Regional Comprehensive Economic Partnership (RCEP)

Since November 2012, sixteen countries {ASEAN+6} have been engaged in the negotiations for a Free Trade Agreement called Regional Comprehensive Economic Partnership. The objective is to attain a modern, comprehensive economic partnership that covers not only goods but also trade in services, investments, technical cooperation, intellectual property, dispute settlement and other related matters.

Partnering Countries

The countries include 10 members of ASEAN (Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, The Philippines, Singapore, Thailand, and Vietnam) and their FTA partners (Australia, China, India, Japan, Korea, and New Zealand). Together, these countries comprise of three billion people, which is over 45% of the world’s population with a combined GDP of about US$ 17.23 trillion, which is about a third of the world’s current annual GDP.

Negotiations

Negotiations for RCEP had stated in 2012 in Cambodia and currently are in fourth year. The latest and 13th round of RCEP negotiations had taken place in New Zealand from 12 to 18 June 2016.  The negotiations aim to achieve high level of tariff liberalization, inclusion of services trade in constancy with WTO rules and based upon four pillars of promotion, protection, facilitation and liberalization. If this is negotiated successfully, RCEP would be world’s largest trading block and will have major implications for global and regional economy.

Questions & Answers

Is RCEP a proposed single integrated market?

No. RCEP is not supposed to create a single integrated market because zero-tariff rates are not going to be achieved and we cannot call any arrangement which has tariff barriers as single market. Slashing tariff beyond a limit is not possible for numerous reasons. Instead, RCEP seeks to bring together different FTAs and create an overarching framework with simplified trade rules within the entire region.

What are the major challenges?

Firstly, each negotiating partner in RCEP is on different level of development and varied interests. Although the RCEP framework has a flexibility clause yet the least developed countries are facing stiff resistance in their domestic environment regarding the RCEP. Secondly, bringing different kinds of FTAs together itself is a tremendous task. Currently, there are 5 ASEAN+1 and 23 bilateral FTAs in operation. Each of them differs greatly in terms with others and this becomes a significant hurdle. The varying internal policies of countries are also posing hurdle to harmonize and consolidate under RCEP. Thirdly, there appears to be no scope of large scale slashing of tariffs due to very tough economic conditions. Fourthly, there are no existing FTAs between India-China, India-Australia, China-Japan etc. As they come under RCEP, they would not like to slash tariff at once to significantly low levels.

What are advantages and risks for India?

There are two apparent advantages for India put forward by proponents of this deal. Firstly, it would boost India-ASEAN trade relations and also its trade ties with China, Japan, South Korea etc. thus taking forward the Act East Policy. Secondly, there would increased investments in India from China, Japan, South Korea etc. which in longer term benefit India.

Going deeper into cost-benefit analysis, we find that two schools of thought have emerged regarding India’s participation in RCEP. First group is apprehensive about RCEP mainly because of threat of flood of China made products in India. This apprehension is not without reasons. Currently, India and China don’t have an FTA and they Chinese products enter Indian markets after payment of heavy tariffs. Signing RCEP is almost equivalent to signing an FTA with China. We note here that despite Make in India campaign and government efforts to boost good industries, manufacturing is still India’s Achilles heel. Government calculations also show that India will face a revenue loss of close to 1.6% in goods trade when RCEP with India is in force.

Second group wants India to adapt to a long term approach and eliminate the duties in goods barring few sensitive sectors such as farm products and industrial goods. They think that doing so; India can leverage the opportunities arising out of global value chain within a decade.

What has been stand of India over negotiations?

We have discussed that manufacturing industry is India’s Achilles heel and if India enters into it without taking a proper and cautious approach, it can be detrimental for the economy. Nevertheless, the conditions of Indian economy demand that India should take a cautious stand over RCEP. India’s overall stand could be understood as follows:

Regarding goods, India had earlier proposed a three tier tariff reduction plan in tariff, based on whether India has an existing FTA or not. Under this plan, India proposed 80% tariff cuts to 10 ASEAN countries {we have India-ASEAN FTA}; 65% to South Korea and Japan {we have bilateral FTAs with them}; and 42.5% to China, Australia, New Zealand with which we have no FTA in place. But the other countries were pushing for a single tier system. In August 2016, it was reported that India has agreed to the single tier system. If this happens, then the most benefits would be accrued by China which imports more and more Iron ore from India but not other commodities. The loss incurred to economy due to goods must be recovered from services, in which India has apparent advantages.

Regarding Services, India has been seeking greater market access and had been insisting on a single deal which includes goods, services as well as investments. Thus, we think that we can supply skilled professionals and services and thus RCEP can help to create more jobs. For this, there is a need of easier visa regime too. But, trade in services is a major contentious issue in RCEP. We remind ourselves that India-ASEAN trade agreement in services was also achieved after great hurdles posed by Philippines which considers India’s skilled manpower threat to its own service industry. Current position is that most countries are reluctant to open up their labor market.

What should be way forward?

From the above discussion, we come to the conclusion that India’s interest is in services, while it has to bow down on goods in RCEP. Eliminating tariffs for other countries may be easy {many of them have less than 5% tariff} but for India, it may be a difficult scenarios as average tariffs stand near 15%. Regarding services, India has been negotiating hard for liberalization of GATS Mode-4 (movement of professionals from one country to another) since the best bet is in service export. It is yet to be seen how India goes ahead with RCEP.

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