Blog Post

India must push forward with RCEP trade deal

Negotiations on a trade agreement between the Association of Southeast Asian Nations (ASEAN) and their free trade partners could have major implications for the world economy.

By: Date: June 1, 2016 Topic: Global Economics & Governance

India could benefit from concluding the Regional Comprehensive Economic Partnership (RCEP), a trade deal that would group 16 nations and account for 40% of world trade, but is procrastinating due to political difficulties.

The RCEP initiative would link the ten member states of the Association of Southeast Asian Nations (ASEAN) and the group’s free-trade agreement partners, Australia, China, India, Japan, South Korea and New Zealand. In total, the grouping of 16 countries includes more than 3 billion people and has a combined GDP of about $17 trillion. RCEP is the largest free-trade agreement (FTA) negotiation in Asia, and also the biggest FTA negotiation that India has ever participated in.

If it is negotiated successfully, RCEP would create the world’s largest trading bloc, with major implications for Asian countries and the world economy. Negotiations among the 16 parties began in early 2013 and are scheduled to conclude by the end of 2016. So far 12 rounds of negotiations have been completed, with the 13th round scheduled to take place during June 12-18, 2016 in Auckland, New Zealand.

The RCEP is expected to act as a counter-balance to the US-led Trans Pacific Partnership (TPP), which was announced on the 5th of October of 2015 (though it is yet to be ratified by the parliaments of the respective member countries). However, four members of the ASEAN, namely Brunei, Singapore, Vietnam and Malaysia, are members of both trade deals.

ASEAN is expected to benefit from both the TPP and the RCEP, but there could be differences between its members’ abilities to adapt to the higher standards of the TPP compared to RCEP.

The RCEP seeks to achieve a modern and comprehensive trade agreement among members. The core of the negotiating agenda covers trade in goods and services, investment, economic and technical cooperation and dispute settlement. The partnership would support the spread of global production networks, and reduce the inefficiencies of the multiple Asian trade agreements that currently exist.

India is a major player in the RCEP negotiations, and is under pressure to reduce its tariffs sharply. In fact, industry leaders in India see a steep tariff reduction for goods from China as the biggest threat, fearing a rush of cheap goods from across the border.

In addition, countries such as Singapore, which has near zero tariffs on most goods, and Malaysia, where 90 percent of trade is carries a negligible customs duty, are pressuring India to lower barriers. According to an internal estimate from the Indian ministry of commerce, the signing of the 16 country RCEP trade agreement will result in a revenue loss of as much as 1.6% of GDP. This has forced the negotiators to tread carefully.

According to recent reports, the serious adverse effects of joining the agreement have made India more aggressive in the ongoing negotiations. It is said that India is seeking greater market access in services to be able to justify the closing of the deal at home. However, the industry chambers in India remain sceptical and view the deal as equivalent to signing a free trade agreement with China.

India has faced this problem since it started negotiating regional trade agreements, and RCEP is no exception. Like in all such agreements, one of the objectives of RCEP is to eliminate nearly 95 percent of tariffs. This might be easy for most ASEAN member states, whose tariffs are less than 5 percent. But for a country like India with average tariffs at around 15 per cent, drastically reducing them to zero or 2-3 per cent is difficult.  This would also entail giving up much greater market access than what it would get in return.

Given the importance of the deal, India has offered several concessions to its member countries in the RCEP – especially since TPP has already been signed, and is likely to hurt Indian exports. For instance, with those countries with which India has already signed FTAs such as ASEAN, India has proposed to eliminate tariffs on 80 percent of items.

Similarly, India has offered to open up 65 per cent of its product space to Japan and South Korea. For Australia, New Zealand and China, Delhi has offered to eliminate duties on only 42.5 per cent of products. As India does not have any kind of free-trade agreement with these three countries, its offer is less. But the expectations from India are high and the members are demanding much more. This means that going ahead with RCEP and other pending free-trade agreements is a politically difficult prospect for India.

India’s interests lie mostly in services, the removal of technical barriers to trade such as those taken under sanitary and phyto-sanitary measures, and trade in goods such as pharmaceuticals and textiles. India has been negotiating hard to liberalise the free movement of professionals aspect of the services agreement (mode 4), in order to offset the revenue loss from goods liberalisation.

India thinks its best bet is in exporting services, through which it can supply its burgeoning skilled professionals to other countries, thus partially meeting the demand for jobs from a million people joining the labour market every month. But at the same time there are serious limitations to this. Many complain that India’s service trade with ASEAN is insignificant, and moreover India faces stiff competition on services from countries like the Philippines.

It is high time India decides whether it wants to go ahead with RCEP and conclude it. Procrastinating and delaying the process – for which India has earned the ire of many member countries – is not good for India. India needs to have a clear vision and strategy with respect to its free-trade agreements and move forward quickly. This would benefit India’s external sector, as India’s exports have been falling for more than a year now. The export slump is a matter of serious concern to the Indian economy.

