Why India Walked Out of Regional Comprehensive Economic Partnership in 2020

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A group of 15 countries generating nearly a third of a global economic output have signed into the RCEP Agreement which India exited.

The world’s largest trade agreement, “the RCEP” pact was signed by 15 Nations on November 15, 2020, during a virtual summit. It was a historic agreement that will have economic implications far beyond the region’s borders and signals a seismic geopolitical shift, not only for countries that are part of the deal but also for the ones that are not. The finalization of the deal comes around a year after India announced its decision to not join the group, mainly because the term was skewed in China’s favour. The deal would have allowed Chinese goods to flood Indian markets, threatening domestic industries. The pact is also a milestone of China’s ambitions of becoming a trade lynchpin.

What is RCEP?

The RCEP stands for Regional Comprehensive Economic Partnership and, when rectified, will create a tragic bloc rivalling the European Union and the US-Mexico-Canada Agreement. Ten of its members make up the Association of Southeast Asian Nations or ASEAN, which include Malaysia and Singapore. Other than the five countries are New Zealand, Australia, Japan, South Korea, and most notably China. The world’s largest free trade deal covers a market of 2.2 billion people (210 crores) for around a third of the world’s population. Its members are responsible for $ 26.2 trillion of economic output, accounting for roughly 30% of the global GDP while the RCEP is the latest in a long time of trade agreement coming out of Asia, it was not supposed to be the biggest negotiations for the RCEP trade deal. Started back in 2013, but it attracted renewed interest in 2017 when President Donald Trump pulled the US out of rival Asia-Pacific grouping that excluded China.

However, some analysts feel that the economic benefit of the RCEP is limited and it could take decades to fully materialize. The reason being that most of the members of RCEP have already signed bilateral trade deals and benefit from reduced tariffs.

Rule of Origin

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The biggest impact could be new to ‘rule of origin’ which officially determines where a product was made. This essentially eliminates tariffs on goods traded between member states, providing greater simplicity than a series of bilateral free trade agreements especially for companies with global supply chains. Take, for example, a company in Thailand building tractors for a client in Indonesia. The two countries are part of the ASEAN free trade zone but because some parts of the tractor are made in Australia, Indonesia might charge a tariff on the finished machine. The RCEP will remove barriers like this, adding an incentive for members to look within the bloc for suppliers. The trade deal could also lay the foundation for strong economic partnerships in the future, particularly between members that do not already have free trade deals, as is the case with China, Japan, and South Korea.

The RCEP is China’s first multilateral free trade agreement, which analysts say is a political victory as much as an economic one. The deal comes at a time like this when the US and China have locked horns over several issues, including the South China Sea, supply chains, and 5G network. Without US involvement in the agreement, China could sidestep pressure for major economic reforms or reform of intellectual property rights.

Why did India decide to remain out of this?

A statement was given by Indian Officials and an external affairs minister that “For a rising economy you have to be economically strong and in the process of being economically strong you have to develop your domestic capacity and this process does not make you anti-national.” This is the stand which India took in deciding to opt-out of the Regional Comprehensive Economic Agreements because India has its issue which it would not able to solve with the RCEP countries and hence it decided to remain out of the RCEP for the time being. But the negotiation is open for India and India can join it any time this statement is given by various RCEP countries.

Issues for India

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Trade deficit

The first issue is the trade deficit or unfavourable trade balance of India with the 15 RCEP countries.

2018 (in Billion) 2019 (in billion)
ASEAN 21.85 23.82
China 53.58 48.65
South Korea 12.05 10.81
Japan 7.91 7.91
New Zealand 0.25 0.14
Australia 7.61 6.93
From Indian Express

The above table shows India’s trade deficit or India’s sheet balance in the year 2018-2019 with all of the 15 countries. If we take ASEAN 10 countries in a single group. then 2018 India had a trade deficit of 21.85 billion and in 2019 India had a deficit of 23.82 billion which is a huge amount. but we take the case of China even the amount more than the double of the number 53.58 billion trade deficit of India with China in 2018 and 2019 it was 48.65 billion. Similarly, with the other countries, India has a trade deficit. It means out of 15 RCEP countries we have a trade deficit with 11 of them so this makes which makes the RCEP unfavourable for India because India is already having trade efficiency with these countries.

If more access will be given to them then this is going to increase the trade deficit. So, India is renegotiating their free trade agreement with these countries already to reduce their trade deficit and to increase the Indian presence in the foreign markets.

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Lack of consensus on rule of origin

This was the main issue because of the China factor because India with China already has a huge trade deficit of around 54 billion. The consensus on the rule of origin was not developed with the RCEP. So, India decided to quit the RCEP. Because China can promote its import way other countries and rule of origin would not be there. So, India will not be able to identify if this is coming from China or some other country.

Protect Domestic Industry

The other reason is to protect the domestic industry like agriculture and dairy sector from New Zealand and Australia because they have a competitive advantage in the agriculture and dairy sector, India left RCEP. Another reason is that this RCEP will force India to give access to Indian sensitive sectors to other countries, which may affect our security.

Cost of not joining the RCEP for India

India will lose out on a large market, the market of 30% of World GDP. It will affect India’s Act East Policy because the countries in the trade bloc will prefer each other first rather than the countries which are out of the bloc. The third one is China’s influence, this will strengthen China’s position economically, strategically in the Indo-Pacific or Asia-Pacific region. Due to this, it affects India’s neighbourhood.


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