India’s Hesitancy in Joining RCEP

• 10 Sep 2024

For Prelims: World Bank, Regional Comprehensive Economic Partnership (RCEP), Global Value Chains (GVCs), National Logistics Policy 2022, FDI, Free Trade Agreements (FTAs), National Electronics Policy 2019, Production Linked Incentives (PLI) scheme 2020, ASEAN.

For Mains: Regional Grouping and Its Impact on India, India’s Concerns with RCEP

Source: ET

Why in News?

Recently, the World Bank's latest India Development Update: India's Trade Opportunities in a Changing Global Context suggested India to re-consider joining Regional Comprehensive Economic Partnership (RCEP).

• An Indian think tanks rejected the idea saying it is based on flawed assumptions and outdated projections.

What is the World Bank's Analysis of India Opting out of the RCEP?

• Income Gains: According to a World Bank study, India’s income will increase by USD 60 billion annually if it rejoins the agreement and will fall by USD 6 billion if it does not. 
  • These gains would span various sectors, including raw materials, light and advanced manufacturing, and services.
• Export Growth: Expected export gains from joining RCEP could include 17% in services like computing, finance, and marketing.
• Denial of Economic Gains: RCEP (without India) will add USD 186 billion to the world economy and increase the GDP of its members by 0.2% on a permanent basis.
  • The major beneficiaries would be China (USD 85 billion), Japan (USD 48 billion), and South Korea (USD 23 billion). 
  • India will miss a major portion of economic gain which may accrue from RCEP.
• Trade Diversion Risks: By staying out of RCEP, India could face trade diversion, as the trade bloc members could shift supply chains and increase competition among themselves, potentially harming India's exports to RCEP countries.
• Potential New Members: South Asian countries such as Bangladesh and Sri Lanka, have recently indicated interest in joining RCEP. 
  • In effect, India cannot fully remain out of the influence of RCEP as India has an FTA with countries like Sri Lanka.

What is the World Bank's Evaluation of India's Export Strategy and Trade Policy?

• Need for Export Diversification: Over the years, India’s trade in goods as a percentage of GDP has declined, and its participation in Global Value Chains (GVCs) has decreased.
  
  • Diversification can be achieved by expanding into more labour-intensive sectors such as textiles, apparel, leather and footwear.
    • India's share in global exports of Apparel, Leather, Textiles, and Footwear (ALTF) initially grew from 0.9% in 2002 to a peak of 4.5% in 2013, but it subsequently declined to 3.5% in 2022.

• Increased GVC Participation: By integrating into GVCs, India can:
  • Expand the variety of what it produces by participating in the production of higher-added value goods.
  • Enhance its competitiveness by gaining access to advanced technologies and global markets.
  • Increase flows of FDI by multinationals seeking to produce in India.
• Balancing Liberalisation and Protectionism: India's trade policy includes both liberalising and protectionist measures. For instance, initiatives like the National Logistics Policy 2022 and digital reforms aim to lower logistics costs and improve trade facilitation.
  • Conversely, there has been a resurgence in protectionist measures, such as increased tariffs and non-tariff barriers, which restrict India's trade openness.
• Trade Agreements: Recent Free Trade Agreements (FTAs) with countries like the UAE and Australia indicate a shift towards preferential trade agreements. However, India has avoided joining large trade blocs, like the Regional Comprehensive Economic Partnership (RCEP), despite potential benefits.
• Reevaluating India’s Tariffs and Industrial Policies: India has become a net exporter of mobile phones as exports have surged amid falling imports due to policies like National Electronics Policy 2019, Production Linked Incentives (PLI) scheme 2020.
  • However, recent hikes in import tariffs on key intermediary inputs, which brought average tariffs from 4% to 18% between 2018 and 2021, threaten the sector’s competitiveness. 
• Opportunities for India: Heightened perceptions of geopolitical risks have prompted companies to diversify their sourcing strategies. 
  • This presents an opportunity for countries like India with an abundant workforce and a growing manufacturing base.

