Should India join RCEP? Extract better terms first

India is currently in the process of negotiating deals to join the Regional Comprehensive Economic Partnership (RCEP), the proposed grouping of 16 countries consisting of the 10 member states of ASEAN plus six other Asia-Pacific countries with which ASEAN already has free trade agreements (Australia, China, India, Japan, South Korea, New Zealand).

As usual, opinions of analysts in India vary over the advantages and disadvantages of joining such a big preferential regional trade arrangement.

Several arguments are offered in support of India joining the arrangement. First, the role of multilateral rules and the dispute settlement body of WTO is fast eroding, especially after the unilateral actions taken by US President Donald Trump in the sphere of international trade and investment. In the absence of the protection provided by the multilateral umbrella of WTO, RCEP offers India the opportunity to discipline the aggressive economic rise of China by using the rules of a regional grouping. Otherwise, India would be at a disadvantage. For example, currently, China imposes 6% MFN tariff on naphtha and 5% on cotton yarn exported by India whereas ASEAN countries (because they already have a FTA with China), enjoy zero duty.

Second, India needs to be a member of some big regional free trade agreement in order to attract FDI that would use India as a base for exports in sectors like IT, pharma, automobiles and components, where India may have competitive advantage in the region. Having many bilateral FTAs with disparate rules of origin and market access is not going to help here.

Third, a large part of the global supply chain of many dynamic products is located in the Asia-Pacific region. If India wants to get connected to this supply chain (which is needed to increase exports in today’s world), it needs to be a member of this regional grouping.

Fourth, if India has to be a member of some big trading bloc, it is better to be a part of some bloc which excludes the US. America, specially under Trump, has become an unreliable leader that is likely to insist on stricter labour and environmental standards as well more stringent restrictions on technology transfer, temporary migration of service professionals and independent dispute settlement mechanism. In fact, if the recent renegotiation of NAFTA is any indication, the US may also change the terms of engagement at frequent intervals to suit its economic and geopolitical interests. All these considerations further strengthen the case for an Asia-Pacific trading bloc like RCEP.

On the other hand, the major counter-arguments are the following First, India already has FTA with several members (ASEAN, Japan and South Korea) of the proposed RCEP. The experience has been negative. India’s combined trade deficit with these three FTA partners has increased from $16 billion in 2009-10 (when these FTAs were concluded) to $31 billion in 2017-18.

Further, in 2017-18, India’s total trade deficit with all other members of RCEP stood at $104 billion (up from $48 billion at the end of the last decade), which is about 64% of India’s global trade deficit. These figures show that India has a big and rising deficit vis-à-vis the prospective partner countries of RCEP, indicating that we have lingering problems in competing with such countries. There is no reason to believe that India would suddenly improve its performance just by being a member of the RCEP.

Second, for both economic and political reasons, the government cannot ignore the interests of millions of small farmers and SMEs. So, India has to provide protection to these vulnerable sections against import competition from lower cost producers in other RCEP member countries. That is not an easy task.

Third, India needs special market access in services, in which India is believed to have competitive advantage, with freer entry of professionals to render such services. Unless the gains there offset the losses in goods trade, India would be a net loser. Consequently, India needs to have special market access in services like IT with freer temporary immigration, along with a longer breathing space vis-à-vis Chinese goods. Unless such concessions are forthcoming, India should hold back on joining.

One has to remember that a country with higher tariffs, such as India, after signing FTA with lower tariffs countries, such as the ASEAN countries, is likely to experience a bigger trade deficit with the member countries but lower deficit with the rest of the world as imports will be diverted towards the lower tariff member countries. What matters is the multilateral deficit. So, the above data on rising trade deficit with prospective RCEP members does not necessarily establish a case against RCEP.

Similar protectionist arguments were advanced against import liberalisation in pre-1991 India but subsequent events proved the naysayers wrong. Indian producers have shown that they can compete with established foreign producers by improving their efficiency as well as working out strategic collaboration with foreign producers. Many of them have started exporting and setting up production facilities abroad in a big way, such as Tatas, other steel producers, auto, IT and pharma companies) after being forced by competition at home from both domestic and foreign players. The same may well happen after India becomes a member of RCEP, with some suitable safeguards (like income support, instead of price support) built in to protect vulnerable small producers, particularly in agriculture, and the exchange rate is allowed to provide protection in lieu of import duties.

Given India’s current status as the fastest growing big market in the world and the uncertainties of access for other countries to the US market, India is currently in a much stronger bargaining position to extract better terms from foreign producers and investors, both before and after joining RCEP. It may also be a good idea to first start competing in the Asia-Pacific games before going for global competition in the Olympics.

(The author is a former Professor of Economics, IIM-Calcutta)