RCEP is the abbreviation used for Regional Comprehensive Economic Partnership.
The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and its five FTA partners (Australia, China, Japan, New Zealand and the Republic of Korea).
The 15 member countries account for about 30% of the world’s population (2.2 billion people) and 30% of global GDP ($29.7 trillion), making it the largest trade bloc in history.
Signed in November 2020, RCEP is the first free trade agreement among the largest economies in Asia, including China, Indonesia, Japan, and South Korea.
This agreement was signed to increase economic cooperation in the region with the support of all the members. India was a member of the RCEP until 2019 when it resigned due to unfavorable circumstances.
RCEP allows its member countries to enter into free trade agreements in order to improve regional cooperation in economic activities, trade services, technical collaborations, dispute resolution, and other related issues.
RCEP aims to lower tariffs, open up trade in services and promote investment to help emerging economies catch up with the rest of the world. It also touches on intellectual property, but will not cover environmental protection and labour rights.
Significance of RCEP
RCEP will cover about 30% of global gross domestic product (GDP), worth $26.2 trillion (€23.17 trillion), and nearly a third of the world’s population, some 2.2 billion people.
Under RCEP, around 90% of trade tariffs within the bloc will eventually be eliminated.
RCEP will also set common rules around trade, intellectual property, e-commerce and competition.
History Behind this Partnership
Countries in East Asia region have thriving trade and economic relations with each other through free trade agreements.
The Association of Southeast Asian Nations (ASEAN)(ASEAN+1 FTAs) has free trade agreements with six partners namely,
The People’s Republic of China (ACFTA)
Republic of Korea (AKFTA)
Australia and New Zealand (AANZFTA)
To broaden and deepen the engagement among parties and to enhance parties’ participation in the economic development of the region, the leaders of the 16 participating countries established the RCEP.
The RCEP was built upon the existing ASEAN+1 FTAs with the spirit to strengthen economic linkages and to enhance trade and investment-related activities as well as to contribute to minimising development gap among the parties.
During the 19th ASEAN Summit held 14–19 November 2011 in Bali, Indonesia, the Regional Comprehensive Economic Partnership (RCEP) wasintroduced.
The RCEP negotiations were launched between the Ten ASEAN member states and six ASEAN FTA partners during the 21st ASEAN Summit and related summits in Phnom Penh, Cambodia in November 2012.
Major FTAs Signed by India
South Asia Free Trade Agreement (SAFTA)
India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA)
India has dropped out of the RCEP in November 2019 in ASEAN+3 summit, because of the following reasons:
Unfavourable Balance of Trade: Though trade has increased the post-Free Trade Agreement with South Korea, ASEAN countries and Japan, imports have risen faster than exports from India.
According to a paper published by NITI Aayog, India has a bilateral trade deficit with most of the member countries of RCEP.
Chinese Angle:India has already signed FTA with all the countries of RCEP except China. Trade data suggests that India’s deficit with China, with which it does not have a trade pact, is higher than that of the remaining RCEP constituents put together.
This trade deficit is the primary concern for India, as after signing RCEP cheaper products from China would have flooded the Indian market.
Further, from a geopolitical perspective, RCEP is China-led or is intended to expand China’s influence in Asia.
Non-acceptance of Auto-trigger Mechanism: To deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism.
Auto-trigger Mechanism would have allowed India to raise tariffs on products in instances where imports cross a certain threshold.
However, other countries in the RCEP were against this proposal.
Protection of Domestic Industry: India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products like dairy, steel etc.
For instance, the dairy industry is expected to face stiff competition from Australia and New Zealand.
Currently, India’s average bound tariff for dairy products is on average 35%.
The RCEP binds countries to reduce that current level of tariffs to zero within the next 15 years.
Lack of Consensus on Rules of Origin: India was concerned about a “possible circumvention” of rules of origin.
Rules of origin are the criteria used to determine the national source of a product.
Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs.
India, being a large supplier of manpower and a leading service provider, does not want an agreement to be signed regarding good trade only. The trade agreement for only goods but no services and investment business will not enhance but only damage the Indian economic policy.
The sectors that have shown resistance to the agreement are:
Dairy: Dairy is vital to India, given the place milk and other derivatives hold in Indian households.
New Zealand is an exporter of dairy products and will be eyeing India primarily to sell milk powder and fat products. India, one of the largest consumers of milk and milk products, has so far been self-sustainable and has sometimes produced a surplus. The entry of New Zealand could change the scenario.
