November 13, 2019
India has decided to put a halt on its joining the largest planned free trade area.
Had India not pulled out at the last minute from signing the deal during the 3rd summit of the Regional Comprehensive Economic Partnership (RCEP) in Bangkok on November 4, the RCEP would have been the largest free trade area in the world so far—comprising of 16 Asia Pacific countries that house 3.4 billion people, and constituting one-third of the global gross domestic product (GDP) and 40 percent of global trade. Ten member countries of the Association of Southeast Asian Nations (ASEAN) along with Australia, China, India, Japan, New Zealand and South Korea form the RCEP, also known as the ASEAN+6, have been attempting to integrate regional trade (including other possible tenets of economic integration like cross-border investments) since 2012. Incidentally, however, it gained the latest momentum only recently, after China put additional effort to implement the RCEP free trade agreement framework in the aftermath of its escalated trade war with the United States. Of course, China needs to think of new markets so that it can keep its factories running.
Despite India pulling out, the hope that a deal will be reached is still alive. The signing date of the charter has been postponed to the beginning of 2020, ostensibly not to leave India out. The joint leaders’ statement issued on November 4 not only recognised the fact that India has significant outstanding issues yet to be resolved, but all participating countries also vowed to ‘work together to resolve these issues in a mutually satisfactory way’. In all likelihood, the deal will be inked early next year by the other countries, even if India cannot be brought on board. Interestingly though, China, this time around, is very keen to bring India along.
India has both explicit and implicit reasons to reject the current draft of the 20-chapter agreement. Indian policy-makers are not entirely convinced that the deal would help reduce its fast burgeoning trade deficit with 11 out of the 15 other countries. The deficit accounted for a whopping $105 billion in 2018, of which trade with China alone constituted $53 billion. In fact, given Indian products lacking a competitive edge, both in quality and price, New Delhi is apprehensive of a further worsening of the trade gap as more competitive goods are likely to flood into its market after it signs the free trade agreement. India has major market-related concerns on the following five sectors: e-commerce, industries (mainly steel and electronics), agribusiness, dairy products and fast-moving consumer goods.
The Indian authorities fear that foreign exchange reserves could be unsustainably drained, once the electronic payment gateway—one of the instruments being used to implement the free trade agreement—is opened. The draining of reserves would put macroeconomic stability at constant risk. Cheap Chinese steel and electronic goods, now facing the heat of the US tariff, might kill peer industries in India. Nepal’s southern neighbour also fears large-scale Australian agribusinesses and dairy products from New Zealand uprooting the mostly traditional, underinvested family-run and subsistence-based agriculture and animal husbandry sectors. On the consumer packaged goods sector, the scale of production has been one of the major constraints for India. Many of the industries are likely to be soon shut down due to fierce competition from these regional players. This, in turn, may make a significant dent on Prime Minister Narendra Modi’s ‘Make in India’ initiative.
The implicit reasons for India’s rejection of the Regional Comprehensive Economic Partnership are perhaps more potent than the explicit ones mentioned above. The first and foremost, India has started to see the entire framework increasingly becoming an instrument handy only to China—to advance its mercantilist interest at the cost of the geostrategic ambitions of India. Second, India is panicked about the potential compromise of fair free-market practices by Chinese protectionism.
Third, India believes in a unique hypothesis that China—by making the regional framework a conduit—would sell its products and components to India under the manufacturing labels of other RCEP countries like Laos, Cambodia and Vietnam where Chinese factories are now relocating themselves to take advantage of the cheaper labour costs. And finally, India sees the unhindered access to domestic trade data generated in the course of market transactions as a potential security threat. In the proposed charter, India is looking to ensure the confidentiality of such data or limiting it to domestic use only. Such electronically generated data, analysed by artificial intelligence, is now treated globally as precious information. It has been used successfully to track and predict consumer behaviour and has influenced product design and marketing.
For all these reasons, Prime Minister Modi’s decision to opt out from the deal was hailed by the Indian media and intelligentsia alike. But India’s choice does not seem to have duly considered the whole gamut of issues and implications. For example, if India’s interest is to contain China from monopolising the RCEP framework, wouldn’t its presence have been more effective to achieve that objective? A subgroup of democratic countries like India, Japan, South Korea, Australia and New Zealand together in the RCEP itself would have been in a far better position to discipline China if it chose to transgress. More importantly, what will happen to Modi’s flagship ‘look East’ foreign policy paradigm if he preferred to withdraw from such an overarching regional economic integration framework? And, in the long run, India’s competitive advantage will not improve if its firms are not tested through international competition.
Why does this matter to Nepal?
An obvious question for Nepal would be: How does the Regional Comprehensive Economic Partnership, or India’s participation in it, matter to Nepal? If China and India agreed to undergo strategic cooperation instead of competing for political and economic influence in the entire Asia Pacific region, it can allow this country to successfully pitch for Nepal-India-China trilateralism. If the grouping were allowed to become a real free trade zone, like the European Union, market entry into one of its member countries would effectively mean unhindered access to the entire trading bloc. Given the expansiveness of Nepal’s economic interaction with India, the latter’s participation in the framework and the ensuing expected market efficiency will likely benefit Nepal.