion a month, based on 12-month moving averages compiled, that puts the 10-nation bloc well ahead of the US & EU, which have seen a steep drop in imports from China in 2023.

This shift has been by the Beijing led RCEP, which has emerged as the world's largest free-trade block. It has, also a testament to the reworking of global supply chains, commodity and goods parts sourced from China are increasingly moving to South Asia for final assembly before being exported to the rest of the world. On average, the BOT of China 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.

Trade between China and the 14 other Regional Comprehensive Economic Partnership (RCEP) member countries amounted to 12.6 trillion yuan ($1.77 trillion) in 2023, an increase of 5.3 per cent compared to the period before the agreement came to effect in 2021. China's exports to RCEP member countries reached 6.41 trillion yuan, an increase of 1.1 percentage points to 27 per cent in terms of the export share compared with that of 2021.

Lithium batteries, auto parts, and flat panel display modules all maintained substantial export growth. Meanwhile, China's imports from RCEP member countries reached 6.19 trillion yuan, taking 34.4 per cent of the country's total imports. China saw a 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 the ASEAN, which have 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 further reveals that China registered a significant increase in trade balance during the post-RCEP period largely owing to its manufacturing sector exports. Nuclear reactors, boilers, machinery and mechanical appliances, vehicles other than railway, plastics and articles thereof, inorganic chemicals, articles of iron and steel are some product category that saw a substantial increase in BOT.

Particularly the exports of machinery and mechanical appliances 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 which surged from $1.8 billion to $15.2 billion during the same period.

Is India's Move Right

The analysis on the BoT of China with the RCEP members present that India's move was right in withdrawing from the RCEP. The ASEAN's experience shows that they have experienced huge trade deficit in the post RCEP period. The early trends indicate that this stance was crucial for 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 and Make in India initiative.

Similarly owing to the current political tensions between India and China relying heavily on China, especially for crucial inputs, could potentially undermine the country’s ability to assertively address any misconduct by China.

Further, the idea of mere signing an FTA or being part of multilateral trade agreement can only make the domestic industries more competitive globally, also might not always right as reduction of tariff barriers unilaterally also would encourage global competitiveness and technology up gradation of the domestics firms and goods.

As the country had taken up unilateral tariff reduction as a part of the 1991 Economic Policy Reforms and also unilateral tariff reduction were taken up during the year 2000 and the results were quite impressive.

Now Ricardian school of thought of 'gains of trade', only work in a world where capital is immobile, the geopolitical environment is benign, and there is an instantaneous frictionless specialisation towards comparative advantages. But reality is not that simple. The fact is, international trade is a complex system characterised by market failures, where the international level playing field for firms is affected by transaction costs, economies of scale, and government policies. Consequently, the economic outcome of trade is not always beneficial for individual countries.

Focussing on improving infrastructure, logistics and transport, communication, reforms in the labour market and laws, technology and product innovations along with prudent government policies would make the Indian exports more competitive and Indian firms more prosperous in the global markets.