Expert Speak India Matters
Published on May 04, 2017
India’s dilemma: Join RCEP or stick to WTO-led regimes

Source Image: Daniel Lobo/CC BY 2.0

India seems to be at the crossroads of choosing between joining a mega trading bloc like Regional Comprehensive Economic Partnership ( RCEP), going for more bilateral FTAs or sticking to multilateral trade negotiations regime under the WTO. India has gained from the dispute settlement mechanism of the WTO in the past and has been a protagonist of multilateralism even though the Modi government objected to WTO’s Trade Facilitation Agreement (proposed in Bali, 2013) when questioned about India’s public stockholding of food for PDS. It flagged the important issue of food security, arguing that sovereign states must have the right to decide the manner in which their poor should be provided subsidised food. In 2016, India signed the TFA along with 112 nations.

Meanwhile, other mega trade deals have surfaced prominently. The Trans Pacific Partnership (TTP) was slated to be the biggest trading bloc involving major powers around the Pacific involving 12 countries but minus India and China.  Trans Trade and Investment Partnership (TTIP) was supposed to be a companion treaty of TPP, and planned to be another mega trade and investment deal between the US and the EU. The TPP may be pronounced dead due to Trump’s putting of a ner in it on  January 16 this year, after becoming the President of US.

Today, India’s interests in the trade arena are very important as it strives to boost export growth and create jobs.  It wants access to the global markets in goods and services as it is championing ‘Make in India’ campaign.

 Unfortunately, the controversy surrounding H1B visas and Trump’s idea of allowing only very skilled persons into the US has stressed India’s IT sector’s future growth. If India joins the other 16-member mega bloc RCEP, it may have better chances of expanding services exports further.

The RCEP involves negotiations in goods, services, investment, economic and technical cooperation, intellectual property rights, competition, dispute settlement and other issues like Rules of Origin, customs procedures and trade facilitation measures. The partners include the 10 countries of ASEAN, China, Japan, South Korea, India, Australia and New Zealand.

There are many hitches to RCEP being signed as it calls for drastic changes in tariff rates which may not be acceptable to India. Besides China’s dominance in the grouping is a potential drawback and may be a deterrent to India joining it.

But India should join it because it will mean access to the Asia Pacific region which will be important for its future economic and strategic status in the region. RCEP is also an important opportunity for India to meet the higher standards promoted by a mega Regional Trading Agreement (RTA) while it continues to support its domestic industries and promotes the development dimensions of trade. India has indicated its interest especially in expanding trade in services, removing trade barriers as well as specific interest in trade in goods like pharmaceuticals and textiles.

India is prepared to reduce tariff rates and at the RCEP meeting in Laos in 2016 it made the bold move of suggesting a single level of tariff for all members rather than proposing a three tiered, differential rate of tariff reduction, subject to the provision of minimum deviation for some nations.

The rise in protectionism and non- tariff barriers and regulatory measures and the deadlock in WTO negotiations are important reasons for India to go with the RCEP agreement as it can increase market access in a mega grouping. The combined GDP (at PPP) of RCEP members will be around $49.5 trillion and will cover a population of 3.5 billion. But the negotiations that began in 2012 are long drawn and secretive and are expected to be concluded by the end of 2017.

India’s export growth has been languishing in the past two years and service exports are facing problems in not only US but also Australia. Recently however, India’s merchandise export growth was in double digits (27.5 per cent in March 2017) because of a spurt in world trade.  India is especially looking at opening up issues under Mode 4 that deals with cross border migration of service professionals.  India’s rupee has recently firmed up which means that IT firms will face problems in exporting services as they will be rendered less competitive. According to Indian official sources, India has made it clear that it can be engaged in tariff reduction on merchandise trade only if discussions on India’s service trade continue as per India’s agenda.

On the goods trade side, Indian manufacturing sector remains relatively less competitive than the RCEP negotiating partners. In plantations, textiles, automobiles, engineering and pharmaceuticals India may face tough competition.

Hence, reforming the vulnerable sectors is important to make them competitive before India joins the mega RTA which would involve heavy investment in trade related infrastructure for reducing the high transaction costs faced by Indian exporters. It should weigh carefully the gains versus the potential losses of becoming a partner in the treaty. India already has Free Trade Agreements with ASEAN, South Korea, and Japan.  With all of them, India has big trade deficits. Thus India will have to realise that opening up trade further will only mean more imports from these countries.  With China, India has used anti- dumping duties and other countervailing measures at the WTO to protect its domestic industry from unfair competition due to Chinese under-priced goods coming in. India’s trade deficit with China stands at $52.7 billion (2015-16). Naturally, India is worried and it has proposed a phasing out of tariffs over a period of 20 to 30 years to become competitive.

RCEP agreement, however, has been criticised by global and Indian health activists for potentially forcing India to end its cheap supply of drugs, specially related to HIV/AIDS to developing countries, especially Africa. India has to be wary of measures that may lead to its losing the right to produce cheap generic drugs due to the enforcement of a strict IPR regime related to patent term extension and data exclusivity.

There are chances that WTO negotiations will be concluded now that TTP is off in which case India can go ahead and remain within the multilateral framework of the WTO and negotiate Trade Facilitation Agreement on services. The gains to be had in increasing trade in service exports should be the main criterion for India going ahead with RCEP.

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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