It is time for serious action. The government needs to be tough, and realise that RCEP’s future as a major trade bloc will remain uncertain until there is enough political will to go through the arduous negotiation rounds and conclude them quickly. Most importantly, India needs to hold more moderate and flexible positions. It must reverse its image as a tough negotiator obstructing talks, and show that it is serious about making progress.

The RCEP will also lay the foundation for India and other members of ASEAN to join TPP, because of the overlapping membership between the TPP and RCEP. The RCEP will no doubt face stiff opposition from various interest groups within the participating countries. But now that India has decided to join, it must balance economic and strategic calculations, and prepare to lead in the “Indo-Pacific century”.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Blog Post

India in 2024: Narendra Modi once more, but to what end?

Even with the recent economic slowdown, India still boasts Asia’s fastest growing economy in 2018. But beneath the veneer of impressive GDP expansion, uneasiness about India’s economic model clearly tempers enthusiasm.

By: Alicia García-Herrero and Trinh Nguyen Topic: Global Economics & Governance Date: May 17, 2019
Read article More on this topic More by this author

Blog Post

What is in store for the EU’s trade relationship with the US ?

If faced with a resurgent President Trump after the next US election, the EU will have some difficult decisions to make as it is compelled to enter a one-sided negotiation. Failure to strike a deal will imperil the world’s largest trade relationship and contribute to the progressive unravelling of the rules enshrined in the World Trade Organization – although the changes required of Europe by Trump’s demands may ultimately turn out to be in the interest of Europeans.

By: Uri Dadush Topic: Global Economics & Governance Date: May 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Evolution of US-China relations amid trade-tariff conflict

Bruegel director Guntram Wolff and Bruegel fellow Uri Dadush welcome William Alan Reinsch, senior adviser and Scholl chair in international business at the Center for Strategic and International Studies, for a discussion of how China-US relations are developing in the context of unfolding trade war.

By: The Sound of Economics Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic More by this author

Blog Post

Implications of the escalating China-US trade dispute

If allowed to escalate, the trade dispute between China and the United States will significantly increase the likelihood of a global protectionist surge and a collapse in the rules-based international trading system. Here the author assesses the specific impacts on the Chinese and US economies, as well as the strategic problems this dispute poses for Europe.

By: Uri Dadush Topic: Global Economics & Governance Date: May 14, 2019
Read article More on this topic

Opinion

Will China’s trade war with the US end like that of Japan in the 1980s?

The outcome of the US-China trade war is anticipated to be quite different from the experience of Japan in the 1980s and 1990s, due to China’s relatively lower dependence on the US and having learned from the Japanese experience.

By: Alicia García-Herrero and Kohei Iwahara Topic: Global Economics & Governance Date: May 13, 2019
Read article More on this topic More by this author

Opinion

Trade war: Is the U.S. panicking due to China's big hedge?

U.S.-China trade war has suddenly taken centre stage following Donald Trump’s unexpected announcement to ramp up tariffs if no deal is reached. U.S. is in desperate need for a comprehensive victory, and China is ready to make concessions, but not to the extent of transforming its state-led economic model into a market-based economy.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 9, 2019
Read article More by this author

Blog Post

Spitzenkandidaten visions for the future of Europe's economy

What are the different political visions for the future of Europe’s economy? Bruegel and the Financial Times organised a debate series with lead candidates from six political parties in the run-up to the 2019 European elections.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Global Economics & Governance, Innovation & Competition Policy Date: May 8, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article More on this topic More by this author

Blog Post

Does attaching environmental issues to trade agreements boost support for trade liberalisation?

This blog post shows that the omission of environmental issues in the new EU-US trade negotiations may make it challenging to pass the trade agreement in the European Parliament. In particular, the inclusion of environmental issues is pivotal to keep the second largest, centre-left S&D group in the pro-trade coalition.

By: Boram Lee Topic: Global Economics & Governance Date: April 24, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Resuming the EU-US trade talks

Maria Demertzis sits down with Bruegel senior fellow André Sapir to break down the news, discussing the events leading up to the renewed EU-US trade talks, and the likely future course.

By: The Sound of Economics Topic: Global Economics & Governance Date: April 23, 2019
Read article More on this topic

Blog Post

The next step of the Belt and Road Initiative: Multilateralisation with Chinese characteristics

The increasingly broad objective of China's Belt and Road Initiative has attracted the attention not only from the BRI members, but also from other major players such as the United States and the European Union.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: April 18, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's cut: EU-China partnership after the 21st EU-China summit

Guntram Wolff discusses with Alicia Garcia Herrero the results of the 21st EU-China Summit

By: The Sound of Economics Topic: Global Economics & Governance Date: April 12, 2019
Load more posts