RCEP: India, out on a self-reliance walk, tossed a USD25 trillion market. Here’s what others got.

 By: Madhavankutty G

Lead - Banking and Economic Research, ET Prime

It took nine years, many sleepless nights of intense negotiations, gargantuan mugs of coee to stay awake, and a sea of paperwork. Even as Donald Trump was busy looking for ways to nd holes in US presidential election results, a bunch of seasoned negotiators and oicials on the other side of the globe diligently stitched what would create world’s most-powerful trade bloc. Signed on November 15 by 10 ASEAN countries and their trade partners, the Regional Comprehensive Economic Partnership (RCEP) can deal a body blow to any global trade grouping. Is India losing out on something big? Or was it just in its decision to pull out of the negotiation? Before we get there, let’s rst understand what RCEP is all about and what makes it a deal to watch out for. The need for striking a trade deal has grown more urgently for ASEAN as its members grapple with the economic impact of the US-China trade war. RCEP can be benecial for countries seeking to stabilise their economies amidst the ongoing uncertainty. Given the growing restiveness over the US dominance, trade liberalisation seems to be the most potent weapon among the many options that the ASEAN grouping could use during a political transition in the world’s largest economy. The new trade grouping which comprises 10 Association of Southeast Asian Nations (ASEAN) members — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam — and their trade partners — Australia, China, Japan, South Korea, and New Zealand — signies a gradual shift of gravity towards Asia. If these economies coalesce and leverage their supply-chain eiciencies, RCEP can set a new world order. The RCEP was rst proposed at the 19th ASEAN meet in November 2011 with an aim to create a consolidated market for the 10 member countries and their trade partners. “The objective of launching RCEP negotiations is to achieve a modern, comprehensive, high-quality, and mutually benecial economic partnership agreement among the ASEAN member states and ASEAN’s FTA (free-trade agreement) partners,” the guiding principles of the RCEP reads. It aims to create a “liberal, facilitative, and competitive investment environment” in the Asia-Pacic region. The RCEP was later conceived by the ASEAN members and China as a response to the US-led Trans-Pacic Partnership (TPP) — later renamed as Comprehensive and Progressive Agreement for Trans-Pacic Partnership (CPTPP) — after the US opted out of the deal in 2017. The TPP was established during US President George Bush’s term. President Donald Trump had, however, pulled out of the deal saying it was a “potential disaster” for America and will harm manufacturing in the US. The key drivers that make RCEP whatitis “What has driven RCEP is economic logic and business opportunity,” says Simon Tay, associate professor, National University of Singapore. He says high trade volumes airm that strong economic interdependencies already exist among the ASEAN economies – accounting for 28% of global trade. “The agreement will make interconnections more seamless in preferences and rules of origin, to further facilitate the ow of intermediate components as well as nal products. That connectivity is also supported by provisions for improved Customs procedures and trade According to a Brookings Research study, RCEP will connect about 30% of the world’s populace and output, and generate signicant gains. According to computer simulations, the trade grouping could add USD209 billion annually to global incomes, and USD500 billion to world trade by 2030. It is also estimated that RCEP and CPTPP together will oset global losses from the US-China trade war. The new agreement is expected to make the economies of North and Southeast Asia more eicient, linking their core competence in technology, manufacturing, agriculture, and natural resources. Even minor changes in trade-policy instruments under RCEP are likely to have signicant impact on trade ows to ASEAN nations. Three key RCEP drivers that can lead to the growth of ASEAN’s trade in goods include its comprehensive coverage, the large market size, and the strong economic linkage via trade and investments. First, RCEP covers comprehensive trade and nontrade issues that can lead to further trade liberalisation in the ASEAN region. The trade agreement consists of 20 chapters to this eect. Some of these, such as rules of origin, technical barriers to trade, trade in services, electronic commerce, and intellectual property, have been included in the Blueprint 2025 of the Asean Economic Community (AEC), which the RCEP is likely to catalyse further. Till date, ASEAN countries have been desirous of implementing the guideline of non-tari measures to eliminate non-tari barrier, but with little progress so far. RCEP commitments will benet consumers and businesses in the ASEAN region by reducing unnecessary costs that can often be imposed on them via trade restrictions, by mandating common rules of origin, and by stimulating innovation with stronger protection of intellectual property rights. Second, RCEP oers opportunities in the form of a huge market of USD24.8 trillion and over 2.3 billion people. In 2018, for instance, the combined gross domestic product (GDP) of RCEP (on a purchasing power parity basis) was greater than that of other trading blocs such as the European Union (EU) and North American Free Trade Agreement (NAFTA). In Asia, the combined GDP of RCEP is about ve times the members of the ASEAN Free Trade Area (AFTA), and about three times of other Asian countries, including India. Third, ASEAN and its dialogue partners have a strong economic relationship through trade and investment. In 2018, ASEAN’s total trade in goods — imports plus exports — stood at USD2.8 trillion, 34% of which