The Regional Comprehensive Economic Partnership [RCEP] is a conglomeration of 10 members of the Association of South East Asian Nations [ASEAN] viz. Malaysia, Indonesia, Thailand, Vietnam, Singapore, Philippines, Myanmar, Brunei, Laos and Cambodia plus 6 others viz. Australia, New Zealand, Japan, South Korea, China and India. If, it materializes [29 negotiation rounds have already been held since start in 2012], this will be a giant group covering a population of 3.6 billion or 50% of the world and GDP [gross domestic product] at US$ 25 trillion or nearly one-third of the global.
During the Summit of ASEAN held in Singapore last year [November 11-15, 2018], prime minister, Narendra Modi had called for early conclusion of the process so that the deal could be signed at the beginning of 2019. We are nearing the end of the year and the process does not seem to be bearing fruit any time soon.
During the ministerial meeting [October 10-12, 2019] held in Bangkok, members stuck to their guns with 14 areas identified as contentious. The meeting was inconclusive even as ministers have been given 10 days to iron out differences by entering into ‘bilateral consultation’. If, things don’t reach a closure by October 22, 2019, then all eyes will be set on Modi to give his ‘Midas touch’ for making it happen during the 3rd RCEP leaders summit next month.
As things stand today and in particular, the hard stance taken by India on at least half a dozen major points, the possibility of an early settlement is unlikely. So, what are India’s prime demands?
First, India wants the reference date for undertaking tariff reduction to be extended to 2019 instead of 2014 planned initially. Since 2014, the government has raised import duty on 3500 items till date. In this backdrop, if for the purpose of phasing out duties, it were to stick to 2014 then it will be losing this benefit; hence 2019 is preferred. This is perfectly logical as the relevant provisions have to be in sync with the commencement date of the agreement.
Second, under the most favored nation [MFN] clause, the investment or service related concessions given to a trading partner [albeit under a bilateral treaty] have to be automatically extended to all other members of the group without any time gap. India is not particularly keen that this principle be applied uniformly to all members. The demand is illogical and inconsistent. Pertinently, MFN is one of the foundation principles underlying WTO rules to which India is fully committed. We should not be seen as adopting a dual stance.
Third, India wants an ‘automatic trigger safeguard mechanism’ to be incorporated in the pact. What it really means is that in the event of import of a particular commodity exceeding a certain number [also known as ‘threshold’ in technical jargon], this clause will automatically kick in giving right to the importing country to apply higher tariff to prevent a surge. This is untenable as it militates against the principle of free international trade based on comparative advantage.
The raison de atre behind movement of goods across national borders at minimal tariff or at zero duty is to let member countries to maximize their gains from trade. This overarching purpose will be defeated if a country gets the right to automatically increase the duty thereby preventing the exporting country to realize the full potential of its low production cost. Moreover, if India insists on this clause then, other members too will want leading to denial of access to each others’ markets.
Additionally, there will be practical problems in determining the threshold level [each member would like to keep it at the lowest possible for extracting maximum mileage] and number of commodities to be covered by this dispensation [each member will insist on having a large number]. They will end up compressing the market for each other instead of expansion which is the overriding consideration behind forging a free market area.
India should shun the idea of ‘automatic trigger safeguard mechanism’. Instead, it needs to focus more on requiring member countries to refrain from giving subsidies including ‘hidden’ [as China does by making fuel, power and other inputs at subsidized rates to enterprises] so that a situation of selling commodities at below cost [or dumping in plain words] in other members’ markets is avoided.
Fourth, India is opposing the demand of other members to seek trade concessions in its domestic space. Termed as ‘ratchet’ in trade terminology, the concept implies that any policy changes will be automatically committed under RCEP agreement to all members after a fixed period. While, India is willing to give concessions in the services and investment segment, developed countries are pushing for similar concessions in goods trade as well.
Finally, India’s expectation level particularly in regard to elimination of custom duty on imports from China [it wants this to be restricted to nearly 3/4th of tariff lines] appears to be too high. No wonder, the latter has refused to join negotiations on these terms. The government should take a somewhat less restrictive stance. It may offer duty elimination on 80% of tariff lines on imports from China as against 90% of tariff lines on imports from all other members.
To sum up, India’s approach to negotiations on RCEP pact is overly protectionist. This is contrary to its very objective of expanding market access for mutual benefit. Keeping in mind the big picture of tapping US$ 25 trillion market, the government should go for a ‘liberal stance’ by embracing MFN and shunning the idea of ‘automatic trigger safeguard mechanism’. Any fear that our market will be flooded by imports should be addressed by removing all the infirmities that industries suffer from [e.g. by lowering the cost of power and fuel alone, ‘Made in India’ products can compete with the lowest price product from anywhere in the world].
In a scenario whereby the effectiveness and utility of the WTO is being seriously undermined by unilateral actions of the USA and other developed countries [during the 11th WTO ministerial (December, 2017), they were on collision course with developing countries resulting in its collapse] and the world is moving towards plurilateral agreements, India should leave no stone un-turned in being a part of this mega partnership for maximizing gains. This will also be in sync with our goal of making India US$ 5 trillion economy by 2024.