the Regional Integral Economic Association (RCEP) aims to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement between ASEAN member states and their NAFTA (free trade agreement) partners.
However, when negotiations to finalize the long-delayed deal entered their final stages, in November 2019, Prime Minister Narendra Modi surprised the other member countries by choosing not to participate.
Following India’s withdrawal, the remaining 15 nations signed the RCEP on Sunday on the sidelines of the annual summit of the 10-nation Association of Southeast Asian Nations, which Vietnam was hosting virtually. However, many participating nations are also becoming too economically dependent on China and the pact is seen as a coup to extend their influence throughout the region.
What is RCEP
The RCEP negotiations were launched by leaders of 10 ASEAN member states (Brunei Darussalam, Cambodia, Indonesia, Loas, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) and six ASEAN NAFTA partners (Australia, China, India, Japan, Korea). and New Zealand) during the 21 Asean summit in Phnom Penh, Cambodia, in November 2012.
The agreement allows for a common set of rules of origin to qualify for tariff reduction with other RCEP members. This means fewer procedures and easier movement of goods. That should encourage multinational companies to invest more in the region, including building supply chains and distribution centers.
Given that China is the key source of imports and also the main export destination for most member countries, the agreement is likely to be in a better position to shape the region’s trade rules. The new tariff regime will take effect from 2022 and tariffs will return to 2014 levels.
RCEP India Exit
India withdrew from the China-backed trade deal because the negotiations did not address its top concerns. These were threats of circumvention of the rules of origin due to the tariff differential, inclusion of equitable agreements to address the problems of trade deficit and opening of services.
The deal would have lowered import duties from 80% to 90% on the goods, along with simpler service and investment rules. Some members of Indian industry feared that the reduction in customs duties would cause a flood of imports, especially from China, with which it runs a massive trade deficit. India’s trade deficit with other RCEP countries was also increasing.
In its negotiations, the government had also raised the issue of the unavailability of MFN (most-favored-nation) obligations, where it would be forced to grant RCEP countries benefits similar to those it granted to others. It had raised a red flag over the decision to use 2014 as the base year for tariff reduction.
Prime Minister Narendra Modi said that India’s decision was based on the impact it would have on the lives and livelihoods of all indigenous people, especially vulnerable sectors of society. Despite its withdrawal, officials have said that India could rejoin the talks if it decides to do so at a later date.
What does it mean for India
India would have the third largest economy in the RCEP. Analysts believe that India could lose investments while its consumers may end up paying more than they should, especially as global trade, investment and supply chains face unprecedented challenges due to the Covid-19 pandemic.
The countries included in the RCEP agreement would also lose the opportunity to access the Indian market which is notoriously difficult to access, especially during the current global economic situation.
For India, it will be an opportunity to strengthen its national industries and move towards its dream of becoming self-sufficient. A large number of sectors, including dairy, agriculture, steel, plastics, copper, aluminum, machine tools, paper, automobiles, chemicals and others, had expressed serious apprehensions about the RCEP, claiming that the dominance of cheap foreign products would hurt their business.
India-Asean relations and impact on RCEP
India’s relationship with Asean is a key pillar of its foreign policy and the basis of the Policy Act East. His focus on a strengthened and multifaceted relationship with Asean is the result of significant changes on the global political and economic scene since the early 1990s and India’s own march towards economic liberalization.
In 2012, Asean and India had commemorated 20 years of dialogue partnership and 10 years of Summit-level partnership with a Commemorative Summit held in New Delhi under the theme ‘ASEAN-India Partnership for Peace and Shared Prosperity’ from 20 to December 21, 2012.
Trade and investment relations between India and Asean have been growing steadily, with Asean being India’s fourth largest trading partner. Its trade with Asean amounts to $ 81.33 billion, which is roughly 10.6 percent of India’s total trade. Whereas, India’s exports to Asean account for 11.28 percent of our total exports.
Investment flows are also sizeable in both directions, with Asean accounting for approximately 18.28% of investment flows in India since 2000. FDI inflows into India from Asean between April 2000 and March 2018 were approximately $ 68.91 billion, while FDI outflows from India to Asean countries from April 2007 to March 2015, according to data maintained by the Department of Economic Affairs (DEA), was approximately $ 38,672 billion.
Under the UPA government, India had opened 74% of its market to ASEAN countries, but richer countries like Indonesia opened only 50% of their markets to India. It also agreed to explore an India-China FTA in 2007 and join the RCEP negotiations with China in 2011-12. However, the impact of these decisions resulted in an increase in the trade deficit with the RCEP nations, from $ 7 billion in 2004 to $ 78 billion in 2014.
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