Amid rising concerns over increasing China’s influence in the Asia Pacific region, India’s decision to withdraw from Regional Comprehensive Economic Partnership (RCEP) over “inadequate” protection against surges in imports, particularly from China and various unresolved “outstanding issues” looks wise in the present scenario. However, this protectionist mind-set is unsustainable in long run and India must do away with its defensive attitude and instead, work on export promotion strategies and creating globally competitive sectors.
Trade blocs are believed to have
substantial “trade creation” effects by removing trade barriers and enabling
free trade between participating countries. The member nations in such free
trade agreements (FTAs) benefit through greater economic integration, lower
tariffs, better trading opportunities, increased exports, economies of scale,
higher competition and improved choice with lower prices for customers. Such
pacts facilitate trade by letting companies to export anywhere within the bloc
without meeting separate requirements of each country. Some of the famous trade blocs include
European Union, NAFTA, ASEAN Free trade area, SAFTA, Mercosur, CECA, CEPA and
recently formed RCEP.
RCEP (Regional Comprehensive
Economic Partnership) Agreement was first proposed at the 19th ASEAN meet in
November 2011 with an aim to create a consolidated market for the 10 ASEAN
member countries and their six FTA trade partners. After nine years of
negotiations, finally, 15 Asia-Pacific nations signed RCEP agreement in Nov
2020, covering over a third of world’s population and accounting for a combined
GDP of $26.2 trillion (30% of the global GDP); thus creating one of the world’s
largest trading blocs. However, India opted to pull out of this trade agreement
that was signed on 15 November at 37th “online” Asian Summit hosted virtually
by Vietnam, among 10 ASEAN members —
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore,
Thailand and Vietnam, and their five FTA partners — Australia, China, Japan,
South Korea and New Zealand.
It was last year in Nov, 2019, at
the Third RCEP Summit, in Thailand, when Prime Minister announced India’s
decision to not be part of the trade bloc after member nation’s refusal to
accede to its requests on providing safeguards to various sectors. Concerns
were expressed by various stakeholders over adverse implications of import
liberalisation if India joins RCEP. RCEP members want 92% of India’s goods
tariff-free over the next 15 years. Most participating countries wanted India
to slash existing tariffs on up to 90% of all goods. Unsatisfactory
negotiations over growing trade deficits with China and various “outstanding
issues” are the major reasons for pulling out of the trade bloc.
Why did India opt out of RCEP-
Concerns over “unsustainable” trade deficits?
India runs a massive trade
deficit with RCEP countries, particularly with China. In 2019 itself, India
registered a bilateral trade deficit at $105 billion with 11 out of the 16 RCEP
countries, out of which China alone accounted for around $50 billion. According
to a paper published by NITI Aayog in 2017, India’s past experience with other
FTAs has not been a very pleasant one and India has registered a bilateral
trade deficit with most of the member countries of RCEP. The paper clearly
shows that post FTA with ASEAN, Japan and South Korea, India’s trade has
remained skewed with imports rising faster than exports, i.e. while exports to
RCEP countries account for just 15% of India’s total exports, imports from RCEP
countries make up 35% of the country’s total imports.
Unresolved “outstanding
issues”
Weaknesses in agriculture and diary sector
Despite being a fundamentally
open economy, India uses tariffs to protect their farmers and has always batted
for adequate protection for agriculture at various international trade
platforms. The dominance of small and marginal farmers in the agricultural
sector and their incapacity to compete with global agricultural firms is the
primary reason behind government excluding agriculture from import
liberalisation.
In RCEP trade bloc, India faces
stiff competition from Australia which has large exports in wheat and sugar,
two of the most important agri-export commodities for India too. It’s worth
noting that Australia has also lodged complaint against India in WTO, alleging
that India's continued sugar subsidies to farmers have led to a
"glut" and "depressed" global prices. Three other RCEP
participating countries, China, Indonesia and Thailand, have joined the dispute
as third parties. These countries want India to reduce its sugar subsidies to
farmers to further their own exports in Indian markets. In addition, India
being a part of RCEP would have meant increased chances of dumping of spices,
mainly, pepper and cardamom from South Asian spice majors. Further, tea and
coffee planters face increased competition from China and Vietnam and
Indonesia. To this end, its looks wise decision by Indian PM not to join RCEP
as any India’s commitment on market access under the RCEP could have provided
an additional opportunity to member countries to exploit Indian farmers and
markets.
Another group of stakeholders in
India’s RCEP deal are diary producers who face tough competition from New
Zealand’s and Australia’s diary industry which are huge exporters of milk and
milk products globally. As its milk producers are more efficient than India’s
small producers, any increased market access given to New Zealand’s producers
for their dairy product would hamper India’s interests. According to latest
estimates, New Zealand is the main exporter of milk worldwide with an export
value of $6.3 billion in 2019.
