In today’s newsletter, we take a look at why everybody’s talking about this new RCEP agreement. But more importantly, why India chose to walk out of the deal.


The Story

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement between the 10-member Association of Southeast Asian Nations (ASEAN), and a few other partner countries. The agreement seeks to create the world’s largest free-trade bloc by strengthening ties and reducing trade barriers between the 16 member countries.

It’s all very simple really. With a free trade agreement in place, Indian manufacturers will be able to ship goods and sell them elsewhere without having to worry about, say a 30% tariff. This way prices can remain competitive and Indian manufacturers can actually have a shot at selling a lot of these goods abroad. On the flip side, India will also have to open up its borders and that’s a contentious topic. But we will get to that bit in a while.

Anyway with RCEP, India will have a new free-trade agreement in place with 15 other countries including the likes of Malaysia, China & Australia. And considering this little group is responsible for close to 40% of all international trade, the RCEP agreement is kind of a big deal.

At least, it would have been, if India actually went through with it.

At the RCEP summit in Bangkok, Prime Minister Modi refused to partake in the agreement. His argument was that India had been proactively contributing to the RCEP discussions in the hope of pursuing a mutually beneficial outcome. But he felt that the current agreement did not fully reflect the basic spirit of free trade, and that it did not address India’s outstanding concerns satisfactorily.

Wait, what concerns?

For one, opening up the country’s domestic markets has repercussions. Imagine cheap Chinese goods and agricultural produce from Australia and New Zealand flooding Indian markets. It would obviously hurt local producers. So India wanted a tariff structure that wouldn’t exactly open the floodgates.

Yes, we are going to open up our borders. But the tariffs can’t be too low. That's the mantra here.

Also, RCEP countries account for almost 27% of India’s total trade. However, India imports more from RCEP countries than it exports. Economists call this — “running a trade deficit”. Ideally, when you open up your borders you would want to reduce the deficit and help boost the country’s export engine. But here’s the thing, China alone accounts for over 60% of the deficit and the “Red Dragon” isn’t like other countries. It’s very hard to export to China, even if you had a free trade agreement in place. For instance, most of our exports are service-based, like IT. But services don't factor prominently in these trade agreements. So how does one expect India to bridge the gap?

And even if it did, how would India contain the free flow of goods coming in from China. In fact, we already predicted such an eventuality and wanted safety measures in place. The idea was to include an auto-trigger mechanism — so when the volume of imports crosses a certain threshold, safeguard duties would suddenly kick in to contain the dump. Unfortunately, we couldn’t get the member countries to budge

And finally, even if all our concern were heard, this would still be a bit of a gamble. If the deal didn’t work miracles within a year or two, the political repercussion would be unimaginable. For the BJP, that is.

So we are out of the deal, at least for now.

But then that begs another question. If we were relatively certain that we couldn’t negotiate better terms. Why did we pursue it for so long?

Well, we can’t say for sure. However, it's possible that India was holding its cards close to its chest in the hope that other countries would pressurize China into accepting India’s terms. India is a big market and without India, this whole RCEP thing looks a bit like a damp squib. So maybe we thought we could get member countries to come around?

It’s possible.

But for now, the remaining 15 countries have concluded text-based negotiations and are ready to sign the pact (maybe next year). And if India’s issues are resolved at a later date, maybe we can still be a part of this deal. But until then, we wait and watch from the sidelines.

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