India's Decision to Opt Out of RCEP: Reasons and Implications

India opted out of joining the RCEP By Avani Sasindran -

WHAT IS THE RCEP? RCEP (Regional Comprehensive Economic Partnership) is a free trade agreement between 15 countries, signed on 15 November 2020 in Hanoi, Vietnam (virtually), with the aim of creating an integrated market, and to facilitate easier trading of goods and services between the RCEP members. It was formed and mainly endorsed by China to serve as the Asian counterpart of the TPP(Trans Pacific Partnership) and EU. The RCEP aims to establish a global competitive free market. 2

HISTORY 2020: Last few rounds of negotiation were held. The RCEP was signed in a virtual ceremony on 15 Nov 2020. 2014 - 2017: Several rounds of negotiation took place. The first RCEP summit was held in 2017 in Philippines. 2011: The RCEP was introduced during the 19th ASEAN Summit in Indonesia. 1 3 5 2 4 2012: Cambodia endorsed framework of RCEP 2013: 1st and 2nd rounds of negotiations take place. 2019: 3rd RCEP summit was held. India opts out of the RCEP. 3

COUNTRIES IN THE RCEP 15 countries signed RCEP in 2020: Brunei-Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Viet Nam, Australia, China, Japan, South Korea, New Zealand. 4

$26.2 trillion RCEP countries possess 30% of the global GDP 2.2 billion people RCEP countries have 30% of the world s population 15 members Largest trade bloc ever - 10 members of ASEAN and 5 other powerful countries 5

Why did India opt out of the RCEP? India opted out of the RCEP on 4 November 2019 for a variety of reasons. A major one was fears among Indian business owners that joining the RCEP, which would reduce custom duties and tariffs, would increase India s already rising trade deficit with other countries. Trade deficit refers to the difference between the value of a nation's exports and imports over a certain time period. 6

We took a call that given the way it is currently, it is not in our interest to enter this agreement because it would have fairly immediate negative consequences for our own economy. - S Jaishankar, External Affairs Minister, India, about why India pulled out of the RCEP 7

1 Absence of free and balanced pact & concerns not addressed While India was a part of the RCEP negotiations for a long time, it ended up pulling out of the agreement, stating that the pact would have been harmful to India s economy. During the negotiation rounds, India raised several concerns, like an auto trigger mechanism to protect domestic industries. These were left unaddressed, prompting it to leave the RCEP.

2 India s Protectionist approach, Atmanirbhar By withdrawing from the RCEP, India maintained its protectionist approach i.e. it favoured local markets over lowering international customs barriers. This was further bolstered by PM Modi s call to become Atmanirbhar (self sufficiency) movement.

3 Opposition from Indian agricultural sector Farmers, especially dairy farmers, across the country were opposed to the RCEP, as they feared competition from their foreign, more industrialized counterparts and their cheaper goods would place them at an unfair advantage and harm the agricultural sector.

4 Tensions with China Border clashes and disputes with China may have also influenced India s decision to back out of the RCEP, as the RCEP is often perceived to be a China- led initiative.

EFFECTS While India s withdrawal from the RCEP stems from a desire to become self reliant, this decision may have adverse effects in the future, as India lost out on a valuable opportunity to set norms and regulations in trade areas like e-commerce. India also denied the opportunity to be a part of the largest trade bloc in the world, possessing the potential to shape future regional trade patterns, and one that could have potentially helped India achieve the true potential of its manufacturing sector through exports. 12

Should India have joined the RCEP? Many economists believe that joining the RCEP could have strengthened India s economic growth. Additionally, due to strong supply chains in Northeast and Southeast Asian countries, economic ties are expected to be close-knit among the RCEP members. Furthermore, the RCEP comes with geopolitical value. Signing it would have highlighted India s commitment towards trade liberalisation and its will to strengthen regional integration. 13

Should India have joined the RCEP? (continued) India s rocky track record with FTAs (Free Trade Agreements) might have been on of the reasons for its hesitation to sign the RCEP. Some sectors have indeed seen deindustrialization due to such trade deals. The absence of measures such as auto trigger mechanisms in the RCEP, which could have led to excessive dependence on China for imports, also merits India s decision. However, exiting the RCEP may prove to be disadvantageous to India, as it could lose market share to the RCEP. 14

CONCLUSION While some say that exiting the RCEP, especially in wake of the COVID-19 pandemic, may backfire on India, others state that preserving and empowering local businesses is of utmost importance. RCEP s lowered trade barriers could have proved useful to India at this point in time, when the pandemic has wreaked havoc on the country s economy, but it is only after a certain period of time has passed that the true effects of opting out of the RCEP will be visible.