RCEP: India in a Catch-22

The Regional Comprehensive Economic Partnership (RCEP) is a proposed Free Trade Agreement between the Asean countries and six other member countries that aims to boost goods and services trade by eliminating most tariff and non-tariff barriers - a move that, in theory, would provide India's consumers greater choice of quality products at affordable rates as well as boost service (and goods) exports from the nation's producers.

The RCEP, an economic partnership that includes China, India, Australia, New Zealand, South Korea, Japan and the 10 Asean nations, has come into prominence as the world's largest trade pact after the US pulled out of the Trans-Pacific Partnership (TPP) that excluded China and was meant, in part, to marginalise Chinese influence in the region. With the collapse of the TPP, the RCEP has risen in prominence as the pact that would bind Asia in terms of commerce.

As with all trade agreements, however, the RCEP remains mired in controversy in India. Sceptics across the political spectrum doubt the value of the partnership, with concerns that Indian manufacturers and farmers may be unable to compete on a global scale without some level of protection. This begs the question, if India's industry and agriculture are still nascent, when will they grow up, if ever, to face competition? Will industry be forever beholden to protectionist tariffs to survive?

Further, India's position has been that it would allow market access to most countries in the RCEP, particularly for those with which it has bilateral free trade agreements, apart from China with which it has a trade deficit of over $50 billion.

The Indian industry is understandably alarmed at the prospect of having to compete with Chinese companies that produce goods more efficiently and at a lower cost than Indian companies.

However, a time must come when one accepts China's comparative advantage in manufacturing and, instead of raising or keeping tariffs up to protect Indian manufacturing from China, in line with David Ricardo's theory of comparative advantage, India rather pushes for lower Chinese and Asean members' tariffs to India's specialty - IT services.

India's position in the RCEP is the most protectionist of all the nations, with New Delhi first mooting a three-tiered tariff elimination system - 42.5% of product lines to be tariff free for China, Australia and NZ; 65% for Japan and South Korea; and 80% for Asean countries.

This was rejected by all members, including Asean, who pushed for an unacceptable 92%, wherein Indian industry and agriculture would be beset with competition from foreign companies.

The Asean countries are also averse to Indian demands for liberalisation in the services sector, especially to easier movement of Indian professionals to RCEP member countries. India's proposal to make the services agreement under Asean-Australia-New Zealand FTA, signed in 2009, as the template for RCEP has been severely opposed by some members in the grouping.

Finally, India has opposed intellectual property clauses that could affect its generic drug export business. According to newspaper reports, the text of the RCEP indicates that India's Ministry of Commerce is resisting many aspects of the Japanese and Korean demands for higher intellectual property rights (IPR) standards.

The measures go beyond what is required by the World Trade Organisation (WTO) Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), and are called TRIPS-plus provisions.

The dilemma

Therefore, the RCEP has put huge pressure on India both on the goods side as well as on the services side, and India is moving cautiously. To exit the deal would imperil and set back global trade, while agreeing to the deal means ending policies that have supported Indian industry for decades. It sounds like a Catch-22.

However, if a deal can be reached on goods tariffs vis--vis China, keeping in mind India's justified concerns over the trade deficit, as well as the pressure resisted on intellectual property provisions and, finally, member countries can be pressured to bring down trade barriers to Indian services, a deal is in the interest of all parties.

One may ask, and justifiably, how a free trade agreement sits in sync with the Modi government's stated objective of 'Make in India'. However, this would be a nave question, because to any seasoned observer, the 'Make in India' policy of the government was primarily a branding exercise rather than one meant to provide tangible results, proof of which is that there have been hardly any concrete policy formulations worth their salt to ensure that the idea translated to results on the ground.

In reality, there has been a large amount of continuity in policy between the last government and this and, in fact, any government, be it UPA or NDA, would have pursued the RCEP, with the same concerns over trade deficit with China, intellectual property and the promotion of Indian services.