was accounted for by the bilateral trade between ASEAN and ve of its dialogue partners, while 23% was accounted for by intra-ASEAN trade. Moreover, total inows of foreign directinvestment (FDI) in ASEAN was USD152.8 billion in 2018 – 25% of which was sourced from its dialogue partners and 15% from ASEAN countries. Taken together, intra-RCEP trade and investments account for 57% of total trade and 40% of total FDI inows into the region. Now, let’s take a look at why RCEP is ahead of other trade pacts. There are three factors that explain why RCEP has more repower than the existing ASEAN free-trade agreements. First, this is a regional agreement to consolidate the existing ASEAN FTAs and hence reduces the negative impact of complicated rules of origin on trade ows. This means fewer procedures and easier movement of goods. Second, the threshold for tari reductions in RCEP is comparable to other regional FTAs such as the CPTPP, which aims for 99% tari elimination. Third, the RCEP will be an FTA in itself, and the reductions of tari and non-tari barriers among RCEP countries will be more comprehensive and more general than those in existing FTAs. As we have already told you, RCEP has everything that can make a trade deal eective. Then why is India not / part of it? Reasons India pulled out According to Rajat Kathuria, director and chief executive, Indian Council for Research on International Economic Relations, China will stand to benet more than others, both in terms of imports and exports. This is something Indian negotiators and the companies feared, too. India pulled out of the deal as its core concerns were not addressed — the threat of circumvention of rules of origin, the inclusion of fair agreements to address trade decits, and opening up of the services sector. A major plank of the deal was bringing down import duties on almost 90% of goods. This fueled fear among the domestic industry that reduced Customs duties would result in huge imports, especially from China with which India runs a massive trade decit. In the run-up to the negotiations, India had also raised the issue of unavailability of most-favoured-nation (MFN) status, which would have forced it to grant similar benets to RCEP countries as it accords others. Another contentious issue was the move to use 2014 as the base year for tari reductions. Pulling out of the RCEP deal created an opportunity for India to strengthen its domestic industries and move towards self-suiciency. A wide range of sectors – from agriculture to automobiles – are apprehensive of RCEP due to the dominance of cheap foreign goods. Some sectors of the Indian economy, like the pharma and IT industries, have found it tough to penetrate and expand in the Chinese market. Despite India repeatedly calling on China to ease barriers, Beijing hasn't taken any substantive measures. And in 2018, in an attempt to make a cosmetic change to the balanceof-trade situation with India, China started exporting goods via Hong Kong. This would be a violation of the rules-of-origin provisions if a fair free-trade mechanism comes into force. What added to India's / reservations was the country's rather unpleasant experience with the free-trade deal it struck with ASEAN several years ago. In 2010, when the ASEAN-India agreement was signed, the services sector — which is India's forte — was not included in the agreement. It took the negotiating parties another ve years to hammer out a deal on services and investment. India's trade decit with ASEAN has widened over the years. India was also concerned about the RCEP's potential impact on sectors like agriculture, which would aect the country's vast rural population. Indian agriculture is largely subsistence-based and beset by alarmingly low levels of modern technology, packaging, processing, and storage facilities. Opening it up to competition from much more advanced agriculture producers in places like Australia, New Zealand, and Japan would have led to an economic and social crisis. That would have been the case even with agriculture-related sub-sectors like dairy and food-processing. However, critics argue that while concerns about the socio-economic impact cannot be overlooked, India's withdrawal from the RCEP highlights the glaring gap between the competitiveness of Indian and Chinese industries, and the slow pace of comprehensive reforms to make the Indian economy more outward- / looking and globally competitive. The Indian government's decision protects vulnerable sections of the economy, as well as medium and big industries, from foreign competition for the time being, but it might also help India clinch a better deal as informal negotiation channels are still open, experts point out. They believe although the move appears reasonable at the moment, staying away from RCEP would have farreaching implications for India in the long run, and exclude the country from regional supply chains and further entrench its inward-looking character. To be sure, options do exist to rejoin the deal at a later date. Let us now understand who all will benet the most and who won’t be so lucky. How the pie will be shared While the US – as well as Europe – could lose heavily by not being a part of the new deal, the biggest winner might not necessarily be China. Other members of RCEP may benet even more. Of course, China will face lower export barriers in the rest of Asia. But ASEAN, on the one hand — and South Korea and Japan in particular — will nd it easier to build their value chains where production is based in ASEAN countries. In fact, ASEAN has been receiving an increasing amount of manufacturing FDI from Japan, South Korea, and Taiwan, which is already bigger than their FDI into China. Such sharp increase in investment into ASEAN is not only a response to China’s rising labour costs, but also to diversify away from an excessively China-centric value