India, Free Trade, and Tariffs: Examining India’s Decision to Leave the RCEP

High tariffs, while currently necessary, will hurt the country’s economy in the long run.

In November 2019, India withdrew from the Regional Comprehensive Economic Partnership (RCEP), a mega Free Trade Agreement (FTA) between the 10 Association of Southeast Asian Nations (ASEAN) members and China, Australia, New Zealand, South Korea, and Japan.

The Indian government’s withdrawal from the trade agreement was preceded by widespread protests by farmers groups, who called for the government to either scrap the deal or at least exclude the agriculture sector—farmers feared that the absence of tariffs would lead to cheap produce from other countries entering the Indian market. Further, against the backdrop of a slowing economy, joining the RCEP was not seen to be politically prudent.

India’s decision to not sign RCEP is a result of PM @narendramodi’s strong leadership & unflinching resolve to ensure national interest in all circumstances.

It shall ensure support to our farmers, MSMEs, dairy & manufacturing sector, pharmaceutical, steel & chemical industries.
— Amit Shah (@AmitShah) November 4, 2019

However, by remaining out of the RCEP, India seems to have reinforced its tag of a “protectionist” economy with the other RCEP member nations, and risks losing out on large markets for its imports. Not joining the RCEP also runs contrary to the current government’s “Act East” policy that seeks to further cooperation between India and other East Asian countries. Given the need for economic cooperation on the one hand, and protecting domestic manufacturers and small businesses on the other, this reading list looks why the RCEP came about and its implications for the Indian economy.

1) A Case for Regional FTAs

Even though the World Trade Organization (WTO) is expected to be an independent organisation that monitors global trade and protects the interests of member countries, it can be influenced by individual countries (namely the United States [US]). Shalini Bhutani writes that a mega-regional FTA such as the RCEP—by excluding hegemons such as the US—would diminish the WTO’s role in regulating global trade, rendering the organisation redundant.

While trade negotiations like the RCEP are seemingly impervious to the concerns of the wider world, these provide an attractive alternative venue to expand on issues hitherto kept out of the WTO. Negotiations outside the WTO, in spaces like the RCEP and the Transatlantic Trade and Investment Partnership (TTIP), are venues for the IP maximalist agenda. There is a real risk of the spillover effect of such FTAs on the future agenda of the WTO. With FTAs, it will become even more difficult to make trade development-friendly, both inside and outside the WTO. Lack of meaningful progress on the DDR at the WTO will only add to its redundancy.

Further, Bhutani argues that the scale of the RCEP is also due to China’s desire to counter the now-defunct Trans Pacific Partnership, a trade agreement between the US and other Asian countries. This could result in China, as an exporting powerhouse, setting terms not agreeable to other smaller member states.

The RCEP, by itself and with the developments around it, has all the ingredients for tighter IP controls and for not-so-free trade. The end result of this recipe will not be digestible to many. India and other countries have also to give due attention to what goes into such regional FTAs. Trade negotiators also have to continue to work at making the WTO and its trade rules palatable. The ultimate test of the rules and policies is whether these really serve people on the ground.

2) Why India Favoured the RCEP in the Past

While explaining the negative implications of the recent comprehensive trade agreements that India has entered into with regional partners, Smitha Francis and Murali Kallummal also explain the scenario with the WTO that has created a purported need for such preferential trade agreements (PTAs) in the first place.

The seeming impasse in World Trade Organisation (WTO) multilateral negotiations since the late 1990s has been the common catalyst driving the rising engagement of countries in PTAs globally. But the heightened competition brought about by south-east Asia and China’s export success, followed by the proliferation of PTAs initiated by ASEAN (beginning with the ASEAN-China FTA) became additional factors driving the rise of PTAs in the Asian region in the 2000s, including for India... As more and more countries have become members of multiple regional trade agreements (RTAs), competitive regionalism has played an important role, as there is an assumption of net gains in becoming a PTA member.

Irrespective of the “actual” market access gained, regional agreements have come to become popular in the absence of deeper liberalisation at a global scale under the WTO.

Given the lack of progress in the WTO negotiations, it was to be expected that developed countries would use the RTA [regional trade agreement] route to push for deeper liberalisation than that under the WTO. Thus in goods and non-goods areas, North-South trade agreements have typically involved stricter and wider commitments than those under the WTO and several critical implications of such agreements have been analysed for other countries. But how is it that India’s PTAs involving developing countries have also come to include WTO-plus commitments?

3) And, Why the RCEP Does Not Work for India

Commenting on the framework of the RCEP earlier this year, the Government of India said that there were significant issues that remained unresolved. Biswajit Dhar writes that a major concern for India was the impact of the trade agreement on the manufacturing sector, especially given that India would have to further open the economy to Chinese imports.

In agriculture, India’s average tariffs have never decreased below 30%. Such levels of tariffs have been primarily driven by the fact that 85% of the farm holdings are small and marginal (less than 2 hectares), of which 67% of the holdings are one hectare or less (GoI 2019c). The government is therefore left with little choice but to impose high levels of tariffs to protect rural livelihoods, as imports caused by sagging global prices could destabilise domestic markets. If this policy space is compromised by lowering import duties on major agricultural commodities as a result of the RCEP, the farming community could face an uncertain future.

Further, Dhar argues that India already faces a ballooning trade deficit with China, which amounted to $77 billion in 2017–18. India’s manufacturing sector is already critically dependent on Chinese imports, and opening up other sectors of the economy would have challenged India’s economic independence.

India–China trade by broad product groups bore strong resemblance with the colonial pattern of trade, when India was a net exporter of raw materials and net importer of finished products … India was a large net importer of capital and intermediate goods from China during 2010–18. Even consumer goods increased steadily during this period. Growing imports of capital and intermediate goods, which had doubled … meant that India’s manufacturing sector was critically dependent on imports.

4) Withdrawal Comes With its Caveats

Sudip Das writes that while the Indian government made a prudent decision in withdrawing from the RCEP, the Indian economy needs to work towards a point where it is no longer dependent on tariffs to compete with the global economy.

Though the RCEP would have substantially increased India’s access to these 15 countries, the domestic employment generating sectors, such as agriculture, dairy and textiles would have been severely affected by cheaper goods from these nations. Though India is the largest dairy producer in the world, the dairy industry needs tariff protection against cheap import of dairy powder and cheese from New Zealand and Australia. Similarly, the steel and chemical industries are concerned about cheap imports from China.

Further, Das contends that India will now lose out on vast trade potential with most of the countries within and beyond its extended neighbourhood.

The RCEP is an extremely large market comprising 20% of the global gross domestic product (GDP) and accounts for three billion people. Staying out of the RCEP means that India’s exports to such markets would be subject to high tariffs, whereas the member countries have an advantage of exporting their products freely amongst themselves. New potential trade opportunities on goods and services through South East Asia, which has huge growth, are lost for the Indian economy without the RCEP. Due to the interlinkages among the various trade segments of the RCEP nations, economic complementarities get generated, which can be tapped by joining the trade agreement.

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