Nearly, 93.4% of New Zealand’s milk powder, 94.5% of its butter, and 83.6% of its cheese production got exported in 2018. India’s export of milk products does not match up.
It could lead to 50 million rural people losing their jobs, which will push up the need for importing.
Automobile: RCEP could allow a “back-door entry route” for automobile parts from China.
Textile: The free import of polyester fabrics from China, Vietnam, Bangladesh and other countries, which could lead to cheaper textiles, affecting an already-hit sector.
India’s trade deficit with China in the textiles and clothing sector is likely to be widened that could be detrimental for its domestic textile manufacturers.
Steel: The steel industry also has concerns regarding China, that excessive imports could harm the domestic market.
It will damage India’s export competitiveness since the trade balance in the country is already skewed to a greater extent.
Agriculture: An apex body of planters of tea, coffee, rubber, cardamom and pepper said that RCEP would make things worse for the sector, which is already experiencing a downturn.
The products will be under intense competition and imports into the country will likely increase over time.
Benefits of joining RCEP for India
Enhanced market access and trade facilitation: RCEP is expected to create better opportunities for the suppliers of member countries into each other’s territory and enhance ease of doing business by creating better import infrastructure at the entry point.
Technological advancement: Countries like Japan and South Korea can be helpful in fulfilling technical gaps which are felt by India in case of high-end technologies. They can also help in taking care of strategic advancement, especially in building defence capabilities.
Investment from China: Despite its security implications, China has been a source of investment for Indian firms. Therefore, it is imperative that no door, which can be helpful for economic growth, is closed for eternity.
Global value chains: RCEP can make India an integral part of global supply chains. This can be better understood in the context of Supply Chain Resilience Initiative (SCRI), a recent initiative of Japan. (see inset)
Strategic Considerations: Like India, Japan is also inclined to steer away RCEP from Chinese dominance. Therefore, it is pushing for Indian presence in RCEP, even as an observer. Apart from that, India’s pullout from the RCEP despite the presence of Japan and Australia, two important members of Quad (Quadrilateral Strategic Dialogue), might show lack of coordination between the members of Quad.
Safeguarding India’s overseas markets: Countries like Vietnam are well-positioned to replace Indian textile exports, by the virtue of decreased tariffs in the territory of RCEP member nations. India might be staring at more of such loss scenarios if it chooses to stay out of RCEP.
India’s huge domestic market: India can leverage its huge domestic market as it is clear to the other RCEP members that it is not just India, which will benefit from membership of RCEP. Even other countries will benefit if India joins the grouping. The exponential growth of service sector in India and rising incomes have led to increasing disposable incomes, which make it a lucrative market for any exporting country.
Strengthen Existing Agreements: The trade and investment agreements with ASEAN, Japan and Korea, as well as its bilateral arrangements with Malaysia and Singapore must be strengthened.
Marketing Products: The marketing of Indian products to existing favourable markets, as well as other countries where India has a low export presence.
The Indian industry, which has a business in these markets, can benefit from targeted promotional strategies given that Indian products are competitive and favoured there.
Export Diversification: Increasing the exports in Africa, a rapidly growing continent which enjoys almost 9% of the export share, as well as Latin America, currently at a low 3%.
West Asia has also been an expanding market where India enjoys synergies.
The export strategy for India requires a two-pronged approach, focussing on both enhancing domestic competitiveness and undertaking targeted promotional activities.
Deeper Economic Reforms: Must be initiated particularly in factor markets of land, labour and capital.
It will provide the much-needed impetus to overall manufacturing investments.
For domestic manufacturing, lowering costs of doing business, building the right infrastructure, ensuring faster and more efficient trade facilitation at the borders, etc.
Targeted Export Promotion: Provide information on markets to their manufacturers and exporters, especially small enterprises, and assisting them with marketing efforts.
Create dedicated agencies and establish offices overseas equipped with professional marketing expertise that will undertake export promotion and to link buyers with Indian exporters in major markets across the world.
External Integration Strategy: The country needs to keep its interests on the table.
The road to further expansion of its exports to RCEP member nations is very much still open, given that India already has trade and investment agreements with 12 of them.
Utilising existing agreements better while proactively exploring new opportunities in other geographies will diversify both our markets as well as our export basket.