The RCEP was hence signed by the remaining 15 nations. Even without India, it is the world’s largest trading bloc, representing 30% of the world’s population, trade and gross domestic product (GDP). Its share of GDP will rise, since this part of the world is growing faster than the rest.
If fast-growing India also joins RCEP, the lead will accelerate. India backed out of RCEP because it would amount to a de facto free trade agreement with China. This fear was based on an implication of the rules of origin (ROO) that would come into force in the bloc.
These rules apply collectively and cease to be country-specific. This fear was sought to be addressed via China-specific clauses and backloaded or delayed tariff reductions for China-origin goods. Surely, 15 years is enough time for Indian industry to prepare itself.
Hence, the real reason for India’s exit five years ago might have been pressure mounted by sector-specific lobbies. This includes the dairy sector, which warned of a deluge of imports from New Zealand and a threat to India’s dairy farmers.
India’s per capita consumption of milk is still below the world average and we need a nationwide campaign to feed a glass of fresh milk to every child every day to meet nutrition needs, which could greatly enhance the demand for milk and tackle the threat of Kiwi supply.
Other industry bodies that had lauded India’s exit from RCEP spoke for sectors such as steel, non-ferrous metals, chemicals, automobiles and plastics.
Was their response based on a belief in protectionism? Was it fear of India’s manufacturing sector being hollowed out by a Chinese onslaught? Or was this reckless spook mongering?
We need to reassess our decision to stay out of RCEP. A thorough study is needed to estimate the impact of RCEP on India and others. Recently, Niti Aayog CEO B.V.R Subrahmanyam said that India should join RCEP.
His view is based on a perceived loss to micro, small and medium enterprises (MSME) in India as they remain out of the value chains that are emerging.
India’s RCEP participation should be based on a broad set of metrics—not merely the trade deficit (which may deteriorate), but also investment inflows, employment creation and participation in new regional value chains (RVC).
A 2022 assessment by Arvind Panagariya and Pravin Krishna indicated no significant deterioration in India’s trade deficit with Asean countries despite 10 years of a free trade agreement. Even if it widens, one should remember that a trade deficit is simply the flip side of capital inflow.
If India is importing more than what it earns in export dollars, it means that the gap is filled by inflows of fresh investment dollars. This is a pattern over four decades and a sign of investor confidence in India’s growth story.
India is the only large Asian country that has had a persistent current account deficit, funded by investment inflows. India’s overall current account is mostly in balance since the services trade surplus with America offsets goods trade with Asia.
The new US regime under Donald Trump is likely to increase tariffs. His appointment of a protectionist trade chief Robert Lighthizer means that we have to brace for trade wars and punitive tariffs.
It’s imperative to expand trade in the RCEP region, tap the huge untapped export potential of agricultural products, pharmaceuticals and services, and embrace value chains that favour MSME-employment.
RCEP is a less ambitious trade deal. It does not impose restrictions of labour and environmental standards, unlike the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). It helps build supply chain resilience and fosters trade among partners, while RVC networks encourage geopolitical cooperation and stability.
A research paper published in the Journal of Asian Economics analyses data on RVCs in the post-RCEP world. The authors find significant expansion of trade in intermediate goods (which form new value chains), and the participation of member countries in RVCs has increased.
The trend is noticeable in the textiles, apparel, motor vehicles and food sectors. RCEP has reconfigured production networks with China, Japan and Korea, with a part of their global production and demand value chains turning more regional.
Trade intensity among RCEP parties has increased. The China-plus-one strategy of global investors has benefited Vietnam, Malaysia and Indonesia, but not India to the same extent.
If India had been a part of RCEP, investors would have been more enthused, as they wouldn’t have to jump across tariff borders. In 2023, the RCEP region attracted $460 billion of foreign direct investment, which was more than a third of global flows.
India’s pursuit of several bilateral trade deals is less efficient than joining a mega trade bloc such as RCEP. We should also think of joining the CPTPP, on whose doors others are knocking.
Mega blocs are presently a reflection of weak multilateralism and the demise of the World Trade Organization. India’s accension will boost domestic competitiveness, employment in value chains and investment inflows.
It must be supplemented with internal reforms aimed at enhancing the stock of human capital through skilling and education, which ultimately determine competitiveness.
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