Why India’s ‘Protectionism’ & Move To Stay Out Of RCEP Can Hurt It

India is missing out on the opportunity being presented by the shifting of supply chains away from China.

5 min read

On Sunday, 15 November, 15 Asia Pacific nations signed the Regional Comprehensive Economic Partnership (RCEP) on the sidelines of the annual summit of the ASEAN in Vietnam.

Negotiations for the agreement began in 2012, and its signing has created the world’s largest trading bloc.

Fifteen countries – 10 of the ASEAN and its five trading partners, Japan, South Korea, Australia, New Zealand and China – have signed up to this huge trading bloc. The time and effort that went into the deal was on account of the various development levels of the participants – some like Laos or Myanmar and Cambodia are less developed, China, Vietnam, Thailand and Malaysia are at the intermediate stage, while Australia, New Zealand, Japan, South Korea and Singapore are developed economies.

Reconciling their conflicting interests have led to a document that runs more than 14,000 pages, and years and years of negotiations by specialised committee and ministerial summits. It covers trade in goods, trade in services and electronic commerce.

Why India Has Chosen To Sit On The Sidelines

The deal is significant for China, which has a number of bilateral pacts, but had not signed up to a regional multilateral trade pact till now. The RCEP is expected to eliminate a range of tariffs on imports over 20 years, and it also has classes on IPR, telecom, financial services, e-commerce and professional services. Analysts say that many states have ongoing FTAs which can be very complicated. But with RCEP, a lot of the problems will be ironed out.

Of course, all this depends on the process of ratification which requires six ASEAN states and 3 of its partners to ratify it before it becomes effective.

Critics have said that the RCEP is not as ambitious as the defunct Trans Pacific Partnership and its successor, the CPATPP. But still, countries are seeing the advantage of signing up. ASEAN will get additional access in trade in goods from China, Japan and South Korea, beyond the existing trade deals. Immediately, the signatory countries will be hoping that the RCEP will assist their respective countries to recover from the COVID pandemic.

India has chosen to sit on the sidelines, even though all the countries were keen to have New Delhi onboard. New Delhi’s action remains something of a mystery.

Officially it says that the RCEP would have ‘hurt Indian industry’. In November 2019 at the RCEP summit, where it was announced that the text-based negotiations had been completed, it was stated that India “had significant outstanding issues, which remain unresolved.” The statement had noted that the signatories of the agreement “intended to further expand and deepen regional value chains for the benefit of our businesses… workers producers and consumers.”

Modi Govt Has Become Increasingly Protectionist – What This Means For Industry

Later, an Indian official said at a press conference in Bangkok that the decision not to join “reflects both our assessment of the current global situation as well of the fairness and balance of the agreement. India had significant issues of core interest that remained unresolved.” Just what this statement meant has not yet been fleshed out.

There were concerns among sections of the industry that cheap Chinese goods would flood the market and kill domestic industry. Ten central trade unions had also called on the government to withdraw from the negotiations.

The government itself was not disinclined. Despite its pro-globalisation stance, the reality is that the Modi government has become increasingly protectionist in recent years with import tariffs being raised in successive budgets.

What Is Modi Govt’s Economic Development Strategy?

The recent call for an ‘Atmanirbhar Bharat’, though somewhat ambiguous, has also fed into this kind of a mindset. And the recent tensions with China could push India also to decouple from China. But it is one thing for a technology super-power like the US to punish China by denying it trade, and quite another for India which benefits from the cheap products that China supplies.

With this action, it is not clear just what is the government’s economic development strategy. The Asia Pacific region has been the best example of the fact that trade brings prosperity. India’s ambitions as a manufacturing power cannot be fulfilled unless it is also a major trading entity.

China, South Korea, Vietnam have all risen through trade. According to Kishore Mahbubani, in 1990, Thai GNP was 14 times that of Vietnam. By 2018 it is only twice that as Vietnam has emerged as a major trading country.


Supply Chains Shifting Away From China: India’s ‘Missed’ Opportunity

Before the Nonthaburi RCEP Summit decision on 4 November 2019, there had been some comment as to how staying out would harm Indian trade competitiveness. The CII President Vikram Kirloskar said that the growth of regional value chains would encourage a momentum to the integration of the Asia-Pacific. Favourable tariffs and Rules of Origin, could make India “a major hub for coordinating regional value chains through itself—both as a market for final products and as a location for third country exports, primarily to the Middle East, Africa and Europe.” But once the government announced its pullout, all the Chambers of Commerce, and Kirloskar himself lined up to support the decision.

India is also missing out on the opportunity being presented by the shifting of supply chains away from China. This trend has been around for a while, but accelerated by the US-China trade war and COVID-19.

Rising wages in China has also resulted in some companies moving to places with lower labour costs. The pandemic disruption in China in February-March, too, has persuaded some industries not to become too dependent on one country or region.

With India out of RCEP, manufacturers will prefer to shift supply chains within the trading bloc for the sake of simplicity of trading rules and tariffs.

Beyond the economic impact, the RCEP has huge geopolitical implications. It not only provides relief to Beijing, coming as it does at the height of the American campaign to ‘decouple’ from the Chinese economy, but provides the basis on which Chinese dominance of the world economy could grow. Along with that, inevitably, will come its political influence.

And the irony is that by staying out, India, which politically endorses an Indo-Pacific policy, has, by its action, undermined the economic foundations on which that policy would rest.

What the RCEP minus India will do, is to reassert the view of the region as the Asia-Pacific.

(The writer is Distinguished Fellow, Observer Research Foundation, New Delhi. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)

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