India is one of the top countries in Asia with maximum number of FTAs (free trade agreements) either in operation or under negotiation or proposed. According to the Asian Development Bank Institute, as of now, India has 42 trade agreements (including preferential agreements) either in effect or signed or under negotiation or proposed. The major FTAs that India has signed and implemented so far include South Asia Free Trade Agreement (SAFTA), India-ASEAN Comprehensive Economic Cooperation Agreement (CECA), India-Korea Comprehensive Economic Partnership Agreement (CEPA) and India-Japan CEPA.
While India has gained substantially in terms of exports from its FTA with SAFTA countries, CEPA with Korea and CECA with ASEAN have been more beneficial to those economies. External Affairs Minister S. Jaishankar put it very succinctly when he said: “If we are to grow by leveraging the international situation, then you have to exploit the opportunities out there. Either you are in the game or you are not in the game. I would say that the era of great caution and a very much greater dependence on multilateralism, that era is to a certain extent behind us. We need to create those structural linkages between us and our neighbours so that they take care of political cycles and any volatility their politics may produce.” What Jaishankar implied was that while we as a nation need to build closer ties with our neighbours, blanket multilateralism is not necessarily the answer in the altered scheme of things globally.
Regional Comprehensive Economic Partnership (RCEP) was signed into existence by 15 countries led by China, Japan, South Korea, Australia, New Zealand and the 10-state ASEAN grouping, creating one of the world’s largest trading blocs. India had been a part of negotiations for almost nine years till it pulled out in November 2019, stating that inadequate safeguards and lowering of customs duties will adversely impact its manufacturing, agriculture and dairy sectors. Prime Minister Narendra Modi’s politics and his policies have always been driven by the “India First” motto and hence, the decision to withdraw from the RCEP was the right decision.
Many have opined that by staying out, India has blocked itself from a trade bloc that represents 30% of the global economy and world population, touching over 2.2 billion people. Did India do the right thing by pulling out of the RCEP? The answer is a firm yes. India has a bilateral trade deficit with most of the member countries of RCEP. India has already signed an FTA with all the countries of RCEP, except China. Trade data suggests that India’s deficit with China, with which it does not have a trade pact, is higher than that of the remaining RCEP constituents put together. This trade deficit is the primary concern for India, as after signing RCEP, cheaper products from China would have flooded the Indian market. Further, from a geopolitical perspective, RCEP is China-led and is intended to expand China’s influence in Asia. To deal with the imminent rise in imports, India had been seeking an auto-trigger mechanism. Auto-trigger mechanisms would have allowed India to raise tariffs on products, in instances where imports cross a certain threshold. However, other countries in the RCEP were against this proposal. Hence, India was absolutely right in withdrawing from the RCEP.
India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products like dairy, steel, etc. For instance, the dairy industry is expected to face stiff competition from Australia and New Zealand. Currently, India’s average tariff for dairy products is, on an average, 35%. The RCEP binds countries to reduce the current level of tariffs to zero, within the next 15 years. This would have clearly harmed India›s position, had India joined the RCEP. India was also concerned about a “possible circumvention” of what is called the “rules of origin”. Rules of origin are the criteria used to determine the national source of a product.
Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would want to maintain higher tariffs. Hence, to join the RCEP, without the much-desired clarity on how “rules of origin” could be strengthened to prevent dumping by member countries, would have been against our national interests
You don’t get into FTAs merely to provide your market to your partner countries. While you accommodate your partner countries, your objective is also to increase the presence of your products in the markets of your partners. What is the option for India? Well, India, as an original negotiating participant of RCEP, has the option of joining the agreement without having to wait 18 months, as stipulated for new members in the terms of the pact. RCEP signatory countries said that they plan to commence negotiations with India once it submits a request of its intention to join the pact “in writing”, and it may participate in meetings as an observer prior to its accession. If indeed, RCEP resolves the thorny issues raised by India, given India’s economic clout today, then of course, India can always join the RCEP at a later date. But till those issues are ironed out to India’s competitive advantage, Prime Minister Modi has decided not to blink and, rightfully so.
India also wanted RCEP to exclude most-favoured nation (MFN) obligations from the investment chapter, as it did not want to hand out, especially to countries with which it has border disputes, the same benefits it was giving to strategic allies. India felt that the agreement would force it to extend benefits that it gives to some key allies, for sensitive sectors like defence, to all RCEP members. RCEP also lacked clear assurance over market access issues in countries such as China and non-tariff barriers on Indian companies.