Why is India Hesitant to Reconsider Joining RCEP?

• Flawed Assumptions in World Bank's Suggestion: The World Bank study projected income gains of USD 60 billion by 2030, but it does not consider that most of these gains would come from increased imports, leading to trade imbalances.
• Trade Deficits Among RCEP Members: Since the RCEP became operational,  ASEAN’s trade deficit with China grew from USD 81.7 billion in 2020 to USD 135.6 billion in 2023. 
  • Similarly, Japan’s trade deficit with China increased from USD 22.5 billion in 2020 to USD 41.3 billion in 2023.
  • South Korea may also face a trade deficit with China for the first time in the year 2024. 
• Overdependence on China-Centric Supply Chains: The rising trade deficits of RCEP members highlight a growing dependence on China-centric supply chains.
  • This dependency presents significant risks, especially in the context of global supply chain disruptions, such as those experienced during the Covid-19 pandemic.
• Unfair Competition: By not joining RCEP, India maintained the flexibility to explore other trade agreements that do not disproportionately favour China or threaten its economic interests.
  • India’s trade deficit with China rose to USD 85 billion in 2023-24
• Alternative Trade Agreements: India already has several functional Free Trade Agreements (FTAs) with 13 out of 15 RCEP members, except New zealand and China.
• "China Plus One" Strategy: India's decision to not join RCEP aligns with the global trend of adopting the "China Plus One" strategy to mitigate risks associated with dependence on China.

What is Regional Comprehensive Economic Partnership (RCEP)?

• RCEP is a trade agreement between the 10 ASEAN countries and their five Free Trade Agreement (FTA) partners: China, Japan, South Korea, Australia, and New Zealand.
• RCEP was introduced during the 19^th ASEAN Summit in November 2011, and negotiations began in November 2012. 
  • RCEP entered into force on 1st January 2022.
• It is the world’s largest FTA when measured by combined GDP (26 trillion dollars), population (2.27billion) and total export value (5.2 trillion dollars) of signatory parties.

Way Forward

• Bilateral Free Trade Agreements (FTAs): Negotiations for a comprehensive FTA with new partners like the United Kingdom and European Union should be concluded at earliest.
• Trade Agreements with Gulf Countries and Africa: India should actively negotiate and expand trade agreements with Gulf Cooperation Council (GCC) countries and African nations, focusing on energy, infrastructure, and digital cooperation.
• Strengthening Existing Regional Groupings: India should continue to advocate for regional trade integration within SAARC and focus on strengthening BIMSTEC, which connects South and Southeast Asia. 
• Indo-Pacific Economic Framework (IPEF): India should complement its "Act East Policy." by actively participating in IPEF to enhance regional cooperation in four key areas: trade, supply chain resilience, clean energy, and fair economy.
• Self-Reliant India:Government should enhance domestic manufacturing capabilities and exports by boosting domestic manufacturing. Schemes like Make in India 2.0 and Production Linked Incentive (PLI) Schemes should be given a renewed push.

Drishti Mains Question:

Q. Critically analyse India's decision to opt out of the Regional Comprehensive Economic Partnership (RCEP).

UPSC Civil Services Examination Previous Year Question (PYQ)

Prelims

Q1. Consider the following countries: (2018)

1. Australia 
2. Canada
3. China 
4. India
5. Japan 
6. USA

Which of the above are among the ‘free-trade partners’ of ASEAN?

(a) 1, 2, 4 and 5

(b) 3, 4, 5 and 6

(c) 1, 3, 4 and 5

(d) 2, 3, 4 and 6

Ans: (c)

Q2. The term ‘Regional Comprehensive Economic Partnership’ often appears in the news in the context of the affairs of a group of countries known as(2016)

(a) G20 

(b) ASEAN

(c) SCO 

(d) SAARC

Ans: (b)