How will RCEP benefit member nations and what does India’s exit from the trade pact mean

15 Asia-Pacific nations have signed the Regional Comprehensive Economic Partnership. It covers over 2.2 billion people and accounts for 30 per cent of the world's economy.

File photo of PM Modi at the RCEP Summit in Thailand in 2019 | @narendramodi | Twitter

New Delhi: After eight years of negotiations, 15 Asia-Pacific nations have finally signed the Regional Comprehensive Economic Partnership (RCEP), hailed as one of the biggest free trade deals in history. It covers over 2.2 billion people and accounts for 30 per cent of the world’s economy.

India chose to opt out of this trade agreement that was signed Sunday (15 November) among 10 Association of Southeast Asian Nations (ASEAN) members — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam — and their six trade partners — Australia, China, Japan, South Korea and New Zealand.

Prime Minister Narendra Modi had in November last year said the decision to not be a part of RCEP was guided by the impact it will have on the “lives and livelihood of all Indians, especially vulnerable sections of the society”.

ThePrint explains what RCEP represents, how it was conceived and ways in which this trade pact will benefit member nations.

How it started

The RCEP was first proposed at the 19th ASEAN meet in November 2011 with an aim to create a consolidated market for the 10 member countries and their trade partners.

The guiding principles of RCEP state, “The objective of launching RCEP negotiations is to achieve a modern, comprehensive, high quality and mutually beneficial economic partnership agreement among the ASEAN member states and ASEAN’s FTA (free trade agreement) partners.”

It aims to create a “liberal, facilitative and competitive investment environment” in the Asia-Pacific region.

The RCEP was later also conceived by the ASEAN members and China as a response to the US-led Trans-Pacific Partnership (TPP) — later renamed as Comprehensive and Progressive Agreement for Trans-Pacific Partnership — after America opted out of this deal in 2017. The key features of TPP included comprehensive market access, regional approach to commitments, inclusive trade, regional integration, and addressing new trade challenges.

The TPP was established during US President George Bush’s term. President Donald Trump had, however, pulled out of the deal saying it was a “potential disaster” for America and will harm manufacturing in the US.

What is expected of RCEP

The RCEP is expected to eliminate a series of tariffs on imported products for the member nations in the coming 20 years. The agreement also includes rules on intellectual property, telecommunications, financial and professional services, and e-commerce .

Speaking to ThePrint, Radhika Pandey, consultant, National Institute of Public Finance and Policy, said, “The intent is that it will lead to trade creation because the countries that are part of the RCEP will progressively lower tariff rates, so that will lead to an increase in trade.”

Many signatories of the RCEP already have FTAs with each other. But Deborah Elms, from the Asian Trade Centre, has been quoted as saying, “The existing FTAs can be very complicated to use compared to RCEP.”

This is because businesses with global supply chains might face tariffs even within an FTA if their products contain components that are made elsewhere.

However, under RCEP, member nations would be treated equally. It would also incentivise companies in member nations to look at the trade region for suppliers.

Does RCEP benefit all?

Even though the intent of RCEP is to create trade and lower tariff rates for all members, experts worry that not all countries will benefit equally.

Sujit Dutta, distinguished fellow at Vivekananda International Foundation, and editor, National Security quarterly journal, told ThePrint, “Only some of the countries will gain from joining RCEP. China is eating into many of the other countries’ industrial products, it remains uncertain on what this would mean for smaller countries.”

He added, “Stronger economies like Singapore have a lot to gain. But, for other smaller countries, it is an unequal relationship. China is too big for these countries.”

Dutta also pointed out that large-scale trade agreements are now “losing their sheen”. This is because they are based on different currencies whose valuations have an unequal effect in different countries.

Rajat Kathuria, director and chief executive, Indian Council for Research on International Economic Relations, also maintained that China will stand to benefit more in comparison to other countries, both in terms of imports and exports.

“China being a big market is going to redirect its economy towards more consumption. There are going to be greater imports into China. Once you have greater imports, there is going to be greater value to consumers, that’s something India missed out on,” Kathuria told ThePrint.

The Peterson Institute for International Economics has estimated that by 2030 RCEP may be able to increase global national income by $186 billion annually. It could also add 0.2 per cent to the economies of member nations.

Why did India pull out of RCEP?

On 4 November last year, India announced its decision to not join RCEP. This came amid concerns that elimination of tariffs would open India’s markets to imports, which in turn could harm local producers. The decision also reflected PM Modi’s clarion call for an Atmanirbhar Bharat.

Pandey explained that India’s strategy was to protect its domestic industries from Chinese imports. “India had suggested some remedial measures. For instance, if imports rise beyond a threshold they should be allowed to impose some kind of barriers. But, the other member countries of RCEP didn’t agree to it.”

“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,” PM Modi had said at the RCEP Summit in Bangkok last year.

The other member nations have, however, maintained that the doors will always remain open for India’s participation in the RCEP. Singapore Prime Minister Lee Hsein Loong had said that the country has joined the trade pact “in hoping that India too, will be able to come on board at some point”.

According to Karthik Nachiappan, research fellow, Institute of South Asian Studies, National University of Singapore, RCEP also did not improve the material standing of Indian firms in sectors like agriculture, manufacturing and electronics.

India’s metal producers, he said, stand to lose from greater competition having already been buffeted by previous FTAs with Southeast Asian countries. “In terms of agriculture, firms producing commodities like dairy, pepper, coconuts and cardamom will face pressures from both high-end producers like Australia and New Zealand, and also like-minded competitors in ASEAN, which is the case for Indian rubber,” he wrote.

N.R. Bhanumurthy, professor of economics at the National Institute of Public Finance and Policy, said, “We don’t have strong databases to understand and negotiate a good trade deal with regard to some of the commodities. When price fluctuations happen then no one knows what will happen to the price of imported commodities, particularly in case of agricultural commodities.”

“The problem is that it is very difficult to increase the export of agricultural commodities while their imports can be increased very easily,” he added.

Did India lose out by not joining RCEP?

The Chinese state media had claimed that India’s decision to not join RCEP was a “strategic blunder” to the country’s economic growth.

Kathuria maintained that India could have gained from being part of the RCEP, in terms of welfare improvement for consumers. “We have lost out on getting greater access if we are negotiating with other markets,” he said.

He also explained how even during negotiations with member nations of RCEP, India’s focus had been on the disruption caused to manufacturing and homegrown producers rather than what it meant for consumers. “Now, all that discussion has been overshadowed by the border conflict with China… In this case, I would say that politics has been a significant factor in our decision to stay out of RCEP,” Kathuria added.

Pandey, meanwhile, said protection and promotion of domestic industry should be temporary. “Not being part of any trade creation group should be temporary. But going forward, this strategy of hindering access ultimately harms the country as a whole in the long term.”

“Some kind of temporary relief to domestic industry is fine and can be given because China is one established monopolist player,” she added.

Global trade would also have increased if India would have been a signatory because it is a market for textile and dairy products, said Pandey. “We have a huge population, a huge market, we have a sizeable share of GDP. That’s why they have left the door open for India to sign later.”