Will the decision cost India and what will that cost be, if any? Well, India is one of the few countries where today we have to give our own industry a level-playing field at home. Building on national capacity doesn’t make you anti global. On the contrary, if you don’t have local capacities, you only end up as a market for other peoples› goods. If you want to actually participate more vigorously in the global economy, you must build stronger domestic capacities, and do what it takes for the gaps to be closed, as a result of years of disadvantage, thanks to inept and corrupt Congress led regimes, which ruled India for decades. Hence, the decision to pull out of RCEP will only strengthen India’s standing both economically and geopolitically, instead of it being an economic disadvantage, as is wrongly being bandied about. In the name of openness, we have allowed subsidised products and unfair production advantages from abroad to prevail. Those who say India should have joined RCEP, fail to realise that RCEP is not just about economic consequences, but political and geopolitical ones too. When India chose to stay out of the Belt and Road Initiative (BRI) in 2017, there was much rabble-rousing commentary that India might be isolating itself. Three years later, India’s position has been recognised by like-minded democracies and, many have said that Prime Minister Modi’s decision was so prescient and correct, in hindsight, given that BRI as an initiative is tottering today and has failed.
Some analysts who argue in favour of RCEP have said that “if you don’t want to be on the menu, you have to be at the table”. Well, India’s seat at the table as an “observer” is an important development, where New Delhi can make sure that it is not on the “menu”. Plus, India has enough financial heft to not become a part of the “menu”. Under the new Aatmanirbhar Bharat initiative aimed at self-reliance, we have a goal of making the share of manufacturing, 25% of our GDP. That is possible if we truly act on the “Vocal for Local” concept. It does not mean we have to be inward looking or simply resort to import substitution. Equally, we have to be cautious about where and whom we are building trade linkages with.
Those who push for joining the RCEP forget that the economic pillar is not more important than the security pillar. Security consideration will always be, and indeed should always be, more important. Economic consideration can only come into play, if it does not contradict security interests. The RCEP, if it works as designed, will make the countries of the region even more vulnerable to China’s economic and political coercion. Hence, India under Prime Minister Modi should actually be applauded for refusing to get bullied by an expansionist China that honey trapped many nations into, say, the BRI initiative. Today, many of those nations are ensnared in the Chinese debt trap, with no way out.
Indeed, it is China’s constant use of trade as a political weapon, and its unfair trading practices, that has led many countries to actively explore alternative supply chains. Yes, things will not change overnight but a beginning had to be made and by calling out China›s bluff on the RCEP, fair and square, Prime Minister Modi did what a lesser leader would not have even dared to attempt.
China represents a direct security threat to most of the countries in the region. That is one reason why Japan and Australia are understandably deepening their bilateral security engagement, why the Quad grouping has strengthened and why India welcomed Australia to the Malabar naval exercise. Joining a China-led trade arrangement simply because many others are doing it would be equal to cutting your nose to spite your face. Security is primary because it is impossible to pursue either economic well-being or any other value in its absence. Ignoring this comes at a cost.
Recent experiences with China itself should serve as a warning to most nations. China is a bully, with scant regard for territorial sovereignty of other nations. To expect China to become “a responsible stakeholder”, as US Deputy Secretary of State Robert Zoellick wanted China to become, by simply engaging in robust trade ties with the Chinese Dragon, is an illusion and a fallacy. China’s natural urge is to usurp and encroach. Why should India offer one of the biggest and fastest growing markets to RCEP on a golden platter, without concomitant economic and geopolitical benefits? Beijing never plays to the international script because its worldview is based on a fundamentally misguided assumption of international politics, in which conflicts and confrontation are the way forward. Consensus is an anathema to CCP. China has always felt and decided that others must listen to it. There is no mystery here. What Xi Jinping, however, never anticipated is the fact that Prime Minister Modi is not a pushover. PM Modi is an extraordinary leader who does not like being told what he should do, and rightfully so. Why should the leader of the world’s largest democracy be beholden to a trade arrangement that has the stamp of an authoritarian Chinese regime, with no concrete benefits for India?
Trade will increasingly become the new political weapon in the post Covid era, with global protectionism on the rise. India under PM Modi has always been an open, liberal democracy that believes in pluralism and inclusivity. Hence Prime Minister Modi’s decision to reject the RCEP in its current form is absolutely the right thing to do.
Thankfully, be it RCEP or BRI, PM Modi has never been mesmerised by the Chinese illusion. Currently, 127 countries and 29 international organisations are part of BRI, through which China has reportedly made investments of more than $90 billion to these countries and regions. In 2017, China imported intermediate goods worth $943.12 billion, with $302.31 billion coming from these countries and regions. What a China-friendly, Left-leaning global media will never tell you is the fact that Chinese banks are reeling under a debt burden of over $103 billion after being forced to indiscriminately lend to financially unsound BRI projects. What the leftist media has also not admitted to is the fact that most of the BRI countries together owe a debt in excess of $380 billion to China and that number is rising rapidly, every minute. China shares a border with at least 14 countries and has territorial disputes with over 21 countries. Given the aforesaid, unless a China-centric RCEP is amended, to ensure tariffs, cross-border flows and anti-dumping laws are calibrated to cater to India, which commands huge economic clout, thanks to Prime Minister Modi’s towering stature, staying out of RCEP, is more beneficial than staying in for the moment.
Sanju Verma is an economist, national spokesperson for the BJP and bestselling author of ‘Truth & Dare: The Modi Dynamic’