In mid-2016, the buzz in international trade circles was about three major regional Free Trade Agreements (FTAs) — Trans-Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP) and Regional Comprehensive Economic Partnership (RCEP).
But 2016 was also a year of extreme flux and rising protectionism in the West as witnessed by the election of a Republican leadership in the United States and Brexit before that. The US elections had a profound impact on international trade with the country pulling out of the TPP, and the TTIP’s future left uncertain. This has meant an increased interest in the future of the RCEP.
There are many reasons why the RCEP is of great significance for India. As a major developing economy, it is in its interest to have access to a wider market, and to go beyond its dependence on the US, UK, and other western countries as its largest trade partners. The need has become more urgent given the threat of protectionism in the very markets that we trade with the most.
Discussions at the World Economic Forum earlier this year yielded a dismal picture of global trade with trade growth continuing to be sluggish worldwide. Terms like ‘de-globalisation’ have taken centrestage with an unlikely champion, China, emerging for free trade.
While India cannot commit to unfettered liberalisation, it can no longer afford to be a slow player in international trade and play catch-up to China when China has been trying to surpass the rest of the world. Given these truths and India’s global ambitions, being part of and negotiating a successful RCEP is a no brainer.
While there has been anxiety in India over the tariff concessions that the country is expected to give, the government has been pushing for more access for its service providers, especially for the movement of people. Services trade makes up for the majority of India’s current exports.
The government is pushing consistently to make it easier for Indian professionals to deliver services abroad. It is no surprise that the Indian government is trying to play to its strengths and find market access for those exports, in which the country has a comparative advantage.
Considering a future where the domestic services market could become saturated, it makes strategic sense for the country to promote manufacturing domestically and seek to ease its path to exporting services.
The RCEP is the only mega-regional trade agreement still being seriously negotiated. It involves all the ASEAN countries and the six countries that ASEAN as a bloc has bilateral FTAs with. Collectively called ASEAN+1, these six include Australia, New Zealand, China, Japan, South Korea and India.
Estimates show that the bloc accounts for 30%-39% of the world GDP and 29% of all FDI flows. It also accounts for a large part of the world market size, considering the presence of China and India, two of the most populous countries in the world with a robust consuming middle-class.
The RCEP has an extremely ambitious scope covering trade in goods, trade in services as well as investment. It also has specific committees for Standards-related issues, Intellectual Property, Economic and Technical Cooperation, and Dispute Settlement.
The main aim of the RCEP is to build on the foundations laid by the current ASEAN+1 FTAs while still accounting for the diversity of capabilities of the participating countries. This was not the case in the TPP or the TTIP.
A reason why these regional trade negotiations were started was the sheer frustration from the standstill at the Doha Development Round of the World Trade Organisation. Regional negotiations were started in the hopes of quicker consensus-building and greater integration into global value chains.
At the Hyderabad negotiations, the focus was on simplification of regulations relating to rules of origin, investment, as well as tariff elimination. For trade in services, there were discussions regarding e-commerce and easing regulation on WTO-recognised modes of supply.
There are a number of domestic industries which are likely to be affected by reduced tariffs as a result of the RCEP. Some of these like steel already face heavy competition from Chinese imports.
There are reservations related to intellectual property and sensitivities regarding having binding rules on e-commerce. The latter is especially sensitive because unlike all other issues being discussed, there is no precedent at the WTO for e-commerce and a few other emerging sectors.
There have also been concerns from the dairy industry in terms of competition from other dairy exporting countries. However, India’s milk production far exceeds that of others.
But it is possible to argue that the problem does not lie with FTAs in general or the RCEP in particular. The Indian economic system has gotten used to traditional modes of protectionism with no focus on building domestic capabilities.
The government must build, and industries take proper advantage of domestic infrastructure so that they can become more competitive in the international arena. A large part of this would be the ability to comply with the International Standards Regime.
There is also a lack of general knowledge about Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS) Agreements at the WTO that concern standards. The domestic infrastructure does not exist for Indian producers to be able to conform to those standards. This is a systemic problem that needs to be fixed even as we negotiate these international agreements.
The RCEP aims to have harmonised standards in as many sectors as possible. Adhering to these standards is in the best interest of Indian producers as it will increase the saleability of their products not just in the RCEP region but also worldwide.
Getting too anxious about a ‘high-standards’ agreement is not the answer as unlike the TPP and the TTIP, the RCEP is making a serious effort to account for the differential capabilities of the countries involved.
Is there a solution?
In a globalised world system with capitalist ideas defining the rules of international engagement, withdrawing from international negotiations is not a choice. This is especially true in a country like ours, which is already starting to feel the pressures of a growing youth population.
Job creation has not been fast enough to keep pace with the needs of the much-touted demographic dividend. The dividend will become a burden unless there is proper skilling and more importantly ‘re-skilling’ to keep with the development of disruptive technologies which lead to higher automation.
The mass layoffs in the IT sector may be the first signs of this very need to diversify and re-skill. Saturating the country with IIT and IIM graduates is evidently not the answer.
Building capacities is the key and this cannot happen in an isolationist utopia. The RCEP is a necessary step towards securing sustained demand not just for present but also future production.
If programmes like ‘Make in India’ and ‘Skill India’ succeed, there will be a need to ensure that there is a secure demand for these manufactured products and this skilled workforce.
While we must acknowledge the serious and important concerns of the goods sector, we must not forget the positive effects that increased trade in services and increased investment will have. Having more harmonised regulation will also reduce transaction costs for all exporters as it will contribute to the ease of doing business. This is not just for exporters from other countries to India but also for Indian exporters trading in the RCEP region.
When dealing with issues of further liberalisation, India would do well to remember the cautionary tale of the man so afraid of dying that he never left his house. He still dies from a mirror in the house falling on his head.
Trade negotiations are never winner takes all. We must give something to gain something in return. It is not practical to expect a stop to all international negotiations while internal infrastructure is built. The two must happen simultaneously.
(The author is a researcher in Comparative Political Economy and an alumna of London School of Economics)