chain. Due to this reason, Japan, South Korea, and Taiwan’s trade integration within ASEAN have been increasing, especially when it comes to intermediate goods. Against this backdrop, ASEAN will likely grow its own manufacturing capacity, owing to huge FDI ows towards these countries, though a good chunk of the nal demand might still come from / China. According to Brookings Research, RCEP will also accelerate Northeast Asian economic integration. A spokesman for Japan’s ministry of foreign aairs noted last year that negotiations on the trilateral ChinaSouth Korea-Japan FTA, which has been stuck for many years, will become active as soon as they are able to conclude the negotiation on RCEP. Signicantly, in early November 2020, President Xi Jinping promised to speed up negotiations on a China-EU investment treaty and a China-Japan-South Korea FTA. Southeast Asia will benet signicantly from the deal to the extent of USD19 billion annually by 2030 but less so than Northeast Asia because it already has FTAs with RCEP partners. The deal will also facilitate the entry of foreign rms to the RCEP bloc. This will oer further impetus to a wider inclusion of small and medium-sized enterprises (SMEs) in the region to the global and regional supply chains. According to the ASEAN secretariat, SMEs in ASEAN employ between 52% and 97% of all workers. Likewise, technical cooperation with advanced economies like Japan, South Korea, New Zealand, and Australia will assist ASEAN SMEs in developing better, more competitive products. The telecommunication services and the agriculture sector are likely to see a boom with businesses competing regionally. An unequal dealfor smaller nations China is trying to take the centre stage in the RCEP agreement. Notwithstanding the long list of beneciaries of the RCEP deal, there is no denying the fact that China’s clout in the new trade order is going to get stronger due to the early gains made in cementing its position in the global value chain. Its quick recovery from the Covid-19 pandemic will act as a catalyst. China’s supply chain is integrated with the electronics supplychain economies of Malaysia, Philippines, South Korea, and Taiwan. China makes up for half of these / countries’ overall exports, which are in turn shipped to every country in the world. Besides, Beijing has signed 24 FTAs globally, of which 16 are fully operational. Beijing has also signed bilateraltrade agreements with ASEAN (2002), the Eurasian Economic Union (2018) and 18 other countries globally, besides being a party to 127 bilateral-investment treaties. Even though the intent of RCEP is to create trade and lower tari rates for all members, not all countries might benet equally. Some will gain disproportionately. It is a fact that China is eating into other’s industrial products. So, the impact of the trade bloc on smaller countries is uncertain. Stronger economies like Singapore have a lot to gain. But, for other smaller countries, it is an unequal relationship. Moreover, mega-trade agreements are now slowly losing their allure due to dierent currencies whose valuations have a lop-sided eect on their economies. The bottom line The RCEP negotiations, initiated in 2012, have had a log drag. The nal agreement has been watered down in terms of key liberalisation measures. Not only was the geographical coverage bigger when the negotiations started (with India), but the scope in terms of liberalisation was also wider. Furthermore, when RCEP started as response to the TPP, the US-China strategic competition was just starting o. Today, it is pooling RCEP members in dierent directions. The best example is the recent trade frictions between China and Australia. There could be many others. Also, increasingly pervasive US sanctions against China may come in RCEP’s way. While the actual increase in market access will remain limited among some of the RCEP members (such as Australia and China), what the world must learn from this deal is Asia is still dependent on the Chinese market and Asian countries cannot pass on the opportunity of improved (even if still limited) market access to China. As for the relative losers outside of the deal such as the US, we would imagine that the Joe / 58 minutes ago 1 hour ago 3 hours ago 4 COMMENTS ON THIS STORY Rajiv Chopra In my view, the key point here is that we are not competitive. Instead of looking for protection and sops, we have to become competitive. We are unwilling to do this. In the medium term, this will bite us Krishnan Avinjikkad India's decision to stay out of China led RCEP on the plea its national interests would have to be compromised with its entry has evoked serious criticism and debates. Mr.B R Deepak, Sinologist and Chairperson of the Institute of Chinese and South Asian Studies at JNU contend that it would do a world of good if India... Read More Keshavdas Keshavdas The underlying assumption in this deal is status quo ante with china. Forget about the shift in geo politics, sheer social reasons - disaffection to Chinese - will diminish this trade agreement beyond expectations. In the past the CHinese were given the benet of doubt. THey experienced that business does not have political barriers. It could ourish even with adversaries There will be a sea change in this assumption. VIEW COMMENTS ADD COMMENTS Biden administration will soon react by engaging in negotiations for a trade deal with Asia. Having played second ddle to the US in multilateral trade forums, members of the new bloc would do their best not to squander away this opportunity.

Source: https://economictimes.indiatimes.com/prime/economy-and-policy/rcep-india-out-on-a-self-reliance-walk-tossed-a-usd25-trillion-market-heres-what-others-got-/primearticleshow/79434469.cms?utm_source=newsletter&utm_medium=email&utm_campaign=prime_dailynewsletter_paid&utm_content=heading_2&ncode=ae88c8a4f8742a8682bf7d9294253f7f