Threat to manufacturing sector and “Make in India”
Another reason for India pulling
out of RCEP was that China would have had to be given similar levels of market
access and preferential tariff treatment. This has made India’s manufacturing
sector uncomfortable which faces increasing competition from cheap Chinese
products, especially in electronic items. China’s presence in RCEP is a potential
threat to “Make in India” initiative too. Recent data shows that India imported
electronic components worth Rs 1.15 lakh crore in 2019-20, out of which, 37%
came from China alone.
India’s aluminium and copper
industries are already facing tough completion from China and if import tariffs
are further cut under RCEP, it will cause severe damage to domestic aluminium
industry which serves as major input in various production chains. The latest
government data shows that India imported around $4.4 billion worth of
aluminium in 2019-20, out of which China was the biggest supplier, shipping
aluminium worth over $1 billion. Further, talking about the copper industry,
China, Japan, Malaysia, Vietnam and Thailand are the RCEP nations which have
emerged as the major exporters of copper, accounting for 45% of India's $5
billion in copper imports for 2019-20.
Stringent Rules of origin (ROO) to ensure precise tariff
differentiation and prevent routing through other countries, especially China
As India already has trade
deficit with 11 RCEP members, India had sought strict rules of origin to
determine the source country of a product and to ensure that Chinese goods are
not repackaged and routed to India through member countries that may have lower
or no duty. For example, Chinese garments enter Indian markets through
duty-free route under SAFTA pact and Duty Free access from Bangladesh. However,
most of the participant countries want lenient rules of origin, especially the
smaller countries like Vietnam or Philippines, since they don’t possess
resources or manufacturing capacities to ensure large scale value addition and
exports. Except the countries such as China or Japan, which has large scale
manufacturing capacities, most of the countries are small and want lenient rules
of origin.
India has asked for “sufficient
value addition” of at least 35% in the country of exports for a product to be
eligible for its tariff concession under RCEP. However, member nations are not
comfortable with this proposal and want to settle for just minimal value
addition. For example, a mobile phone manufactured in China, that is excluded
from the list of Chinese products eligible for duty concession in India can
still find its place in Indian market through Vietnam because the phone is part
of India’s offer list for Vietnam. This is despite the fact that the entire
mobile phone is made in China but only a tempered glass is put on a Chinese
phone in Vietnam and then exported to India at zero or lower duty. It is in
this light, that most experts are asserting that 35%, value addition clause
will be the toughest proposals for countries like China to agree.
Further, upon India’s insistence
on the 35% value addition clause in the RCEP agreement, other member nations
wanted to limit the list of tariff lines where such a level of value addition
would be mandatory to just 100. However, India rejected such a short list.
Exclusion from Most Favoured Nation (MFN) obligations in Investment
Chapter
India provides Most Favoured
Nation treatment to its strategic allies or for geopolitical reasons. However,
MFN clause under RCEP agreement would have meant that India would be forced to
give similar benefits to all RCEP countries that it gave to its allies.
However, India wanted to exclude MFN obligations from investment chapter as
India didn’t want to provide same preferential treatment to all RCEP countries,
especially China with which India has large trade deficits and border disputes.
Refusal to “Automatic trigger safeguards mechanism” (ATSM)
To prevent dumping and to check a
sudden surge in imports from partner countries, especially from China, Austria,
and New Zealand, under RCEP negotiations, India had demanded an “auto-trigger”
mechanism to allow it to raise tariffs on products if imports cross a certain
threshold. However, the move was resisted by most of the member nations.
Apprehensions in Trade in services specifically easing movement of
professionals under MODE 4 of GATT
As India enjoys comparative
advantage in trade in services, especially under Mode 4, India had long pushed
for to greater movement of professionals and workers into their market in
return for greater access in goods trade. But here also, India faced resistance
from small countries such as Singapore, New Zealand and Brunei. However, this
time under RCEP negotiations, India took a firm stand that it doesn’t make
sense to have an agreement in goods without anything substantial easing in
trade in services.
Concerns over using base year before 2014 for tariff reduction
Another concern for India was
regarding its demand over the use of base year for tariff reduction. Majority
of the member nations wanted tariff reduction to happen from the rates
prevalent in 2013, i.e. from the year when the RCEP negotiations started.
However, to provide protection to its domestic industry, India had sought to
use base year for tariff reductions after 2014. As India, under its “Make in
India” initiative, in the 5-year span of 2014-19, had raised import duties on
several thousand products, thus, using a base year before 2014 would mean a
drastic drop in duties on the imported products, and thus would prove
disastrous for domestic manufacturers. Thus, India wants to change the base
year applied to tariff reductions under RECEP FTA to 2019.
Conclusion: Looking for Alternative to Protectionism
In conclusion, it can be said
that these protectionist policies are unsustainable in the long run; rather
India should focus on export promotion strategies and diversification of the
export markets to tap the growing markets of Africa and Latin America, to which
its exports are comparatively less. Strengthening of MSME sector for export
promotion and technological upgradtion and ease of doing business to improve
their competitiveness is another prerequisite for creating globally competitive
sectors, going forward.
Comments
Post a Comment